[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11703]


[[Page Unknown]]

[Federal Register: May 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20284; 812-7939]

 

New York Life Institutional Funds, Inc., et al.; Application

May 9, 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: New York Life Institutional Funds, Inc. (the ``Company''), 
The MainStay Funds (the ``Trust''), and NYLIFE Distributors, Inc. 
(``Nylife Distributors'').

RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from 
sections 2(a)(32), 2(a)(35), 18(f)(1), 18(g), 18(i), 22(c), and 22(d) 
of the Act and rule 22c-1 thereunder.

SUMMARY OF APPLICATION: Applicants seek an order that would permit the 
Company and the Trust to (a) issue multiple classes of shares 
representing interests in the same portfolio of securities and (b) 
assess and, under certain circumstances, waive a contingent deferred 
sales charge (``CDSC'') on redemptions of shares. The order will 
supersede previous orders that permitted the assessment of a CDSC.

FILING DATE: The application was filed on June 9, 1992, and amended on 
August 6, 1992, November 12, 1992, January 27, 1994, and May 5, 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 June 3, 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, 51 Madison Avenue, New York, New York 10010.

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.

Applicants' Representations

    1. The Company and the Trust are open-end management investment 
companies consisting of multiple series. Nylife Distributors serves as 
distributor for the Company and the Trust. New York Life Insurance 
Company (``New York Life''), MacKay-Shields Financial Corporation, 
Monitor Capital Advisors, Inc., and Quorum Capital Management Limited 
serve as investment advisers to individual series of the Company and 
the Trust. New York Life serves as administrator to the Company, and 
Nylife Distributors serves as administrator to the Trust. Nylife 
Distributors, MacKay-Shields Financial Corporation, Monitor Capital 
Advisors and Quorum Capital Management are wholly owned subsidiaries of 
New York Life.
    2. Applicants request that relief also extend to all series of the 
Company or the Trust that may be created in the future and to other 
registered open-end management investment companies for which Nylife 
Distributors, or any entity that controls, is controlled by or is under 
common control with Nylife Distributors, may serve as investment 
adviser or distributor (collectively these investment companies, the 
Company, and the Trust are the ``Funds'').

A. The Multiple Class Distribution System

    1. Applicants propose to establish a multi-class distribution 
system to enable each of the Funds to create an unlimited number of 
classes of shares. Classes could be offered in connection with a 12b-1 
plan (a ``12b-1 Plan''), a non-rule 12b-1 administrative services 
arrangement (``Administrative Services Arrangement''), neither a 12b-1 
Plan nor an Administrative Services Arrangement, or a combination of 
these options. These classes also could be subject to different sales 
loads. Classes offered subject to differing types of sales loads would 
provide investors the option of purchasing shares that would either be 
subject to a conventional front-end sales load (the ``Front-End 
Option''), subject to a CDSC (the ``Deferred Option''), subject to a 
combination of a front-end load and a CDSC (the combination option), 
any of which could be coupled with a 12b-1 Plan or an Administrative 
Services Arrangement, or not subject to any sales charges.
    2. Under Administrative Services Arrangements, Funds may enter into 
agreements (``Administrative Services Agreements'') with organizations 
to provide services to the clients of the organization, who 
beneficially own shares of a particular class. Alternatively, a Fund 
may enter into an Administrative Services Agreement with the Fund's 
administrator to provide services to class shareholders. With respect 
to each class of shares, the Fund would pay an organization or the 
administrator for its services in accordance with its particular 
Administrative Services Agreement (such payments are ``Administrative 
Services Payments'') and the expense of such payments would be borne 
entirely by the beneficial owners of the class of shares to which each 
such Administrative Services Agreement relates.
    3. Expenses incurred by a Fund may not be attributable to a 
particular portfolio or to a particular class of share of a portfolio 
(``Corporate Level Expenses''). Certain expenses may be attributable to 
a portfolio but not attributable to any particular class of the 
portfolio's shares (``Fund Expenses''). Corporate Level and Fund 
Expenses will be allocated among the classes of shares based on the 
value of their relative net assets at the beginning of the day. In 
addition to the cost of 12b-1 and/or Administrative Service Payments, 
each class will bear certain expenses specifically attributable to the 
particular class (``Class Expenses''), as provided in condition 1 
below.
    4. Applicants wish to have the ability to convert shares of one 
class to those of another class, subject to conditions 5 and 16 below. 
For example, shares of a Deferred Option class could convert after a 
specified period of time to shares of the Front-End Option class in the 
same portfolio. For purposes of conversion to Front-End Option shares, 
all shares in a shareholder's account that had been purchased through 
the reinvestment of dividends and other distributions paid in respect 
of Deferred Option shares would be considered to be held in a separate 
sub-account. Each time any Deferred Option shares in the shareholder's 
fund account convert to Front-End Option shares, a pro rata portion of 
the Deferred Option shares then in the sub-account also would convert 
to Front-End Option shares. The portion would be determined by the 
ratio that the shareholder's Deferred Option shares converting to 
Front-End Option shares bears to the shareholder's total Deferred 
Option shares not acquired through dividends and distributions.
    5. Applicants propose that each class of shares sold without a 
front-end sales load or subject to a CDSC be permitted to be exchanged 
for shares of a class sold without a front-end sales load or subject to 
a CDSC in the same or another Fund. Each class of shares sold with a 
front-end sales load or subject to a CDSC would be only exchanged for 
the same class of shares in a different Fund. The exchange privileges 
would be operated in accordance with rule 11a-3 under the Act.

