[Federal Register Volume 59, Number 163 (Wednesday, August 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20774]
[[Page Unknown]]
[Federal Register: August 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20489; 812-8912]
Alex. Brown Cash Reserve Fund, Inc., et al.; Notice of
Application
August 18, 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: Investment Company Capital Corp. (``ICC''); and Alex. Brown
Cash Reserve Fund, Inc.; Flag Investors Telephone Income Fund, Inc.;
Flag Investors International Fund, Inc.; Flag Investors Emerging Growth
Fund, Inc.; Total Return U.S. Treasury Fund, Inc.; Flag Investors
Quality Growth Fund, Inc.; Managed Municipal Fund, Inc.; Flag Investors
Intermediate-Term Income Fund, Inc.; Flag Investors Value Builder Fund,
Inc.; North American Government Bond Fund, Inc.; and Flag Investors
Maryland Intermediate Tax-Free Income Fund, Inc. (the ``Funds'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) for an
exemption from sections 13(a)(2), 13(a)(3), 17(a)(1), 18(f)(1), 22(f),
and 22(g) and rule 2a-7 thereunder, and under section 17(d) and rule
17d-1 thereunder.
SUMMARY OF APPLICATION: Applicants request an order to permit the Funds
to enter into deferred compensation arrangements with their independent
directors.
FILING DATE: The application was filed on March 25, 1994, and amended
on May 20, 1994 and August 3, 1994. Applicants have agreed to file an
amendment during the notice period, the substance of which is
incorporated herein.
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 September 12,
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 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, DC 20549.
Applicants, 135 East Baltimore Street, Baltimore, Maryland 21202.
FOR FURTHER INFORMATION CONTACT:
Marc Duffy, Senior Attorney, (202) 942-0565, or Robert A. Robertson,
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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Funds are open-end management investment companies organized
as Maryland corporations. ICC is registered as an investment adviser
under the Investment Advisers Act of 1940. ICC currently serves as the
investment adviser for each of the Funds other than Total Return U.S.
Treasury Fund, Inc., Managed Municipal Fund, Inc., and North American
Government Bond Fund, Inc., for which it serves as administrator.
Applicants request that the relief granted hereby also apply to all
subsequently registered investment companies that in the future are
advised by ICC or an entity controlling, controlled by, or under common
control (within the meaning of section 2(a)(9) of the Act) with ICC.\1\
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\1\Although certain investment companies currently advised by
ICC do not presently intent to rely on the requested order, any such
company would be covered by the order if it enters into deferred
compensation arrangements with its Eligible Directors, as described
in the application.
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2. Each of the Funds has a board of directors (a ``Board''), the
majority of which are not ``interested persons'' of the Fund within the
meaning of section 2(a)(19) of the Act. Each of the directors who is
not an interested person of the Funds receives annual fees from one or
more of the Funds. Directors who are interested persons of any of the
Funds do not receive any remuneration from the Funds.
3. Under the deferred fee arrangement (the ``Deferred Fee
Arrangement''), the directors who receive directors' fees from one or
more of the Funds (the ``Eligible Directors'') will be entitled to
defer the receipt of 50% or more of such fees. The Deferred Fee
Arrangement will be implemented by means of an agreement entered into
between an Eligible Director and the appropriate Fund (the
``Agreement''). The purpose of the Agreement would be to permit an
Eligible Director to elect to defer receipt of his or her director's
fees, in order to enable him or her to defer payment of income taxes on
such fees, or for other reasons. Applicants believe that the
availability of the Deferred Fee Arrangement will enhance the ability
of the Funds to attract and retain directors of the same high caliber
as those who now serve on their Boards.
4. Under each Agreement, the deferred fees payable by a Fund with
respect to an Eligible Director will be credited to a book reserve
account established by such Fund (the ``Deferred Fee Account''). Each
Eligible Director may elect to have his or her deferred fees treated as
if they had been invested and reinvested in shares of one or more of
the Funds or in a selection of the Funds as may be determined by the
Boards of the Funds (such shares are referred to as the ``Underlying
Securities'').
5. Any money market series of the Funds that values its assets
using the amortized cost method will buy and hold the Underlying
Securities that determine the performance of the Deferred Fee Account
to achieve an exact match between such series' liability to pay
deferred fees and the assets that offset that liability. Furthermore,
as a matter of prudent risk management, applicants intend that the
participating Funds will purchase and hold shares of the Underlying
Securities in amounts equal to the deemed investment in the Deferred
Fee Accounts of its Eligible Directors. The balance sheet for each Fund
will show either liability and asset entries for deferred fees or
include a footnote explaining the offset of the liability for deferred
fees with an equal amount of assets.
6. Each Agreement provides that the obligations of each Fund to
make payments from the Deferred Fee Account will be general obligations
of each such Fund and payments made pursuant to the Agreement will be
made from such Fund's general assets and property. With respect to the
obligations created under an Agreement, the relationship of the
Eligible Directors to the applicable Funds will be only that of general
unsecured creditors. Each Agreement also provides that the Funds will
be under no obligation to purchase, hold, or dispose of any investments
under the Agreement, but, if one or more of the Funds choose to
purchase investments to cover their obligations under such Agreement,
then any and all such investments will continue to be a part of the
general assets and property of the Funds.
7. Under each Agreement, deferred fees (including accrued interest)
will become payable in cash upon an Eligible Director's retirement or
disability in generally equal, quarterly installments over a period of
five years (unless the participating Fund has agreed to a longer
payment period) beginning on the date payment of retirement benefits
commence to such Eligible Director under the ``Flag Investors/ISI Funds
Retirement Plan for Eligible Directors.'' In the event of an Eligible
Director's death, remaining amounts payable to him or her under the
Agreement will be paid to his or her designated beneficiary. In all
other events, the right to receive payments will be nontransferable.
