[Federal Register Volume 59, Number 155 (Friday, August 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19679]


[[Page Unknown]]

[Federal Register: August 12, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20446; 812-9068]

 

First American Mutual Funds, et al.; Notice of Application

August 5, 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: First American Mutual Funds (``FAMF''), First American 
Investment Funds, Inc. (``FAIF''), and First Bank National Association 
(the ``Adviser'').

RELEVANT ACT SECTIONS: Order requested: (a) Under section 17(b) 
granting an exemption from section 17(a); (b) permitting certain joint 
transactions under section 17(d) and rule 17d-1, and (c) under 6(c) 
granting an exemption from the provisions of section 15(f)(1)(A).

SUMMARY OF APPLICATION: Applicants seek an order under section 17(b) 
for an exemption from section 17(a) and an order under section 17(d) 
and rule 17d-1 to permit certain series of FAIF to acquire all of the 
assets of certain series of FAMF in exchange for shares of FAIF. 
Applicants also seek an order under section 6(c) granting an exemption 
from section 15(f)(1)(A) to permit FAIF's board of directors to 
continue with its present membership following completion of the 
proposed transactions.

FILING DATE: The application was filed on June 24, 1994 and amended on 
August 4, 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 August 30, 1994, 
and should be accompanied by proof of service on the 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 Street, NW., Washington, DC 20549. 
Applicants: FAMF and FAIF, 680 East Swedesford Road, Wayne, 
Pennsylvania 19087. The Adviser, First Bank Place, 601 Second Avenue 
South, Minneapolis, Minnesota 55480.