B. The CDSC

    1. Applicants request an exemption from sections 2(a)(32), 
2(a)(35), 22(c), and 22(d) of the Act, and rule 22c-1 thereunder, to 
permit the Funds to assess a CDSC on redemptions of certain classes of 
shares, and to permit the Funds to waive the CDSC for certain types of 
redemptions. The requested exemption will supersede three prior 
orders.\1\ Each Fund's particular CDSC schedule may vary, but the sum 
of any front-end sales charge, CDSC, and asset based sales charge will 
not exceed the maximum sales charge provided in article III, section 
26(d) of the Rules of Fair Practice of the National Association of 
Securities Dealers, Inc. (``NASD'').
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    \1\MacKay-Shields MainStay Series Funds, Investment Company Act 
Release Nos. 15038 (Apr. 3, 1986) (notice), 15078 (Apr. 30, 1986) 
(order), 15718 (May 5, 1987) (notice), and 15758 (May 29, 1987) 
(order) and The Mainstay Funds, Investment Company Act Release Nos. 
20046 (Jan. 21, 1994) and 20104 (Mar. 1, 1994).
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    2. The CDSC will not be imposed on shares that were purchased more 
than a specified period of years prior to their redemption or on shares 
derived from the reinvestment of distributions. Furthermore, no CDSC 
will be imposed on an amount that represents an increase in the value 
of the shareholder's account resulting from capital appreciation above 
the amount paid for shares purchased during the CDSC period. In 
determining whether a CDSC is applicable, it will be assumed that a 
redemption is made first of shares representing capital appreciation, 
second of shares derived from reinvestment of dividends and capital 
gains distributions, and finally of other shares held by the 
shareholder for the longest period of time.
    3. Applicants request the ability to waive or reduce the CDSC (a) 
on redemptions following the death or disability, as defined in section 
72(m)(7) of the Internal Revenue Code of 1986, as amended (the 
``Code''), of a shareholder if redemption is made within one year of 
death or disability of a shareholder; (b) in connection with 
distributions permitted to be made under the Code without penalty from 
an individual retirement account or other qualified retirement plan, 
other than tax-free rollovers or transfers of assets; (c) in connection 
with redemptions of shares purchased by active or retired officers, 
directors or trustees, partners and employees of the Funds, the 
distributor or affiliated companies, by members of the immediate 
families of such persons, by dealers having a sales agreement with the 
distributor, or any trust, pension, profit sharing plan for the benefit 
of such persons; (d) on redemptions by New York Life or an affiliate 
thereof; (e) in connection with redemptions of shares made pursuant to 
a shareholder's participation in any systematic withdrawal plan adopted 
by a Fund; (f) in connection with redemptions by accounts established 
with an initial purchase order of $1 million or more; (g) in connection 
with redemptions effected by separate accounts or advisory accounts 
managed by New York Life or an affiliated company; (h) in connection 
with redemptions by tax-exempt employee benefit plans resulting from 
the adoption or promulgation of any law or regulation pursuant to which 
continuation of the investment in the Funds would be improper; (i) in 
connection with redemptions effected by registered investment companies 
by virtue of transactions with a Fund; (j) in connection with 
redemptions by any state, county, or city, or any instrumentality, 
department, authority or agency thereof and by trust companies and bank 
trust departments; (k) on redemptions made for the purpose of funding a 
loan to a participant in a tax-qualified retirement plan permitted to 
make such loans; (1) on transfers to (i) other funding vehicles 
sponsored or distributed by New York Life or an affiliated company or 
(ii) guaranteed investment contracts, regardless of the sponsor, within 
a retirement plan; (m) on redemptions made to meet required 
distributions by a charitable remainder trust under section 664 of the 
Code; and (n) on redemptions by living revocable trusts.

