[Federal Register Volume 59, Number 116 (Friday, June 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14734]


[[Page Unknown]]

[Federal Register: June 17, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20350; 812-8834]

 

American AAdvantage Funds, et al.; Notice of Application

June 10, 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: American AAdvantage Funds, and future portfolios thereof 
(the ``Trust''), and AMR Investment Services, Inc. (``AMR'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) for an 
exemption from sections 18(f)(1), 18(g), and 18(i) of the Act.

SUMMARY OF APPLICATION: Applicants seek an amendment to a prior order 
that permits applicants to issue two classes of shares representing 
interests in the same portfolio of securities (the ``Prior Order'').\1\ 
The requested amendment would permit applicants to issue an unlimited 
number of classes of shares. Applicants request that any relief granted 
pursuant to the application also apply to any future open-end 
management investment companies that are advised by AMR or an entity 
controlling, controlled by, or under common control (within the meaning 
of section 2(a)(9) of the Act) with AMR and that issue and sell classes 
of shares on a basis identical in all material respects to that 
described in the application.

    \1\Investment Company Act Release Nos. 18298 (Sept. 6, 1991) 
(notice) and 18346 (Oct. 7, 1991) (order).
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FILING DATE: The application was filed on February 8, 1994, and amended 
on March 11, 1994, May 11, 1994, and June 7, 1994.

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 July 6, 1994, 
and should be accompanied by proof of service on applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth St., NW., Washington, DC 20549. 
Applicants, 4333 Amon Carter Boulevard, Fort Worth, Texas 76155.

