[Federal Register Volume 59, Number 87 (Friday, May 6, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-10981] [[Page Unknown]] [Federal Register: May 6, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Rel. No. IC-20265; 812-8710] Kemper Technology Fund, Inc., et al.; Notice of Application May 2, 1994. AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission''). ACTION: Notice of Application for Exemption under the Investment Company Act of 1940 (the ``Act''). ----------------------------------------------------------------------- APPLICANTS: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield Fund, Kemper U.S. Government Securities Fund, Kemper International Fund, Kemper State Tax-Free Income Series, Kemper Investment Portfolios, Kemper Adjustable Rate U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Environmental Services Fund, Kemper Short-Term Global Income Fund, Sterling Funds, and any existing or future open-end management investment companies or series thereof for which Kemper Financial Services, Inc. (``KFS'') or any person directly or indirectly controlling, controlled by or under common control with KFS serves or may in the future serve as investment adviser or principal underwriter (collectively, the ``Funds''), and KFS.\1\ \1\No existing Funds other than those named as applicants currently intend to rely upon the requested exemptive order. --------------------------------------------------------------------------- RELEVANT ACT SECTIONS: Exemption requested pursuant to section 6(c) from sections 2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c), and 22(d) and from rule 22c-1. SUMMARY OF APPLICATION: Applicants seek an order to permit the Funds to issue multiple classes of shares representing interests in the same portfolio of securities and to permit the Funds to assess and, under certain circumstances, waive a contingent deferred sales charge (``CDSC'') on certain redemptions of certain shares.\2\ --------------------------------------------------------------------------- \2\Certain applicants have received exemptive orders with respect to (i) issuance of multiple classes of shares (Kemper Investment Portfolios, Investment Company Act Release Nos. 18385 (Oct. 31, 1991) (notice) and 18422 (Nov. 27, 1991) (order)) and (ii) imposition and waiver of a CDSC upon the redemption of certain shares (Investment Portfolios, Inc., Investment Company Act Release Nos. 13676 (Dec. 16, 1983) (notice) and 13720 (Jan. 13, 1984) (order) and Kemper Blue Chip Fund, Investment Company Act Release Nos. 18801 (June 19, 1992) (notice) and 18849 (July 15, 1992) (order) as amended and restated in Kemper Blue Chip Fund, Investment Company Act Release Nos. 20036 (Jan. 26, 1994) (notice) and 20089 (Feb. 23, 1994) (order)) (collectively, the ``Prior Orders''). The order requested hereby, if granted, would supersede the Prior Orders. FILING DATE: The application was filed on December 1, 1993 and amended on February 28, 1994. By letters dated April 20, 1994 and April 28, 1994, applicants' counsel stated that an amendment, the substance of --------------------------------------------------------------------------- which is incorporated herein, will be filed 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 Commission by 5:30 p.m., on May 26, 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, NW., Washington, DC 20549. Applicants, 120 South LaSalle Street, Chicago, Illinois 60603. FOR FURTHER INFORMATION CONTACT: James M. Curtis, Senior Counsel, at (202) 942-0563, or Barry D. Miller, Senior Special Counsel, at (202) 942-0564 (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 Reference Branch. Applicant's Representations 1. Each Fund is an open-end management investment company registered under the Act. KFS serves as the investment adviser and principal underwriter for each Fund. Each Fund has a non-rule 12b-1 administrative services agreement (``Administrative Plan'') with KFS providing for a service fee\3\ at an annual rate of up to .25% of average daily net assets. --------------------------------------------------------------------------- \3\As used herein, the term ``service fee'' has the meaning given to that term in Article III, Section 26 of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (``NASD'') and the term ``distribution fee'' means an ``asset-based sales charge'' as defined in said NASD rule. --------------------------------------------------------------------------- 2. Applicants propose to establish a Multiple Distribution System (the ``Multiple Distribution System''). Under the Multiple Distribution System, each Fund would have the opportunity to offer investors the option of purchasing shares subject to: (i) A front-end sales load that may vary among Funds and a service fee (``Class A shares''), (ii) without a front-end sales load, but subject to a CDSC, a rule 12b-1 distribution fee and a service fee (the ``Deferred Option'' or ``Class B shares''), (iii) without a front-end sales load or CDSC but subject to a rule 12b-1 plan distribution fee and to a service fee (the ``Level Load Option'' or ``Class C shares''), and (iv) without a front-end load, CDSC, distribution fee or service fee (``Class I shares'').