[Federal Register Volume 59, Number 146 (Monday, August 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18585]
[[Page Unknown]]
[Federal Register: August 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20426; 812-8982]
PIMCO Funds, et al.; Notice of Application
July 26, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANTS: PIMCO Funds, Pacific Investment Management Company
(``PIMCO''), and Pacific Equities Network (``PEN'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from
sections 18(f), 18(g), and 18(i).
SUMMARY OF APPLICATION: Applicants seek a conditional order under
section 6(c) of the Act to permit PIMCO Funds and any open-end
investment companies established in the future for which PIMCO (or an
entity controlling, controlled by, or under common control with PIMCO)
acts as investment adviser, or for which PEN (or an entity controlling,
controlled by, or under common control with PEN) serves as principal
underwriter (collectively with PIMCO Funds, the ``Funds''), to offer
two classes of shares representing interests in the same portfolio of
securities.
FILING DATE: The application was filed on May 5, 1994, and amended on
July 7, 1994. Applicants have agreed to file an additional amendment
during the notice period. This notice reflects the changes to be made
by such additional amendment.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on August 22, 1994,
and should be accompanied by proof of service on applicants, in the
form of an affidavit or, for lawyers, a certificant 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 such notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, D.C.
20549. Applicants: PIMCO Funds and PIMCO, 840 Newport Center Drive,
Suite 360, Newport Beach, California 92660; PEN, 700 Newport Center
Drive, Newport Beach, California 92660.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Attorney,
at (202) 942-0583, or Barry D. Miller, Senior Special Counsel, at (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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. PIMCO Funds is an open-end management investment company
organized as a Massachusetts business trust. PIMCO Funds currently
offers seventeen separate investment portfolios (the ``Portfolios''),
each with its own investment objective and policies.
2. PIMCO, an indirect wholly owned subsidiary of Pacific Mutual
Life Insurance Company, acts as investment adviser to PIMCO Funds. PEN,
an indirect subsidiary of Pacific Mutual Life Insurance Company, is
PIMCO Funds' distributor.
3. To broaden its potential shareholder base, PIMCO Funds proposes
to offer a second class of shares with respect to each Portfolio. Each
such class would evidence an interest in one of the Portfolios and,
except for class designation, the allocation of certain expenses,
voting rights, and exchange privileges, would be identical in all
respects to shares of the original outstanding class of shares of PIMCO
Funds, which would be designated the ``Institutional Class'' or ``Class
A.'' The new class of shares would be designated the ``Administrative
Class,'' or ``Class B.'' Since shares of each class of a Portfolio
would evidence interest in a single investment portfolio, each class of
a Portfolio would have or be subject to the same investment objective,
policies, and restrictions as the other class of the same Portfolio.
Differences in the expense allocation between the two classes would
occur because the second class would incur expenses as a result of
being offered in connection with a distribution adopted pursuant to
rule 12b-1 under the Act (a ``12b-1 Plan'') or a non-rule 12b-1
administrative services plan (an ``Administrative Services Plan''), or
with a combination of these.
4. Class A shares would be offered solely to pension and profit
sharing plans, employee benefit trusts, endowments, foundations,
corporations, other institutions, and high net worth individuals. There
would be no sales charge imposed on the purchase and redemption of
shares, and no 12b-1 fees. There would be a significant minimum initial
investment (which is currently $500,000 for PIMCO Funds) required to
purchase Class A shares. As with the currently outstanding shares of
the Portfolios, Class A shares could be offered through registered
broker-dealers, qualified pension and profit-sharing plans and other
qualified financial intermediaries (``Service Organizations'') that may
offer the Funds or their Portfolios to their customers. Service
Organizations would receive no compensation from the Funds or the
Portfolios for the provision of related shareholder account maintenance
and support functions. These Service Organizations would recover the
expenses of providing services to their customers by charging either
the investor or, in the case of a pension or profit-sharing plan, the
plan itself or its employer sponsor directly for such services.
5. Class B shares would be offered to customers of Service
Organizations that typically are compensated by service or distribution
fees paid by the mutual funds offered to their customers rather than by
transaction or other fees paid directly by such customers. The service
fees paid by this class could be in the nature of a distribution fee
payable pursuant to a 12b-1 Plan, or in the nature of an administrative
services fee paid in connection with an employee benefit or retirement
plan, or in a combination of the two types of plans.
6. In the case of a service fee payable pursuant to a 12b-1 Plan, a
Fund or a Portfolio thereof would enter into agreements with certain
Service Organizations providing for the performance of certain
services, some of which could be construed as distribution
assistance.\1\ Under a 12b-1 Plan, a Portfolio typically would pay PEN
or the Service Organization for such services. The expense of such
payments by a Fund or a Portfolio would be borne entirely by the Class
B shareholders. Any 12b-1 Plan adopted by a Fund or a Portfolio will
comply with both rule 12b-1 and the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. Services provided in
accordance with the terms of a 12b-1 Plan would not be duplicative of
any services currently provided or to be provided to a Fund or its
Portfolios by its administrator, distributor, or transfer agent.
