[Federal Register Volume 59, Number 200 (Tuesday, October 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25644]


[[Page Unknown]]

[Federal Register: October 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-2012; File No. 812-9038]

 

The Woodward Funds et al.; Notice of Application

October 11, 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: The Woodward Funds (the ``Trust''), NBD Bank, N.A. 
(``Adviser''), First of Michigan Corporation (``FoM''), and Essex 
National Securities, Inc. (``Essex'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
exempting applicants from sections 2(a)(32), 2(a)(35), 18(f)(1), 18(g), 
18(i), 22(c), and 22(d) of the Act and rule 22c-1 thereunder.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain investment companies to issue multiple classes of shares 
representing interests in the same portfolios of securities and assess, 
and under certain circumstances waive, a contingent deferred sales 
charge (``CDSC'') on redemptions of shares.

FILING DATE: The application was filed on June 6, 1994, and amended on 
August 29, 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 November 7, 
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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549. 
Applicants: the Trust, c/o NBD Bank, N.A., P.O. Box 7058, Troy, 
Michigan 48007; the Adviser, 611 Woodward Avenue, Detroit, Michigan 
48226; and FoM, 100 Renaissance Center, 26th Floor, Detroit, Michigan 
48243; Essex, 215 Gateway Road West, Napa, California 94558.

FOR FURTHER INFORMATION CONTACT: Bradley W. Paulson, Staff Attorney, at 
(202) 942--0147 or Robert A. Robertson, Branch Chief, 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 is available for a fee from the 
SEC's Public Reference Branch.

Applicants' Representations:

A. The Multiple Class Distribution System

    1. The Trust is a Massachusetts business trust registered under the 
Act as an open-end management investment company. The Trust offers 
fifteen series representing interests in separate investment 
portfolios. The Adviser serves as investment adviser, transfer agent, 
and custodian for each of the Trusts's portfolios. FoM and Essex are 
the Trust's sponsors and co-distributors. Applicants request relief on 
behalf of future portfolios of the Trust and other investment companies 
for which the Adviser in the future serves as investment adviser or, if 
and when permitted under applicable law, distributor. The Trust and 
investment companies that in the future are advised or distributed by 
the Adviser are collectively referred to as the ``Companies.'' The 
Trust's portfolios and the portfolios of all investment companies that 
in the future are advised or distributed by the Adviser are 
collectively referred to as the ``Portfolios.''
    2. Applicants propose that each Company be permitted to offer an 
unlimited number of classes of shares in the Portfolios. These classes 
might be offered (a) in connection with plans adopted pursuant to rule 
12b-1 under the Act; (b) in connection with non-rule 12b-1 
administrative plans (together with rule 12b-1 distribution plans, 
``Plans''); (c) in connection with certain retirement plans; (d) in 
connection with the allocation of expenses attributable only to certain 
classes (``Class Expenses''), which are set forth in condition 1, 
below; (e) subject to varying front-end sales charges; (f) subject to 
varying CDSCs; and/or (g) subject to certain conversion features. With 
respect to each class, a Company would pay its distributor or other 
organization for expenses, services, and assistance in accordance with 
the terms of the particular Plan. The expense of such payments would be 
borne entirely by the beneficial owners of the class of the Portfolio 
to which these payments relate.
    3. Expenses of a Company that are not attributable directly to any 
one Portfolio (``Company Expenses'') would be allocated to each 
Portfolio based on the relative net assets of such Portfolio or as 
otherwise determined under the supervision of the Company's trustees. 
All shares representing interests in the same Portfolio would bear such 
Portfolio's portion of Company Expenses allocated to each of the 
Portfolio's classes based on the relative net asset value of the 
Portfolio's respective classes. Expenses that are attributable to one 
Portfolio but not another (``Portfolio Expenses'') would be allocated 
to each class within a Portfolio based on the relative net asset value 
of the respective classes to which the expenses are attributable. Class 
Expenses are those expenses, in addition to payments made pursuant to a 
Plan, that are attributable only to a particular class and are 
allocated to that class exclusively. Class Expenses would be allocated 
equally to each outstanding share representing an interest in the 
class.
    4. The Adviser, FoM, Essex, or other service contractors may waive 
or reimburse Class Expenses on certain classes on a voluntary, 
temporary basis. The amount of Class Expenses waived or reimbursed may 
vary from class to class. Class Expenses are by their nature specific 
to a given class and may vary from one class to another. Applicants 
believe that it is acceptable and consistent with shareholder 
expectations to waive or reimburse Class Expenses at different levels 
for different classes.
    5. In addition, the Adviser, FoM, Essex, or other service 
contractors may waive or reimburse Company Expenses and/or Portfolio 
Expenses (with or without a waiver or reimbursement of Class Expenses). 
These expenses may be waived or reimbursed only if the same 
proportionate amount of Company Expenses or Portfolio Expenses is 
waived or reimbursed for each class of a Portfolio. Any waived or 
reimbursed Company Expenses would be credited to each Portfolio of the 
Company according to the relative net assets of each Portfolio, and, in 
turn, credited to each class of each Portfolio according to the 
relative net asset values of each class.
    6. The gross income of each Portfolio will be allocated on a pro 
rata basis among the Portfolio's classes according to the relative net 
asset value of the Portfolio's classes. Because Plan payments and Class 
Expenses may differ among classes, the per share net income of each 
class may differ from the net income of other classes of shares of a 
Portfolio.
    7. Share exchange privileges may be available under which 
shareholders might exchange shares of one Portfolio (including shares 
with a CDSC) for shares with similar characteristics of another 
Portfolio; exchange shares of a non-money market Portfolio for shares 
of a money market Portfolio (or vice versa); and/or exchange shares of 
one class of a Portfolio for shares of another class of the same 
Portfolio. All exchanges will comply with rule 11a-3 under the Act.