\4\ --------------------------------------------------------------------------- \4\No Fund will charge a service fee under a rule 12b-1 plan. --------------------------------------------------------------------------- 3. The Funds may create one or more additional classes of shares in the future, the terms of which will differ from the Class A, B, C, and I shares in the following respects: Any such class: (a) May bear different distribution fees and any other costs relating to implementing or amending the rule 12b-1 plan for such class; (b) may bear different service fees; (c) may bear different shareholder servicing fees;\5\ (d) may bear different ``Class Expenses,'' that may include any or all of the following expenses: (i) Printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, and proxy statements to current shareholders of a specific class; (ii) Commission registration fees incurred by a specific class; (iii) litigation or other legal expenses relating to a specific class of shares; (iv) Trustee fees or expenses incurred as a result of issues relating to a specific class; and (v) accounting expenses relating to a specific class; (e) may bear a different name or designation; (f) will have exclusive voting rights as to any rule 12b-1 plan adopted exclusively with respect to such class except as provided in condition 16 below; (g) may have different conversion features; (h) may have different exchange privileges; (i) may be sold under different sales arrangements, including selling only to a particular type of investor; and (j) may bear any other incremental expenses subsequently identified that should be properly allocated to such class and that shall be approved by the Commission. --------------------------------------------------------------------------- \5\As used herein, the term ``shareholder servicing fees'' means fees and out-of-pocket expenses paid by the Funds to their shareholder servicing agent for transfer agency, account maintenance or dividend disbursing functions or for administering dividend reinvestment or systematic investment plans. ``Shareholder servicing fees'' does not refer to ``service fees'' as described in Article III, section 26 of the Rules of Fair Practice of the NASD. --------------------------------------------------------------------------- 4. Any distribution arrangement of a Fund, including distribution fees, service fees, and front-end and deferred sales loads, will comply with Article III, section 26, of the Rules of Fair Practice of the NASD. 5. After a shareholder's Class B shares remain outstanding for a period of time, they automatically will convert to Class A shares of the same Fund at the relative net asset values of the two classes and will thereafter not be subject to a rule 12b-1 plan. Shares purchased through the reinvestment of distributions paid upon Class B shares will be treated as Class B shares and will be converted to Class A shares on a pro rata basis with the Class B shares. The Level Load Option differs from the Deferred Option in that the Class C shares would not automatically convert to Class A shares after a specified period of time as would the Class B shares. 6. Any other class of Non-Institutional Shares (as defined below) may provide that shares in that class (the ``Purchase Class'') will, after a period of time, automatically convert into another class of shares (the ``Target Class'') on the basis of the relative net asset values of the two classes, without the imposition of any sales load, fee, or other charge provided that, after conversion, the converted shares would be subject to an asset-based sales charge and/or service fee, if any, that in the aggregate are lower than the asset-based sales charge and/or service fee to which the Purchase Class shares were subject prior to the conversion. 7. Any conversion of shares of one class to shares of another class is subject to the continuing availability of a ruling of the Internal Revenue Service or an opinion of counsel to the effect that the conversion of shares does not constitute a taxable event under federal income tax law. Any such conversion may be suspended if such a ruling or opinion is no longer available. 8. Class I shares would be offered for purchase only by the following investors (the ``Institutional Investors''): (a) Tax-exempt retirement plans of KFS and its affiliates, and (b) the following investment advisory clients of KFS and its investment advisory affiliates that invest at least $1 million in a Fund: (1) benefit plans unaffiliated with KFS, such as qualified retirement plans (other than individual retirement accounts and self-directed retirement plans), (2) banks and insurance companies unaffiliated with KFS purchasing for their own accounts, and (3) endowment funds of non-profit organizations unaffiliated with KFS. 9. Future classes may be offered to meet the specific investment needs of non-institutional investors (herein, such future classes together with Class A, B, and C shares are ``Non-Institutional Shares''). Other future classes, in addition to Class I shares, may be offered to meet the specific investment needs of a particular category of Institutional Investor (together with Class I shares, ``Institutional Shares''). Still other future classes may be offered to various market segments or through various types of intermediaries. 