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\1\These services may include, but are not limited to, providing
facilities to answer questions from prospective investors about the
Fund and its Portfolios; receiving and answering correspondence,
including requests for prospectuses and statements of additional
information; preparing, printing and delivering prospectuses and
shareholder reports to prospective shareholders; complying with
federal and state securities laws pertaining to the sale of Fund
shares; and assisting investors in completing application forms and
selecting dividend and other account options. Service Organizations
may also provide their endorsement of the Fund to their clients,
members, or customers as an inducement to invest in the Fund.
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7. Under an Administrative Services Plan, a Fund or a Portfolio
would enter into agreements with Service Organizations in which each
organization would agree to provide certain services to its clients,
members, or customers who purchase shares of the class.\2\ The
provision of services under Administrative Services Plans would not be
duplicative of any services currently provided or to be provided to a
Fund or a Portfolio by its administrator, distributor, or transfer
agent. Each Portfolio would pay a Service Organization for its services
in accordance with the terms of its particular Administrative Services
Plan, and the expense of such payments would be borne entirely by the
beneficial owners of the Class B shares.
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\2\Such services could include receiving, aggregating and
processing shareholder orders; furnishing shareholder subaccounting;
providing and maintaining elective shareholder services such as
check writing and wire transfer services; providing and maintaining
pre-authorized investment plans; communicating periodically with
shareholders; acting as the sole shareholder of record and nominee
for shareholders; maintaining account records for shareholders;
answering questions and handling correspondence from shareholders
about their accounts; issuing confirmations for transactions by
shareholders; and performing similar account administrative
services.
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8. The net asset value of all outstanding shares representing
interests in a Portfolio would be computed on the same days and at the
same times. For purposes of computing net asset value, the gross income
of a Portfolio would be allocated to each class on the basis of the
relative net assets of each class. The following expenses would be
subtracted from gross income on the basis of net assets of each class
of the respective Portfolio: (a) expenses incurred by the Fund as a
registered series investment company and not attributable to a
particular Portfolio or to a particular class of shares thereof (``Fund
Expenses''), and (b) expenses incurred by a particular Portfolio but
not attributable to any particular class of such Portfolio's shares
(``Portfolio Expenses''). Further, in addition to expenses incurred
under a 12b-1 or Administrative Services Plan, expenses specifically
attributable to a particular class (``Class Expenses''), as set forth
in condition 1 below, would be allocated directly to that particular
class, rather than on the basis of the relative net assets of the two
classes.
9. Another difference between Class A shares and Class B shares
will be the exchange privileges applicable to such shares. Class A
shares of a Portfolio will be exchangeable only for Class A shares of
other Portfolios, and Class B shares of a Portfolio will be
exchangeable only for Class B shares of other Portfolios. The exchange
privileges applicable to shares of the two classes will comply with
rule 11a-3 under the Act.
Applicants' Legal Analysis
1. Applicants request an exemptive order to the extent that the
proposed issuance and sale of two classes of shares with respect to a
Fund or a Portfolio might be deemed: (a) to result in a ``senior
security'' within the meaning of section 18(g) of the Act, and thus to
be prohibited by section 18(f)(1) of the Act; and (b) to violate the
equal voting provisions of section 18(i) of the Act.
2. Applicants state that section 18 is intended to redress abuses
such as excessive borrowing and the issuance of excessive amounts of
senior securities (which increase the speculative nature of junior
securities), and the operation of investment companies without adequate
assets or reserves. Applicants note that the proposed arrangement does
not involve borrowing and does not affect the Portfolios' existing
assets or reserves. Nor will the proposed arrangement increase the
speculative character of the shares of a Portfolio, since all of the
income and expenses of that Portfolio (with the exception of certain
12b-1 Plan payments, Administrative Services Plan payments, and Class
Expenses) will be allocated between the classes of shares based on the
relative net assets of each class.
3. Under the proposed arrangement, mutuality of risk will be
preserved with respect to all of the shares of each Portfolio. Further,
since all shares of a Portfolio will be redeemable at all times, no
class will have distribution or liquidation preferences with respect to
particular assets. Because the similarities (and, with respect to 12b-1
Plan payments, Administrative Services Plan payments, Class Expenses
and associated voting rights, dissimilarities) of the shares of each
class will be fully disclosed in the prospectus for each class of a
Portfolio, investors will not be given misleading impressions as to the
safety or risk of the shares, and the nature of the shares will not be
rendered speculative.