FOR FURTHER INFORMATION CONTACT:
John V. O'Hanlon, Senior Attorney, at (202) 942-0578 or C. David 
Messman, Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. FAMF is an open-end management investment company organized as a 
Massachusetts business trust and registered under the Act.\1\ FAMF 
currently offers four series of shares: Diversified Growth Fund, 
Managed Income Fund, Limited Term Tax Free Income Fund, and Equity 
Income Fund (collectively, the ``Acquired Funds''). As of June 13, 
1994, FAMF had total net assets of approximately $129 million.
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    \1\FAMF was organized in 1992 as ``The Boulevard Funds'' and 
changed its name to FAMF on May 18, 1994.
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    2. FAIF is an open-end management investment company organized as a 
Maryland corporation and registered under the Act.\2\ FAIF currently 
offers seventeen series of shares. One of these series is the Limited 
Term Income Fund (together with three series to be created in 
connection with the proposed transactions, the ``Acquiring Funds''). As 
of June 13, 1994, FAIF had total net assets of approximately $979 
million.
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    \2\FAIF was incorporated in 1987 as ``SECURAL Mutual Funds, 
Inc.'' and changed its name to FAIF in 1991.
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    3. The Adviser acts as investment adviser to each series of FAMF 
and FAIF. The Adviser is a wholly-owned subsidiary of First Bank 
System, Inc. (``FBS'').
    4. Boulevard Bank National Association (``Boulevard Bank'') is an 
indirect wholly-owned subsidiary of FBS. Boulevard Bank and its 
affiliates hold of record through a nominee more than 5% of the 
outstanding shares of each Acquired Fund, and they hold or share voting 
and/or investment discretion with respect to a portion of such shares. 
All such shares are held for the benefit of others in a trust, agency, 
custodial, or other fiduciary or representative capacity. Boulevard 
Bank and its affiliates do not have an economic interest in any such 
shares.
    5. First Trust National Association (``First Trust'') also is a 
wholly-owned subsidiary of FBS and acts as custodian for FAMF and FAIF. 
First Trust and its affiliates hold of record in their own name and in 
the name of a nominee more than 5% of the outstanding shares of one of 
the Acquiring Funds, and they hold or share voting and/or investment 
discretion with respect to a portion of such shares. All such shares 
are held for the benefit of others in a trust, agency, custodial, or 
other fiduciary or representative capacity. First Trust and its 
affiliates do not have an economic interest in any such shares.
    6. FBS acquired the holding company for Boulevard Bank on March 25, 
1994, and thus became the indirect 100% owner of Boulevard Bank. 
Boulevard Bank was the investment adviser to each series of FAMF until 
March 28, 1994. Thus, FBS' acquisition of indirect ownership of 
Boulevard Bank arguably constituted a sale of Boulevard Bank and an 
assignment of its advisory contract with FAMF within the meaning of 
section 15(f). On March 25, 1994, the shareholders of FAMF approved the 
Adviser as successor investment adviser to each series of FAMF and 
elected a new Board of Trustees of FAMF. The new members of the FAMF 
Board are identical to the members of the FAIF Board of Directors, 
except that one director of FAIF does not serve on FAMF's board. This 
individual was not nominated to serve on FAMF's board in order to 
ensure that at least 75% of FAMF's trustees would be ``disinterested,'' 
as required by the ``safe harbor'' provisions of section 
15(f)(1)(A).\3\
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    \3\The proxy statement provided to shareholders of FAMF in 
connection with their March 25, 1994 meeting stated that the section 
15(f)(1)(A) requirement that at least 75% of FAMF's directors be 
disinterested may be disregarded in the future if the SEC grants an 
exemptive order or no-action relief permitting such action.
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    7. Applicants propose that the Acquired Funds be combined with and 
into the Acquiring Funds in tax-free reorganizations (the 
``Reorganizations''). In the Reorganizations, each Acquiring Fund will 
acquire all of the assets and liabilities of the respective Acquired 
Fund in exchange for shares of the Acquiring Fund, which then will be 
distributed to former shareholders of the Acquired Fund. The number of 
Limited Term Income Fund shares to be issued in exchange for each 
Managed Income Fund share of each class will be determined by dividing 
the net asset value of one Managed Income Fund share of such class as 
of the effective time of the Reorganization (before giving effect 
thereto) by the net asset value of one Limited Term Income Fund share 
of the same class at such time. In the case of the three Acquired Funds 
which are being acquired by newly created Acquiring Funds, the share 
exchanges will take place on a share-for-share basis.
    8. Each Acquired Fund and each Acquiring Fund offers or will offer 