10. Only Institutional Investors will be eligible to invest in Institutional Shares. Applicants may choose not to make a particular class of Institutional Shares available to one or more categories of Institutional Investors. If no class of Institutional Shares is made available to a particular category of Institutional Investor, Institutional Investors in this category will be permitted to purchase Non-Institutional Shares. However, no Institutional Investor that is eligible to invest in any class of Institutional Shares will be permitted by applicants to invest in any class of Non-Institutional Shares. Accordingly, there will be no overlap between the investors eligible to invest in Institutional Shares and investors eligible to invest in Non-Institutional Shares of a Fund or series thereof. 11. Under the Multiple Distribution System, certain expenses may be attributable to a Fund, but not to a particular series thereof. All such expenses will be borne by each class on the basis of the relative aggregate net assets of the classes, except in the case of a Fund that has series, in which case they will first be allocated among series, based on the relative aggregate net assets of such series. Expenses that are attributable to a particular series, but not to a particular class thereof, will be borne by each class on the basis of the relative aggregate net assets of the classes. 12. Applicants also propose to assess and, under certain circumstances, waive or reduce a CDSC on certain redemptions of their shares. The CDSC will not be imposed upon a redemption of shares that were purchased more than a specified period of time prior to the redemption (the ``CDSC Period'') or upon shares derived from reinvestment of distributions. Furthermore, no CDSC will be imposed upon an amount that represents share appreciation. 13. The Funds request the ability to waive the CDSC as described below: (a) On redemptions following the total disability (as evidenced by a determination by the federal Social Security Administration) of the shareholder (including a registered joint owner) occurring after the purchase of the shares being redeemed, (b) in the event of the death of the shareholder (including a registered joint owner), (c) on redemptions pursuant to the Funds' right to liquidate small accounts or to charge an annual small account fee, (d) on redemptions of shares acquired as a result of the investment of distributions from shares of a class of one Fund into shares of the same class of another Fund, (e) for redemptions made pursuant to a systematic withdrawal plan, and (f) in connection with the following redemptions of shares held by employer sponsored employee benefit plans maintained on the subaccount record keeping system made available by KFS: (i) Redemptions to satisfy participant loan advances (loan repayments would constitute new purchases for purposes of the contingent deferred sales charge and the conversion privilege), (ii) redemptions in connection with retirement distributions (limited at any one time to 10% of the total value of plan assets invested in the Fund), (iii) redemptions in connection with distributions qualifying under the hardship provisions of Internal Revenue Code section 403(b)(7) or in Treasury Regulation 401(k)- 1(d)(2), as amended, and (iv) redemptions representing returns of excess contributions to such plans. 14. The Funds will provide a credit (i.e., a reimbursement) for any CDSC paid by a redeeming shareholder in connection with a redemption of shares of a class followed by a reinvestment in any shares of the same class of the same Fund or, as permitted by KFS, the same class of another Fund, effected within such number of days of the redemption as may be specified in a Fund's prospectus. The CDSC credit will be paid by KFS. Upon redemption thereafter, when calculating the amount of the CDSC the shares will be deemed to have been held for the period from purchase through reinvestment, except for the period between redemption and reinvestment, until such shares are finally redeemed. Applicants' Legal Analysis 1. The creation of multiple classes of shares may result in shares of a class having priority over another class as to payment of dividends and having unequal voting rights, because under the proposed arrangement: (1) Shareholders of different classes (i) would pay different fees because of the rule 12b-1 plan (and related costs) and (ii) may pay different service fees, shareholder servicing fees and Class Expenses and (2) each class would be entitled to exclusive voting rights as to matters concerning its rule 12b-1 plan. 2. The abuses that section 18 of the Act is intended to address as set forth in section 1(b) of the Act are that the interest of investors are adversely affected when investment companies by excessive borrowing and the issuance of excessive amounts of senior securities increase unduly the speculative character of their junior securities or operate without adequate assets or reserves. The Multiple Distribution System does not involve borrowings and does not affect the Funds' existing assets or reserves. In addition, the proposed arrangement will not increase the speculative character of the shares of the Funds, since all such shares will participate pro rata in all the Fund's appreciation, income and expenses (with the exception of the different distribution fees payable by each class of shares and any other costs relating to implementing the rule 12b-1 plan for such class or an amendment to such plan including obtaining shareholder approval of the rule 12b-1 plan for such class or any amendment to such plan), any different service fees, shareholder servicing fees, and Class Expenses. 