FOR FURTHER INFORMATION CONTACT:Marc Duffy, Staff Attorney, (202) 942-
0565, or C. David Messman, Branch Chief, (202) 942-0564 (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 Trust is registered under the Act 
as an open-end management investment company. The Trust currently 
offers shares representing interests in seven investment portfolios 
(together with future investment portfolios, the ``Funds''); the 
American AAdvantage Money Market Fund, the American AAdvantage 
Municipal Money Market Fund; and the American AAdvantage U.S. Treasury 
Money Market Fund (the ``Money Market Funds''); the American AAdvantage 
Balanced Fund (the ``Balanced Fund''); the American AAdvantage Equity 
Fund (the ``Equity Fund''); the American AAdvantage International 
Equity Fund (the ``International Equity Fund''); and the American 
AAdvantage Limited-Term Income Fund (the ``Limited-Term Income Fund'' 
and, collectively with the Balanced Fund, the Equity Fund, and 
International Equity Fund, the ``Non-Money Market Funds'').
    2. AMR is the manager of each Fund, the sole investment adviser of 
the Money Market Funds, and the sole active investment adviser to the 
Limited-Term Income Fund. AMR is a wholly-owned subsidiary of AMR 
Corporation, the parent company of American Airlines, Inc. The assets 
of each of the Non-Money Market Funds, other than the Limited-Term 
Income Fund, are allocated by AMR among certain investment advisers 
designated for each Fund.
    3. Applicants seek to amend the Prior Order to permit the Funds to 
offer an unlimited number of classes of shares in their existing and 
future investment portfolios. These new classes will be offered (a) in 
connection with a plan adopted pursuant to rule 12b-1 under the Act (a 
``Distribution Plan''), (b) in connection with a non-rule 12b-1 
shareholder services plan (a ``Shareholder Services Plan''), (c) in 
connection with the allocation of certain expenses, as described below, 
that are directly attributable only to certain classes, and/or (d) 
without any Distribution Plan or Shareholder Services Plan. The 
Distribution Plan and the Shareholder Services Plan are sometimes 
collectively referred to as the ``Plans.''
    4. Shares of the Funds presently are offered with no front-end 
sales charge. Pursuant to the terms of the Prior Order, the Money 
Market Funds currently offer and sell two classes of shares designated 
as Mileage Class shares and Institutional Class shares. Mileage Class 
shares are presently offered and sold only to natural persons and 
certain grantor trusts. Institutional Class shares of the Money Market 
Funds and shares of the Non-Money Market Funds are presently offered 
and sold primarily to institutions.
    5. Shares of each existing Fund are distributed directly by the 
Trust. In the future, some or all classes of the Funds may be 
distributed through one or more principal underwriters. Under the 
current self-distribution arrangement, distribution activities are 
carried out primarily by officers of the Trust. The Mileage Class of 
each of the Money Market Funds has adopted a rule 12b-1 plan, which 
provides that each Mileage Class will pay .25% of its average daily net 
assets to AMR as compensation for distribution services.
    6. Currently, each shareholder of the Non-Money Market Funds is 
required to enter into a shareholder services agreement with AMR (a 
``Shareholder Services Agreement''). Under this agreement, AMR provides 
or oversees on behalf of the shareholder's account certain 
administrative and management services (other than investment advisory 
and portfolio allocation services) for which each shareholder (and not 
the Fund) pays an annualized fee directly to AMR. This fee currently 
equals 0.30% of a shareholder's assets invested in each Fund.
    7. If applicants' proposed multiple class distribution system 
(``Multiple Class System'') is approved by the SEC, and subject to 
shareholder approval, the Non-Money Market Funds will no longer have 
Shareholder Services Agreements. After implementation of the Multiple 
Class System, the Non-Money Market Funds will have internalized fees as 
described below. Certain classes of the Funds, however, may establish 
an externalized account maintenance fee for low balance accounts. It is 
presently expected that any account maintenance fee charged will not 
exceed an annual fee of approximately $25. The fee will be a direct 
charge against the shares held in the account and will be collected by 
redeeming a sufficient number of full and/or fractional shares.
    8. With respect to each new class of shares created, the Funds 
could enter into a Distribution Plan agreement and/or a Shareholder 
Services Plan agreement with AMR and/or other groups, organizations or 
institutions (``Organizations'') concerning the provision of certain 
services to shareholders of a particular class.
    9. Because many of the services contemplated under a Distribution 
Plan will be distribution related, such Plan will be adopted pursuant 
to rule 12b-1 under the Act. A Shareholder Services 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, although the shares offered in connection with 
such a Plan need not be accorded the voting rights specified in rule 
12b-1. Under a Shareholder Services Plan, fees will be paid by a Fund 
to one or more Organizations for shareholder services provided with 
respect to the shares. Organizations may charge other fees directly to 
class shareholders who are the beneficial owners of shares in 
connection with class shareholder accounts.
    10. With respect to each new class, a Fund could pay an 
Organization either directly or indirectly pursuant to a Distribution 
Plan or Shareholder Services Plan for its services and assistance in 
accordance with the terms of its particular Plan agreement (``Plan 
Payments'') and the expense of such payments will be borne entirely by 
the beneficial owners of the class of the Fund to which each Plan 
agreement relates. Plan Payments paid to an Organization pursuant to a 