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 any implementing the multiple class 
distribution system, the Funds 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. The proposed arrangement does not 
involve borrowings, and does not affect the Funds' existing assets or 
reserves. The proposed arrangement also will not increase the 
speculative character of the shares of a Fund.
    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 permitting applicants to assess and, under certain 
circumstances, waive a CDSC on redemptions of shares. Applicants submit 
that their request permits shareholders purchasing a class of shares 
subject to a CDSC to have the advantage of greater investment dollars 
working for them from the time of their purchase of shares of the Funds 
than if a sales load were imposed at the time of purchase.

Applicants' Conditions

    Applicants agree that any order granting the requested relief shall 
be subject to the following conditions:

A. Multiple Class Distribution System

    1. Each class of shares will represent interests in the same 
portfolio of investments of a Fund, and be identical in all respects, 
except as set forth below. The only differences between the classes of 
shares of a Fund relate solely to: (a) The method of financing certain 
Class Expenses, which are limited to (i) transfer agency fees 
identified by the transfer agent as being attributable to a specific 
class of shares; (ii) printing and postage expenses related to 
preparing and distributing materials such as shareholder reports, 
prospectuses, and proxies to current shareholders of a specific class; 
(iii) blue sky registration fees incurred by a class of shares; (iv) 
SEC registration fees incurred by a class of shares; (v) the expense of 
administrative personnel and services as required to support the 
shareholders of a specific class; (vi) litigation or other legal 
expenses relating solely to one class of shares; and (vii) directors'/
trustees' fees incurred as a result of issues relating to one class of 
shares; (b) expenses assessed to a class resulting from 12b-1 and 
Administrative Services Payments; (c) voting rights as to matters 
exclusively affecting one class of shares, except as provided in 
condition (5) below; (d) exchange features; (e) conversion features; 
and (f) class designation differences. Any additional incremental 
expenses not specifically identified above which are subsequently 
identified and determined to be properly allocated to one class of 
shares shall not be so allocated until approved by the SEC pursuant to 
an amended order.
    2. The directors of the Company, trustees of the Trust, and the 
directors/trustees of any subsequently created Funds (collectively, 
``Directors/Trustees''), including a majority of the independent 
Directors/Trustees, will approve the offering of multiple classes of 
shares (the ``Multi-Class System''). The minutes of the respective 
meetings of the Directors/Trustees regarding the deliberations of the 
Directors/Trustees with respect to the approvals necessary to implement 
the Multi-Class System will reflect in detail the reasons for the 
Directors/Trustees' determination that the proposed Multi-Class System 
is in the best interests of both the Funds and their 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/Trustees 
of the Funds including a majority of the Directors/Trustees who are not 
interested persons of the Fund. Any person authorized to direct the 
allocation and disposition of monies paid or payable by a Fund to meet 
Class Expenses shall provide to the board of Directors/Trustees, and 
the Directors/Trustees 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/Trustees, pursuant to their 
fiduciary responsibilities under the Act and otherwise, will monitor 
each Fund for the existence of any material conflicts between the 
interests of the various classes of shares. The Directors/Trustees, 
including a majority of the independent Directors/Trustees, shall take 
such action as is reasonably necessary to eliminate any such conflicts 
that may develop. Each Fund's adviser and distributor will be 
responsible for reporting any potential or existing conflicts to the 
Directors/Trustees. If a conflict arises, the Fund's adviser and 
distributor at their own cost will remedy such conflict up to and 
including establishing a new registered management investment company.
    5. If a Fund implements any amendment to its 12b-1 Plan (or, if 
presented to shareholders, adopts or implements any amendment of a non-
rule 12b-1 shareholder services plan) that would increase materially 
the amount that may be borne by class of shares (for purposes of the 
Application, ``Class X'') under the plan, existing shares of a class of 
shares that converts into Class X shares after a period of time (for 
purposes of the application, ``Class Y'') will stop converting into 
Class X unless the Class Y shareholders, voting separately as a class, 
approve the proposal. The Directors/Trustees shall take such action as 
is necessary to ensure that existing Class Y shares are exchanged or 
converted into a new class of shares (``New Class X''), identical in 
all material respects to Class X as it existed prior to implementation 
of the proposal, no later than the date such shares previously were 
scheduled to convert into Class X. If deemed advisable by the 
Directors/Trustees to implement the foregoing, such action may include 
the exchange of all existing Class Y shares for a new class (``New 
Class Y''), identical to existing Class Y shares in all material 