B. The CDSC

    1. Applicants also propose that they, except for investment 
companies that do not use the amortized cost method of valuation under 
Rule 2a-7 of the Act, be permitted to issue shares of certain classes 
subject to the imposition of a CDSC. CDSCs will not be imposed with 
respect to: (1) The portion of redemption proceeds attributable to 
appreciation in the value of the shares, (2) shares acquired through 
the reinvestment of income dividends or capital gain distributions, or 
(3) shares held longer than a designated time after their purchase. In 
determining whether a CDSC would be payable, it would be assumed that 
shares, or amounts representing shares, that are not subject to a CDSC 
would be redeemed first, and other shares or amounts would be redeemed 
in the order purchased.
    2. No CDSC would be imposed on any shares purchased before the 
effective date of the requested order or before the amendment of the 
affected Portfolio's prospectus disclosing the CDSC arrangement. The 
sum of any front-end load, asset-based sales charge, and CDSC will not 
exceed the maximum sales charge provided for in article III, section 26 
of the Rules of Fair Practice of the National Association of Securities 
Dealers, Inc.
    3. Applicants request relief to permit each Company to waive or 
reduce the CDSC in certain circumstances. Any waiver or reduction will 
comply with the conditions in paragraphs (a) through (d) of rule 22d-1 
of the Act.
    4. Shares of certain CDSC classes (``Convertible CDSC Shares'') 
could automatically convert into shares of non-CDSC classes (``Non-CDSC 
Shares'') after a prescribed period following the purchase of the 
Convertible CDSC Shares. Shares acquired through the reinvestment of 
dividends and other distributions paid with respect to Convertible CDSC 
Shares will also be Convertible CDSC Shares. Such Convertible CDSC 
Shares will convert to Non-CDSC Shares on the earlier of a prescribed 
period following the date of such reinvestment or the conversion date 
of the most recently purchased Convertible CDSC Shares that were not 
acquired through the reinvestment of dividends or other distributions.