Distribution Plan agreement currently are not expected to exceed .75% 
of the average daily net asset value of the shares of the class subject 
to that particular Distribution Plan agreement. Similarly, Plan 
Payments paid to an Organization pursuant to a Shareholder Services 
Plan agreement are currently not expected to exceed .30% of the average 
daily net value of the shares of the class subject to that particular 
Shareholder Services Plan agreement.
    11. If any class of a Fund's shares are distributed by a member of 
the National Association of Securities Dealers, Inc. (``NASD''), with 
respect to each class of shares such Fund shall comply with Article 
III, section 26 of the Rules of Fair Practice of the NASD as it relates 
to the maximum amount of asset-based sales charges that may be imposed 
by an investment company.
    12. Applicants anticipate that shares of one new class will be 
offered to tax-exempt employee benefit and retirement plans of AMR 
Corporation and its affiliates (the ``AMR Class''). Other new classes, 
as well as the existing Institutional Class and Mileage Class, will be 
offered to institutional investors (other than such benefit plans) and 
to natural persons (the ``Unaffiliated Classes''). The offerees of AMR 
Class shares, on the one hand, and of the Unaffiliated Classes, on the 
other hand, will not overlap. Offerees of the AMR Class shares will 
consist of tax-exempt employee benefit and retirement plans of AMR 
Corporation and its affiliates for the benefit of employees, under 
which the assets are held in trust by a trustee and employees have 
limited pre-retirement access to the assets. Applicants propose to 
describe, in a separate prospectus, the expenses, performance data and 
net asset value of the AMR Class shares only to investors eligible to 
purchase AMR Class shares and not to investors eligible to purchase 
shares of the Unaffiliated Classes. Only those limited ``inside'' 
investors described above will be eligible to purchase AMR Class 
shares. Persons to whom the Unaffiliated Classes will be offered will 
be ineligible to purchase AMR Class shares since such investors do not 
fall within the scope of AMR Class offerees as defined above.
    13. In addition, because shares of each class will be marketed to 
different types of investors, the method of soliciting sales of such 
shares will vary. A separate prospectus will be used to offer AMR Class 
shares and will be tailored to the needs of such investors regarding 
purchase procedures and cost information.
    14. The shares in different classes within a Fund might have 
different exchange privileges. Any exchange privilege connected to any 
of the Funds' shares will be limited to exchanges among Funds that are 
part of the same ``group of investment companies,'' as defined in rule 
11a-3 under the Act. All exchanges will be conducted in accordance with 
the provisions of rule 11a-3. In addition, applicants anticipate that 
shares of each Fund will be exchangeable for shares of other classes 
within the same Fund to the extent that the shareholder will have been 
eligible to purchase the shares acquired in the exchange.
    15. The expenses of the Trust that cannot be attributed directly to 
any one Fund (``Trust Expenses'') generally will be allocated to each 
Fund based on the relative net assets of those Funds. Certain expenses 
that may be attributable to a particular Fund, but not a particular 
class (``Fund Expenses'') will be allocated to each class based on the 
daily net assets of the class. Finally, certain expenses may be 
attributable to a particular class of shares of a Fund (``Class 
Expenses''). Class Expenses will be charged directly to the net assets 
of the particular class and thus will be borne on a pro rata basis by 
the outstanding shares of such class.
    16. Class Expenses may include: (a) Plan Payments relating to a 
class of shares, (b) transfer agent fees identified as being 
attributable to a specific class of shares, (c) stationery, printing, 
postage, and delivery expenses related to preparing and distributing 
materials such as shareholder reports, prospectuses, and proxy 
statements to current shareholders of a specific class, (d) Blue Sky 
registration fees incurred by a class of shares, (e) SEC registration 
fees incurred by a class of shares, (f) expenses of Administrative 
Services Agreements and other administrative personnel and services as 
required to support the shareholders of a specific class, (g) trustees' 
fees or expenses incurred as a result of issues relating to one class 
of shares, (h) accounting expenses relating solely to one class of 
shares, (i) auditors' fees, litigation expenses, and legal fees and 
expenses relating to a class of shares, and (j) expenses incurred in 
connection with shareholders meetings as a result of issues relating to 
one class of shares. Any other expense will be allocated as a Class 
Expense only if such allocation is approved by a further SEC exemptive 
order.
    17. AMR may choose to waive or reimburse Class Expenses on certain 
classes of the Fund on a voluntary, temporary basis. Class Expenses are 
by their nature specific to a given class and obviously 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 Fund.
    18. In addition, AMR may waive or reimburse Trust Expenses and/or 
Fund Expenses (with or without a waiver or reimbursement of Class 
Expenses), but only if the same proportionate amount of Trust Expenses 
and/or Fund Expenses are waived or reimbursed for each class of a Fund. 
Thus, any Trust Expenses that are waived or reimbursed will be credited 
to each class of a Fund according to the relative net assets of the 
classes. Similarly, any Fund Expenses that are waived or reimbursed 
will be credited to each class of that Fund according to the relative 
net assets of the classes. Trust Expenses and Fund Expenses apply 
equally to all classes of a given Fund. Accordingly, it may not be 
appropriate to waive or reimburse Trust Expenses or Fund Expenses at 
different levels for different classes of the same Fund.