8. An Agreement will not obligate any Fund to retain a director,
nor will it obligate any Fund to pay any (or any particular level of)
director's fees to any director.
Applicants' Legal Analysis
1. In connection with the adoption and implementation of the
Deferred Fee Arrangement, applicants request an order under section
6(c) of the Act exempting them from sections 13(a)(2), 13(a)(3),
17(a)(1), 18(f)(1), 22(f), and 22(g) of the Act and rule 2a-7
thereunder, and under section 17(d) of the Act and rule 17d-1
thereunder. Section 6(c) authorizes the SEC to exempt any person,
security, or transaction from any provision of the Act if such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act. Applicants believe
that the Deferred Fee Arrangement meets the appropriate statutory
standards.
2. Section 18(f)(1) generally prohibits a registered open-end
investment company from issuing senior securities. Section 13(a)(2)
requires that a registered investment company obtain shareholder
authorization before issuing any senior securities not contemplated by
the recitals of policy in its registration statement. Applicants
contend that the Agreement possesses none of the characteristics of
senior securities that led Congress to enact these sections. The Funds
will not be ``borrowing'' from their Eligible Directors in the sense
that concerned Congress. All liabilities created by credits to the
Deferred Fee Account under an Agreement would be offset by essentially
equal amounts of assets. The Agreements will not induce speculative
investments by any Fund or provide opportunity for manipulative
allocation of the expenses and profits of any Fund; control of each
Fund will not be affected; and, given the common existence of similar
deferred compensation agreements, the Agreements will not confuse
investors or convey a false impression of safety.
3. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by a
registered open-end investment company. The restrictions on
transferability of the Eligible Directors' benefits under the
Agreements would be clearly set forth in the Agreements.
4. Sections 22(g) prohibits a registered open-end investment
company from issuing any of its securities for services or for property
other than cash or securities. Section 22(g) is primarily concerned
with the dilutive effective on the equity and voting power that can
result when securities are issued for consideration that is not readily
valued. Amounts payable under the Agreements are based on the deferral
of compensation otherwise due to be paid to the Eligible Directors. The
Agreements merely provide for the deferral of such fees and thus should
be viewed as being ``issued'' not in return for services, but in return
for the Funds not being required to pay such fees on a current basis.
5. Section 13(a)(3) prohibits a registered investment company from,
among other things, deviating without a shareholder vote from any
investment policy that is changeable only if authorized by shareholder
vote. Several of the Funds have investment policies prohibiting the
purchase of investment company shares without shareholder approval.
This policy would prevent these Funds from purchasing shares of any
other of the Funds without shareholder approval. Applicants believe
that it is appropriate to grant an exemption from section 13(a)(3) to
enable the Funds to invest in Underlying Securities without a
shareholder vote. The value of the Underlying Securities will be de
minimis in relation to the total net assets of the Funds, and will at
all times equal the value of the corresponding Fund's obligations to
pay deferred fees. Changes in the value of the Underlying Securities
will not affect the value of shareholders' investments in the Funds.
Thus, permitting the Funds to invest in Underlying Securities without
obtaining shareholder approval required by section 13(a)(3) would
result in no harm to the Funds or their shareholders.
6. Rule 2a-7 requires a registered investment company to limit its
portfolio to securities meeting certain standards of maturity, quality,
and diversification as a condition to adopting the term ``money
market'' as part of its name or holding itself out to investors as a
money market fund. Rule 2a-7 also contains a number of conditions
designed to reduce the likelihood that the net asset value of a money
market fund as determined by the amortized cost method will deviate
materially from its net asset value as determined by the mark-to-market
method. Applicants request an exemption from rule 2a-7 to the extent
necessary to permit the Funds that are money market funds to invest in
Underlying Securities and to exclude Underlying Securities in
calculating their dollar-weighted average maturities. Applicants
believe that, under these circumstances, the underlying concerns that
led the SEC strictly to prescribe the permissible characteristics of a
money market fund's portfolio securities are not present.
7. Section 17(a)(1) prohibits, except in limited circumstances, the
sale of any security by an affiliated person of a registered investment
company to such company. The Funds that are advised by the same entity
may be ``affiliated persons'' under section 2(a)(3)(C) of the Act.
Applicants believe that the sale of securities issued by the Funds
pursuant to the Agreements does not implicate the concerns of Congress
in enacting this section, but would merely facilitate the matching of
each Fund's liability for deferred fees with the Underlying Securities
that would determine the amount of such liability.
8. Section 17(d) and rule 17d-1 thereunder prohibit an affiliated
person of a registered investment company, acting as principal, from
participating in, or effecting any transaction in connection with, any
joint enterprise or other joint arrangement or profit-sharing plan in
which such registered company is a participant, without prior receipt
of an order of the SEC. Deferral of an Eligible Director's fees in
accordance with an Agreement essentially will maintain the parties,
viewed both separately and in their relationship to one another, in the
same position as if the fees were paid on a current basis.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each Fund will vote shares of any affiliated Fund held pursuant
to the Deferred Fee Arrangement in proportion to the votes of all other
holders of shares of such affiliated Fund.
2. Any money market series of the Funds that values its assets in
accordance with a method prescribed in rule 2a-7 will buy and hold the
Underlying Securities that determine the performance of the Deferred
Fee Account to achieve an exact match between such series' liability to
pay deferred fees and the assets that offset that liability.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20774 Filed 8-23-94; 8:45 am]
BILLING CODE 8010-01-M