respects except that New Class Y will convert into New Class X. New 
Class X or New Class Y may be formed without further exemptive relief. 
Exchanges or conversions described in this condition shall be effected 
in any manner that the Directors/Trustees 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 Class X or New Class Y shall be borne solely by the adviser and 
the distributor. Class Y shares sold after the implementation of the 
proposal may convert into Class X shares subject to the higher maximum 
payment, provided that the material features of the Class X plan and 
the relationship of such plan to the Class Y shares are disclosed in an 
effective registration statement.
    6. The Administrative Services Arrangements 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.
    7. The Directors/Trustees of the Fund 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 justify any distribution or servicing fee charged to 
that class. Expenditures not related to the sale or servicing of a 
particular class will not be presented to the Directors/Trustees to 
justify any fee attributable to that class. The statements, including 
the allocations upon which they are based, will be subject to the 
review an approval of the independent Directors/Trustees in the 
exercise of their fiduciary duties.
    8. Dividends paid by a Fund with respect to each class of its 
shares 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 
made by a class under its 12b-1 Plan or Administrative Services 
Arrangement and any Class Expenses 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 among the classes has been reviewed by an 
expert (the ``Expert'') who has rendered a report to applicants, which 
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 
applicants that the calculations and allocations are being made 
properly. The reports of the Expert will 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 workpapers of the Expert with respect to such 
reports, following request by the Funds (which the Funds agree to 
provide), will be available for inspection by the SEC staff upon 
written request by a senior member of the Division of Investment 
Management, limited to the Director, an Associate Director, the Chief 
Accountant, the Chief Financial Analyst, an Assistant Director and any 
Regional Administrators or Associate and Assistant Administrators. The 
initial report of the Expert is a ``request 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.
    10. Applicants have adequate facilities in place to ensure 
implementation of the methodology and procedures for calculating the 
net asset value, dividends and distributions, and sales loads of the 
various classes of shares and the proper allocation of expenses among 
the 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 will take immediate 
corrective measures if this representation is not concurred in by the 
Expert, or appropriate substitute Expert.
    11. The prospectuses of each class of a 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 with respect to one particular class 
of shares over another in that Fund.
    12. Each Fund's distributor will adopt compliance standards as to 
when each class of shares may appropriately be sold to particular 
investors. Applicants will require all persons selling shares of the 
Funds to agree to conform to such standards.
    13. The conditions pursuant to which the exemptive order is granted 
and the duties and responsibilities of the Directors/Trustees with 
respect to the Multi-Class System will be set forth in guidelines which 
will be furnished to the Directors/Trustees.
    14. Each Fund will disclose the respective expenses, performance 
data, distribution arrangements, services, fees, sales charges, 
deferred sales charges, and exchange privileges (if any) applicable to 
each class of shares in every prospectus, regardless of whether all 
classes of shares are offered through each prospectus. Each Fund will 
disclose the respective expenses and performance data applicable to all 
classes of shares in every shareholder report. The shareholder reports 
will contain, in the statement of assets and liabilities and statement 
of operations, information related to the Fund as a whole generally and 
not on a per class basis. Each Fund's per share data, however, will be 
prepared on a per class basis with respect to all classes of shares of 
such Fund. To the extent that any advertisement or sales literature 
describes the expenses and/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 a Fund's net asset value or public offering price will 
present each class of shares separately.
    15. Applicants acknowledge that the grant of the requested 
exemptive order will not imply SEC approval, authorization of, or 
acquiescence in any particular level of payments that applicants may 
make pursuant to any 12b-1 Plan or Administrative Services Arrangement 
in reliance on the exemptive order.
    16. Any conversion of shares from one class to another will be 
based on the relative net assets 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.

B. CDSC

    1. Applicants will comply with the representations in the 
application concerning the CDSC and the provisions of proposed rule 6c-
10 under the Act\2\ as such rule is currently proposed and as it may be 
reproposed, adopted, or amended.
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    \2\Investment Company Act Release No. 16619 (Nov. 2, 1988).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11703 Filed 5-12-94; 8:45 am]
BILLING CODE 8010-01-M