4. Applicants believe that the proposed allocation of expenses and
voting rights in the manner described is equitable and would not
discriminate against any group of shareholders. Investors purchasing
Class B shares offered in connection with a 12b-1 Plan or
Administrative Services Plan would bear the costs associated with the
related services and, with respect to any 12b-1 Plan, would also enjoy
exclusive shareholder voting rights with respect to matters affecting
such plan. Conversely, investors purchasing Class A shares, which would
not be covered by such plans, would not be burdened with such expenses
or enjoy such voting rights.
Applicants' Conditions
Applicants agree that any order 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 Portfolio, and be identical in all
respects, except as set forth below. The only differences between the
classes of shares of a Portfolio will relate solely to: (a) the impact
of the disproportionate Administrative Services Plan payments, 12b-1
Plan payments, and Class Expenses, which will be limited to (i)
transfer agent fees as identified by the transfer agent as being
attributable to a specific class, (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder
reports, prospectuses, and proxies to the current shareholders of a
specific class, (iii) Blue Sky registration fees incurred by a class,
(iv) SEC registration fees incurred by a class, (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, and (vii) Trustees' fees
incurred as a result of issues relating to one class; (b) voting rights
as to matters exclusively affecting one class of shares; (c) exchange
features; and (d) class designation differences. Any additional
incremental expenses not specifically identified above that are
subsequently identified and determined to be properly allocated to one
class of shares shall not be so allocated until approved by the
Commission pursuant to an amended order.
2. The trustees of the Funds, including a majority of the
independent trustees, will approve the offering of two classes of
shares (the ``Dual-Class System''). The minutes of the respective
meetings of the trustees regarding the deliberations of the trustees
with respect to the approvals necessary to implement the Dual-Class
System will reflect in detail the reasons for the trustees'
determination that the proposed Dual-Class System is in the best
interests of the Funds and their shareholders.
3. On an ongoing basis, the trustees of a Fund, pursuant to their
fiduciary responsibilities under the Act and otherwise, will monitor
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. PIMCO as adviser, and
PEN as distributor, will be responsible for reporting any potential or
existing conflicts to the trustees. If a conflict arises, the adviser
and the distributor at their own cost will remedy such conflict up to
and including establishing a new registered management investment
company.
4. 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 trustees of the relevant
Fund, including a majority of the trustees who are not interested
persons of that 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 trustees of such Fund, 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.
5. Any Administrative Services Plans 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 trustees of the Funds will receive quarterly and annual
statements concerning distribution and shareholder 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 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 and approval of the independent trustees 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 payments made by Class B under its 12b-1 or
Administrative Services Plan, and any Class Expenses will be borne
exclusively by that class.
8. The methodology and procedures for calculating the net asset
value and dividends and distributions of the 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 Commission, 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 Fund 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 Commission 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 Fund (which the Fund agrees to provide), will
be available for inspection by the Commission staff upon written
request to the Fund 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 ``report on policies and procedures
placed in operation'' and ongoing reports will be ``reports on policies
and procedures placed in operation and tests of operating
effectiveness'' as defined and described in Statement of Auditing
Standards No. 70 of the American Institute of Certified Public
Accountants (``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 two classes of
shares and the proper allocation of expenses between 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 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 in by the Expert, or appropriate
substitute Expert.
10. The prospectus of each Fund of Portfolio will contain a
statement to the effect that any person entitled to receive
compensation for servicing Fund shares may receive different
compensation with respect to one particular class of shares over
another in the Fund.
11. The Distributor will adopt compliance standards as to when each
class of shares may appropriately be offered to particular investors.
Applicants will require all persons selling shares of the funds to
agree to conform to such standards.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the trustees with respect to the
Dual-Class System will be set forth in guidelines to be furnished to
the trustees.
13. The Funds will disclose the expenses, performance data,
distribution arrangements, services, fees, and exchange privileges (if
any) applicable to both classes in every prospectus, regardless of
whether both classes are offered through each prospectus. Each
Portfolio will disclose the respective expenses and performance data
applicable to all classes of shares of the Portfolio in every
shareholder report. 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 each class of shares of
such Portfolio. To the extent that 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 the other class of shares. The
information provided by applicants for publication in any newspaper or
similar listing of a Portfolio's net asset value or public offering
price will present each class of shares separately.
14. Applicants acknowledge that the grant of the requested
exemptive order will not imply Commission approval, authorization of,
or acquiescence in any particular level of payments that the applicants
may make pursuant to any rule 12b-1 or administrative services plan, in
reliance on the exemptive order.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18585 Filed 7-29-94; 8:45 am]
BILLING CODE 8010-01-M