Applicants' Legal Analysis

    1. Applicants request an amendment to the Prior Order exempting 
them from the provisions of sections 18(f)(1), 18(g), and 18(i) of the 
Act to the extent that the proposed issuance and sale of an unlimited 
number of classes of shares representing interests in the same Funds 
might be deemed to (a) result in a ``senior security'' within the 
meaning of section 18(g) and thus be prohibited by section 18(f)(1), 
and (b) violate the equal voting provisions of section 18(i).
    2. The proposed Multi-Class Arrangement 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 in a Fund, since all shares will participate in 
all of a Fund's appreciation, income, and expenses in the manner 
described above.
    3. Applicants believe that the proposed allocation of expenses and 
voting rights under the Multi-Class System is equitable and will not 
discriminate against any group of shareholders. Investors purchasing 
shares offered in connection with a Plan and/or bearing Class Expenses 
will bear the costs associated with the related services and have 
exclusive shareholder voting rights with respect to matters affecting 
the applicable Plan. Conversely, investors purchasing shares that are 
not covered by a plan or not bearing Class Expenses will not be 
burdened with such expenses or enjoy such voting rights.
    4. Accordingly, applicants assert that the requested amendment is 
appropriate in the public interest and is 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 amended order granting the requested 
relief shall be subject to the following conditions:
    1. Each class of shares of a Fund will represent interests in the 
same portfolio of investments, and be identical in all respects, except 
as set forth below. The only differences between the classes of shares 
of a Fund will relate solely to one or more of the following: (a) 
Expenses assessed to a class pursuant to a Plan, if any, with respect 
to such class; (b) the impact of Class Expenses, which are limited to 
any or all of the following: (i) Transfer agent fees identified as 
being attributable to a specific class of shares, (ii) stationery, 
printing, postage, and delivery expenses related to preparing and 
distributing materials such as shareholder reports, prospectuses, and 
proxy statements 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) expenses of 
Administrative Services Agreements and other administrative personnel 
and services as required to support the shareholders of a specific 
class, (vi) Trustees' fees or expenses incurred as a result of issues 
relating to one class of shares, (vii) accounting expenses relating 
solely to one class of shares, (viii) auditors' fees, litigation 
expenses, and legal fees and expenses relating to a class of shares, 
and (ix) expenses incurred in connection with shareholders meetings as 
a result of issues relating to one class of shares; (c) the fact that 
the classes will vote separately with respect to matters relating to 
the Fund's Distribution Plan, if any, or any other matters 
appropriately limited to such class(es); (d) the different exchange 
privileges of the class of shares, if any; and (e) the designation of 
each class of shares of a Fund. Any additional incremental expenses not 
specifically identified above that 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 SEC.
    2. The Board of Trustees (the ``Board''), including a majority of 
the Trustees who are not interested persons of the Trust (``Independent 
Trustees'') will have approved the Multiple Class System with respect 
to a particular Fund prior to the implementation of the system by that 
Fund. The minutes of the meetings of the Board of the Trust regarding 
the deliberations of the Trustees with respect to the approvals 
necessary to implement the Multiple Class System will reflect in detail 
the reasons for the determination by the Board that the proposed 
Multiple Class System is in the best interests of each Fund 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 Trustees of the 
Trust, including a majority of the Independent Trustees. Any person 
authorized to direct the allocation and disposition of monies paid or 
payable by a Fund to meet Class Expenses shall provide the Board 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. If any class is subject to a Shareholder Services Plan, the Plan 
will be adopted and operated in accordance with the procedures set 
forth in rule 12b-1 (b) through (f) as if the expenditure made 
thereunder were subject to rule 12b-1, except that shareholders need 
not enjoy the voting rights specified in rule 12b-1.
    5. On an ongoing basis, the Board of the Trust, pursuant to its 
fiduciary responsibilities under the Act and otherwise, will monitor 
each Fund, as applicable, for the existence of any material conflicts 
among the interests of the classes of its shares, if there is more than 
one class. The Board, including a majority of the Independent Trustees, 
shall take such actions as is reasonably necessary to eliminate any 
such conflicts that may develop. AMR and each Fund's manager investment 
adviser(s) and distributor, if any, will be responsible for reporting 
any potential or existing conflicts to the Board. If such a conflict 
arises, AMR, and the investment adviser(s) and distributor, if any, at 
their own expense, will take such actions as are necessary to remedy 
such conflict, including establishing a new registered management 
investment company, if necessary.