Retail Class, CDSC Class, and Institutional Class shares.\4\ Each such 
class of each Acquired Fund is subject to front-end and deferred sales 
charges and to rule 12b-1 and shareholder servicing fees that are 
identical to those of its counterpart Acquiring Fund. In addition, each 
Acquired Fund is subject to investment advisory fees which are 
identical to those of its counterpart Acquiring Fund. In the 
Reorganizations, former Acquired Fund shareholders will receive 
Acquiring Fund shares of the class which corresponds to that of their 
Acquired Fund shares and which have an aggregate net asset value equal, 
at the effective time of the Reorganizations, to that of their Acquired 
Fund shares. The investment objectives, policies, and restrictions of 
each Acquired Fund are substantially similar to those of its respective 
Acquiring Fund.
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    \4\Each series of FAIF and FAMF is authorized to issue multiple 
classes of shares in reliance on an exemptive order issued to the 
distributor of their shares. Investment Company Act Released Nos. 
19698 (Sept. 9, 1993) (notice) and 19757 (Oct. 4, 1993) (order).
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    9. The Adviser has agreed to waive advisory fees and reimburse 
expenses for each class of each Acquiring Fund to the extent that it is 
currently doing so with respect to the counterpart classes of the 
respective Acquired Funds, in each case through January 31, 1996. As a 
result, through such date former Acquired Fund shareholders will retain 
the benefit of the fee waivers currently applicable to them following 
the Reorganization. The differential among classes in the total expense 
cap agreed to by the Adviser is and will be equal to the differential 
in rule 12b-1 fees applicable to the respective classes.
    10. Former holders of Acquired Fund CDSC Class shares who receive 
Acquiring Fund CDSC Class shares in the Reorganizations will receive 
credit for the period they held Acquired Fund CDSC Class shares in 
applying any contingent deferred sales charge on Acquiring Fund CDSC 
Class shares and in applying any conversion feature. In addition, in 
applying any deferred sales charge on purchases of Retail Class shares, 
credit will be given for the period a former Acquired Fund shareholder 
who is subject to such a deferred sales charge held his or her shares.
    11. A registration statement on Form N-14 will be filed with 
respect to the Reorganizations. A special meeting of shareholders of 
FAMF will be held to consider and act upon the Reorganizations in 
accordance with the Act and Massachusetts law. If the required 
shareholder votes are obtained, the closing is expected to take place 
shortly thereafter.
    12. At meetings held June 8, 1994, the Board of Trustees of FAMF 
and the Board of Directors of FAIF, including the disinterested 
trustees and directors, found, as required by rule 17a-8(a), that 
participation in the Reorganizations is in the best interests of the 
Acquired Funds and the Acquiring Funds and that the interests of 
existing shareholders of such funds will not be diluted as a result of 
the Reorganizations. The Boards also unanimously approved the 
Reorganizations. In doing so, the Boards considered: The compatibility 
of the investment objectives, policies, and restrictions of the 
respective Acquired Funds and Acquiring Funds; the expected advantages 
to the Acquired Funds and the Acquiring Funds of the Reorganizations; 
the anticipated tax-free nature of the Reorganizations; the terms and 
conditions of the Reorganizations; the costs associated with the 
Reorganizations, and the agreement of the Adviser to bear such costs; 
the anticipated advisory fees and sales charges before and after the 
Reorganization, the Adviser's agreement to waive a portion of such 
fees, and the provision for giving credit to former Acquired Fund 
shareholders for the period they held their shares in applying deferred 
sales charges; and the potential benefits to the Adviser of the 
Reorganizations.
    13. The expected advantages to the Acquired Funds and Acquiring 
Funds considered by the Boards include: elimination of certain 
duplicative expenses of separate funds and of separate legal entities; 
spreading of relatively fixed expenses across larger asset bases; 
potential increased sales of the surviving funds due to the ability of 
FAIF to offer a ``full line'' of funds; and facilitation of portfolio 
management. The potential benefits to the Adviser considered by the 
Boards include potentially reduced expenses for advisory fee waivers to 
the extent that the total expense ratios before waivers of the combined 
funds decrease as a result of the Reorganizations. The Boards found 
that the expected advantages to the Acquiring Funds and the Acquired 
Funds outweighed the potential benefits to the Adviser.
    14. Applicants have agreed not to make any material changes to the 
reorganization agreements that affect the application without the prior 
approval of the SEC staff. Applicants also have agreed not to waive, 
amend, or modify any provision of the reorganization agreements that is 
required by state or federal law in order to effect the 
Reorganizations.