3. Applicants believe that the imposition of the CDSC is fair and in the best interests of their shareholders. The proposed CDSC provides shareholders the advantage of having more investment dollars working for them from the time of their purchase than if a sales load were imposed at the time of purchase. Furthermore, the CDSC described above is fair to shareholders because it applies only to amounts representing purchase payments and does not apply to amounts representing share appreciation, or to amounts representing reinvestment of distributions. Applicants Conditions Applicants agree that the order of the Commission 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 a Fund, and be identical in all respects to each other class, except as set forth below. The only differences among the various classes of shares of the same Fund will relate solely to: (a) Different distribution fee payments associated with any rule 12b-1 plan for a particular class of shares and any other costs relating to implementing or amending such Plan (including obtaining shareholder approval of such Plan or any amendment thereto) which will be borne solely by shareholders of such classes, (b) different service fees, (c) different shareholder servicing fees, (d) different Class Expenses, which will be limited to the following expenses determined by the Trustees to be attributable to a specific class of shares: (i) Printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, and proxy statements to current shareholders of a specific class; (ii) Commission registration fees incurred by a specific class; (iii) litigation or other legal expenses relating to a specific class; (iv) Trustee fees or expenses incurred as a result of issues relating to a specific class; and (v) accounting expenses relating to a specific class; (e) the voting rights related to any 12b-1 Plan affecting a specific class of shares, except as provided in condition 16 below; (f) conversion features; (g) exchange privileges; and (h) class names or designations. Any additional incremental expenses not specifically identified above which are subsequently identified and determined to be properly applied to one class of shares shall not be so applied unless and until approved by the Commission by an amended order. 2. The Trustees of each Fund, including a majority of the Independent Trustees, will approve the Multiple Distribution System for a particular Fund prior to its implementation by that Fund. The minutes of the meetings of the Trustees of each Fund regarding the deliberations of the Trustees with respect to the approvals necessary to implement the Multiple Distribution System will reflect the reasons for the Trustees' determination that the proposed Multiple distribution System is in the best interests of both the Fund and its shareholders. 3. The initial determination of any Class Expenses that will be applied to a class and any subsequent changes thereto will be reviewed and approved by a vote of the Board of Trustees, including a majority of the non-interested Trustees. Any persons authorized to direct the application and disposition of monies paid or payable by the Fund to meet Class Expenses shall provide to the Board of Trustees, and the Trustees shall review at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. 4. Any distributor will adopt compliance standards as to when each class of shares may be sold to particular investors. Applicants will require all persons selling shares of the Funds to conform to such standards; and such compliance standards will require that all investors eligible to purchase Institutional Shares will be sold only Institutional Shares rather than any other class of shares offered by a Fund, and that all investors eligible to purchase Non-Institutional Shares will be sold only Non-Institutional Shares. 5. The 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. On an ongoing basis, the Trustees 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 Trustees, including a majority of the Independent Trustees, shall take such action as is reasonably necessary to eliminate any such conflicts that may develop. KFS will be responsible for reporting any potential or existing conflicts to the Trustees. If a conflict arises, KFS at its own cost will remedy such conflict up to and including establishing a new registered management investment company. 7. The Trustees of the Funds will receive quarterly and annual statements concerning distribution and servicing 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 support any distribution or service fee charged to that class. Expenditures not related to the sale or servicing of a particular class will not be presented to the Trustees to support any distribution or servicing fee attributable to that class. The statements, including the allocations upon which they are based, will be subject to the review of the Independent Trustees in the exercise of their fiduciary duties. 8. Dividends paid by a Fund as 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 any distribution fees, service fees, shareholder servicing fees and Class Expenses allocated to a class will be borne exclusively by that class. 