    6. The Board of each Fund will receive quarterly and annual 
statements concerning the amounts expended under the Plans 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 fee for services charged to that class. Expenditures not 
related to the sale or servicing of a particular class will not be 
presented to the Board 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 Trustees 
in the exercise of their fiduciary duties.
    7. Dividends and other distributions paid by a Fund with respect to 
each class of its shares, to the extent any dividends and other 
distributions are paid, will be declared and paid on the same day and 
at the same time, and will be determined in the same manner and will be 
in the same amount, except that the amount of the dividends and other 
distributions declared and paid by a particular class may be different 
from that of another class because Plan Payments made by a class under 
a Plan and other Class Expenses will be borne exclusively by that 
class.
    8. The methodology and procedures for calculating the net asset 
value and dividends and other distributions of the classes and the 
proper allocation of expenses among the classes have been reviewed by 
an expert (the ``Expert'') who has rendered a report to the Board of 
the Trust, which has been provided to the staff of the SEC, stating 
that such methodology and procedures are adequate to ensure that such 
calculations and allocations would 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 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 work papers of the Expert with respect to such 
reports, following request by the Funds which the Funds agree to make, 
will be available for inspection by the SEC staff upon written request 
to the Funds for such work papers by a senior member of the Division of 
Investment Management or a Regional office of the SEC, limited to the 
Director, an Associate Director, the Chief Accountant, the Chief 
Financial Analyst, Assistant Director, and any Regional Administrators 
or Associate or Assistant Administrators. The initial report of the 
Expert is a ``Special Purpose'' report on ``policies and procedures 
placed in operation'' in accordance with Statements on Auditing 
Standards (``SAS'') No. 70, ``Reports on the Processing of Transactions 
by Service Organizations'' of the American Institute of Certified 
Public Accountants (``AICPA''). Ongoing reports will be reports on 
``policies and procedures placed in operation and tests of operating 
effectiveness'' prepared in accordance with 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 other distributions of the 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 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 action 
if the Expert or appropriate substitute Expert, does not so concur in 
the ongoing reports.
    10. If any class of shares is distributed by a principal 
underwriter, the prospectus of such Fund will contain a statement to 
the effect that a salesperson and any other person entitled to receive 
compensation for selling or servicing shares of a Fund may receive 
different compensation with respect to one particular class of shares 
over another in the Fund.
    11. If any class of shares is distributed by a principal 
underwriter, the Trust 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 a Fund to agree 
to conform to such standards.
    12. The conditions pursuant to which the amended exemptive order is 
granted and the duties and responsibilities of the Board of the Trust 
with respect to the Multiple Class System will be set forth in 
guidelines which will be furnished to the Trustees.
    13. Each Fund will disclose the respective expenses, performance 
data, distribution arrangements, services, fees, sales loads, and 
exchange privileges applicable to each class of shares, other than AMR 
Class shares, in every prospectus, regardless of whether all classes of 
shares are offered through each prospectus. AMR Class shares will be 
offered solely pursuant to a separate prospectus. The prospectus for 
the AMR class shares will disclose the existence of the Funds' other 
classes, and the prospectus for the Funds' other classes will disclose 
the existence of the AMR Class shares and will identify the investors 
eligible to purchase AMR Class shares. 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 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, except AMR Class 
shares. Advertising materials reflecting the expenses or performance 
data for AMR Class shares will be available only to those persons 
eligible to purchase such shares. The information provided by 
applicants for publication in any newspaper or similar listing of a 
Fund's net asset value and public offering price will present each 
class of shares separately. The Funds need not provide such information 
with respect to the AMR Class shares; however, to the extent that a 
Fund chooses to do so, the net asset value or public offering price of 
AMR Class shares also will be presented separately.
    14. Applicants acknowledge that the grant of the amended exemptive 
order requested by this application will not imply SEC approval of, 
authorization of, or acquiescence in any particular level of payments 
that any Fund may make pursuant to a Plan in reliance on the amended 
exemptive order.

    For the Commission, by the Division of Investment Management 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-14734 Filed 6-16-94; 8:45 am]
BILLING CODE 8010-01-M