Applicants' Legal Analysis

    1. Section 2(a)(3) of the Act provides, in pertinent part, that any 
person directly or indirectly owning, controlling, or holding with 
power to vote 5% or more of the outstanding voting securities of any 
other person is an affiliated person of that person.
    2. Section 17(a), in pertinent part, prohibits an affiliated person 
of a registered investment company, or any affiliated person of such a 
person, acting as principal, from selling to or purchasing from such 
registered company, or any company controlled by such registered 
company, any security or other property.
    3. Section 17(b) provides that the Commission may exempt a 
transaction from the provisions of section 17(a) if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid, are reasonable and fair and do not involve 
overreaching on the part of any person concerned, and that the proposed 
transaction is consistent with the policy of the registered investment 
company concerned and with the general purposes of the Act.
    4. Rule 17a-8 under the Act exempts from the prohibitions of 
section 17(a) mergers, consolidations, or purchases or sales of 
substantially all of the assets of registered investment companies that 
are affiliated persons solely by reason of having a common investment 
adviser, common directors, and/or common officers, provided that 
certain conditions set forth in the rule are satisfied.
    5. As noted above, the Acquiring Funds and the Acquired Funds have 
a common investment adviser. Thus, the Reorganizations would be exempt 
from the provisions of section 17(a) by virtue of rule 17a-8, but for 
the fact that the Acquiring Funds and the Acquired Funds may be 
affiliated for reasons other than those set forth in the rule. 
Boulevard Bank and its affiliates hold of record more than 5% of the 
outstanding voting securities of each of the Acquired Funds and hold or 
share voting and/or investment discretion with respect to a portion of 
such shares. Because of this ownership, each Acquired Fund is an 
affiliated person of Boulevard Bank under section 2(a)(3)(B). Boulevard 
Bank is an affiliated person of the Adviser because it is under common 
ownership and control with the Adviser. The Adviser, in turn, is an 
affiliated person of each Acquiring Fund under section 2(a)(3)(E) by 
virtue of its investment advisory relationship with these funds. 
Therefore, each Acquiring Fund is an affiliated person of an affiliated 
person of each Acquired Fund.
    6. Similarly, one Acquiring Fund might be deemed an affiliated 
person of an affiliated person of its counterpart Acquired Fund because 
First Trust and its affiliates hold of record more than 5% of the 
outstanding voting securities of such Acquiring Fund and hold or share 
voting and/or investment discretion with respect to a portion of such 
shares.
    7. Section 17(d) of the Act prohibits any affiliated person of, or 
principal underwriter for, a registered investment company, or any 
affiliated person of such a person, acting as principal from effecting 
any transaction in which such registered company is a joint, or joint 
and several, participant with such person in contravention of such 
rules and regulations as the Commission may prescribe for the purpose 
of limiting or preventing participation by such registered company on a 
basis different from, or less advantageous than, that of such other 
participant. Rule 17d-1 under the Act provides that no joint 
transaction covered by the rule may be consummated unless the SEC 
grants exemptive relief after considering whether the participation of 
the investment company is consistent with the provisions, policies and 
purposes of the Act and the extent to which the participation in on a 
basis different from or less advantageous than that of other 
participants.
    8. The proposed sale of assets by each Acquired Fund to its 
respective Acquiring Fund and the related transactions involved in the 
Reorganizations might be deemed to be a joint enterprise or other joint 
arrangement in which a registered investment company and affiliated 
person of such company are participants.
    9. Applicants submit that the Reorganizations meet the standards 
for relief under section 17(b) and rule 17d-1, in that the terms of the 
Reorganizations, including the consideration to be paid or received, 
are reasonable and fair and do not involve overreaching on the part of 
any person concerned; the Reorganizations are consistent with the 
policy of each Acquired Fund and Acquiring Fund; the Reorganizations 
are consistent with the general purposes of the Act; the participation 
of the Acquired Funds and the Acquiring Funds in the Reorganizations on 
the basis proposed is consistent with the provisions, policies, and 
purposes of the Act; and the extent to which such participation is on a 
basis different from or less advantageous than that of other 
participants does not outweigh the advantages of such participation.
    10. Section 15(f) of the Act permits an investment adviser or 
affiliate thereof to receive any amount or benefit in connection with 
the ``assignment'' of its investment advisory contract with a 
registered investment company if the requirements of that section are 
satisfied. Section 15(f)(1)(A) requires that, for three years after the 
transaction, at least 75% of the directors of the investment company 
(or its successor) are not interested persons, within the meaning of 
section 2(a)(19) of the Act, of the investment adviser or predecessor 
investment adviser of such investment company.
    11. Applicants request an exemption from section 15(f)(1)(A) 
because FBS' acquisition of indirect ownership of Boulevard Bank 
constituted a sale of Boulevard Bank and an assignment of its advisory 
contract with FAMF within the meaning of section 15(f).
    12. Although FAMF's Board of Trustees currently meets the 75% 
requirement of section 15(f)(1)(A), upon completion of the 
Reorganizations FAIF's board of directors will not because two of its 
six directors will be deemed ``interested persons'' of the Adviser 
under section 2(a)(19). Thus, unless exemptive relief from section 
15(f)(1)(A) is granted, the Reorganizations cannot be completed within 
the ``safe harbor'' of section 15(f) unless the Board of Directors of 
FAIF is reconstituted by either adding two disinterested directors or 
by securing the resignation of one interested director. Neither of 
these actions is believed by applicants to be in the best interests of 
FAIF shareholders or necessary for the protection of FAMF shareholders.
    13. Section 15(f)(3) of the Act provides that if an assignment of 
an investment advisory contract with a registered investment company 
results in a successor investment adviser to such company and such 
adviser is then an investment adviser with respect to other assets 
substantially greater in amount than the amount of assets of such 
company, such discrepancy in size of assets shall be considered by the 
Commission in determining whether or to what extent an application for 
exemption from the provisions of section 15(f)(1)(A) should be granted.
    14. As of June 13, 1994, FAMF had total net assets of approximately 
$129 million, while FAIF had total net assets of approximately $979 
million. Applicants submit that this substantial disparity in assets 
should be taken into account under section 15(f)(3) in determining 
whether to grant exemptive relief. Applicants believe that it is 
appropriate to compare the overall size of FAIF to that of FAMF, 
because the question is whether the Board that is responsible for all 
series of FAIF (and not just for the Acquiring Funds) is to be 
reconstituted. Applicants further submit that the requested relief from 
section 15(f)(1)(A) is necessary and appropriate in the public 
interest, consistent with the protection of investors, and consistent 
with the purposes fairly intended by the Act, as required by section 
6(c).

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19679 Filed 8-11-94; 8:45 am]
BILLING CODE 8010-01-M