9. The methodology and procedures for calculating the net asset value and dividends and distributions of the various classes and the proper allocation of expenses between or among the various classes has been reviewed by an expert (the ``Expert'') who has rendered to the applicants a report, which has been provided to the staff of the Commission, stating 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 Funds 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 Commission pursuant to sections 30(a) and 30(b)(1) of the Act. The work papers of the Expert concerning such reports, following request by the Funds which the Funds agree to make, will be available for inspection by the Commission staff upon the written request to the Fund for such work papers by a senior member of the Division of Investment Management or of a Regional Office of the Commission, 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 Regional Administrators. The initial report of the Expert is a ``Report on Policies and Procedures in Existence,'' 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 they may be adopted by the AICPA from time to time. 10. 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 between or among such classes of shares; and this representation has been concurred with by the Expert in the initial report referred to in condition (9) 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 (9) above. Applicants agree to take immediate corrective action if the Expert, or appropriate substitute Expert, does not so concur with the ongoing reports. 11. The prospectuses of each Fund will contain a statement to the effect that a salesperson and any other person entitled to receive compensation for selling or servicing Fund shares may receive different compensation as to one class of Fund shares in relation to another. 12. The conditions pursuant to which the exemptive order is granted and the duties and responsibilities of the Trustees of the Funds concerning the Multiple Distribution System will be set forth in guidelines that will be furnished to the Trustees as part of the materials setting forth the duties and responsibilities of the Trustees. 13. Each Fund will disclose 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 other than Institutional Shares in every prospectus, regardless of whether all classes of shares are offered through each prospectus. Institutional Shares will be offered solely pursuant to a separate prospectus. The prospectus for Institutional Shares will disclose the existence of the Fund's other classes, and the prospectus for the Fund's other classes will disclose the existence of Institutional Shares and will identify the persons eligible to purchase Institutional Shares. The shareholder reports on each Fund will disclose the respective expenses and performance data applicable to each class of shares. 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 for all classes of shares of that Fund. To the extent that 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 except Institutional Shares. Advertising materials reflecting the expenses or performance data for Institutional Shares will be available only to those persons eligible to purchase Institutional 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 present separately each class of shares except Institutional Shares. 14. Applicants acknowledge that the grant of the exemptive order requested by the application will not imply Commission approval, authorization, or acquiescence in any particular level of payments that the Funds may make pursuant to their rule 12b-1 distribution plans or Administrative Plan in reliance upon the exemptive order. 15. Purchase Class shares will convert into Target Class 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. 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 service plan) that would increase materially the amount that may be borne by the Target Class shares under the plan, existing Purchase Class shares will stop converting into Target Class shares unless the Purchase Class shareholders, voting separately as a class, approve the proposal. The Trustees shall take such actions as are 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 the Target Class as it existed prior to implementation of the proposal, no later than such shares previously were scheduled to convert into the Target Class. If deemed advisable by the Trustees 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 the existing Purchase Class shares in all material respects except that New Purchase Class will convert into New Target Class. The New Target Class or the New Purchase Class may be formed without further exemptive relief. Exchanges or conversions described in this condition shall be effected in a manner that the Trustees reasonably believe will not be subject to federal taxation. In accordance with condition 6 above, any additional cost associated with the creation, exchange, or conversion of the New Target Class or the New Purchase Class shall be borne solely by the investment adviser and principal underwriter. 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, Investment Company Act Release No. 16619 (November 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. 94-10981 Filed 5-5-94; 8:45 am] BILLING CODE 8010-01-M