[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