Applicants' Legal Analysis

    1. Applicants request an exemption under section 6(c) of the Act 
from sections 18(f)(1), 18(g), and 18(i) of the Act of the extent that 
the proposed issuance and sale of multiple classes could be deemed to 
result in a ``senior security'' within the meaning of section 18(g) 
and, therefore, be prohibited by section 18(f)(1); and to violate the 
equal voting provisions of section 18(i). Applicants believe that by 
implementing the multiple class distribution system, the Companies can 
facilitate the distribution of their shares and provide a broad array 
of services without assuming excessive accounting and bookkeeping 
costs. Applicants also believe that the proposed allocation of expenses 
and voting rights is equitable and would not discriminate against any 
group of shareholders. The proposed arrangement does not involve 
borrowings, and does not affect the Companies' existing assets or 
reserves. The proposed arrangement also will not increase the 
speculative character of the shares of a Company.
    2. Applicants also request an exemption under section 6(c) from 
sections 2(a)(32), 2(a)(35), 22(c), and 22(d) of the Act and rule 22c-1 
thereunder permitting applicants to assess and, under certain 
circumstances, waive a CDSC on redemptions of shares. Applicants 
believe that the proposed CDSC arrangement is fair and in the best 
interests of their shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief shall 
be subject to the following conditions:
    1. Each class of shares representing interests in the same 
Portfolio of a Company will be identical in all respects, except as set 
forth below. The only differences between the classes of shares of the 
same Portfolio will relate solely to: (a) The impact of (i) expenses 
assessed to a class pursuant to a Plan, (ii) other Class Expenses which 
would be limited to (A) transfer agent fees identified by the transfer 
agent as being attributable to a specific class of shares, (B) fees and 
expenses of a Company's administrator that are identified and approved 
by the Company's board of trustees as being attributable to a specific 
class of shares, (C) printing and postage expenses related to preparing 
and distributing materials such as shareholder reports, prospectuses 
and proxies to current shareholders of a class, (D) blue sky 
registration fees incurred by a class of shares, (E) SEC registration 
fees incurred by a class of shares, (F) the expense of administrative 
personnel and services as required to support the shareholders of a 
specific class, (G) litigation or other legal expenses or audit or 
other accounting expenses relating solely to one class of shares, and 
(H) trustees' fees incurred as a result of issues relating to one 
class; and (iii) any other incremental expenses subsequently identified 
that should be properly allocated to one class and which are approved 
by the SEC pursuant to an amended order; and/or (b) the fact that the 
classes will vote separately with respect to a Portfolio's Plans or 
other matter submitted to shareholders relating to Class Expenses, 
except as provided in condition 16 below; and/or (c) the different 
exchange privileges of certain classes of shares; and/or (d) certain 
conversion features offered by some of the classes; and/or (e) the 
designation of each class of a Portfolio.
    2. The board of trustees of a Company, including a majority of the 
independent trustees, will approve the offering of different classes of 
shares under the multiclass distribution system. The minutes of the 
trustees' meetings concerning the trustees' deliberations on the 
approvals necessary to implement a multiclass system will reflect in 
detail the reasons for the trustees' determination that the proposed 
multiclass system is in the best interests of both the Company involved 
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 a 
Company, including a majority of the trustees who are not interested 
persons of the Company. Any person authorized to direct the allocation 
and disposition of monies paid or payable by a Company to meet Class 
Expenses shall provide to the board of trustees, and the trustees shall 
review, at least quarterly, a written report of the amounts so expanded 
and the purposes for which such expenditures were made.
    4. On an ongoing basis, the trustees of a Company, pursuant to 
their fiduciary responsibilities under the Act and otherwise, will 
monitor each Portfolio having a multiclass system for 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. A Portfolio's investment adviser and 
distributor will be responsible for reporting any potential or existing 
conflicts to the trustees. If a conflict arises, a Portfolio's 
investment adviser and/or distributor at their own cost will remedy 
such conflict up to and including establishing a new registered 
management investment company.\1\
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    \1\If a Portfolio's adviser is a bank, the obligations of such 
adviser to take such remedial action may be limited by applicable 
law, such as the Glass-Steagall Act, which has been interpreted to 
prohibit banks from acting as a sponsor or distributor of an open-
end investment company.
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    5. Any non-rule 12b-1 administrative 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, except that shareholders need not enjoy the voting rights 
specified in rule 12b-1.
    6. The trustees of a Company will receive quarterly and annual 
statements concerning the expenditures under each Plan 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 will be used to justify any 
distribution or servicing expenditure 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 pursuant to a Plan relating to each 
respective class and the Class Expenses relating to each class will be 
borne exclusively by that class.
    8. The methodology and procedures for calculating the net asset 
value and dividends and distributions of the various classes in any 
Portfolio having a multiclass distribution system and the proper 
allocation of expenses among the various classes in each such Portfolio 
have been reviewed by an expert. The expert has rendered a report to 
the Company involved, which report will be provided to the staff of the 
SEC, that such methodology and procedures are adequate to ensure that 
such calculations and allocations will 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 Company involved 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 Company involved 
(which the Company agrees to provide), will be available for inspection 
by the SEC staff upon written request to the Company for such work 
papers by a senior member of the Division of Investment Management or a 
regional office of the SEC. Authorized staff members would be 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 the ongoing reports will be ``Reports on Policies and 
Procedures Placed in Operation and Tests of Operating Effectiveness'' 
as defined and described in the 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 various classes 
of shares and the proper allocation of expenses among the classes of 
shares. This representation will be concurred with by the export 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. Applicants will take immediate corrective measures if this 
representation is not concurred with by the expert or an appropriate 
substitute expert.
    10. The prospectuses of each Portfolio having a multiclass system 
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 Portfolio shares may receive different compensation with respect 
to one particular class over another in the same Portfolio.
    11. The Distributor for a Company having a multiclass system will 
adopt compliance standards for any Portfolio that has a multiclass 
system, which standards will relate to when each class may 
appropriately be sold to particular investors. Applicants will require 
all persons selling shares of a Portfolio having a multiclass system to 
agree to conform to such applicable standards.
    12. The conditions pursuant to which the exemptive order is granted 
and the duties and responsibilities of the trustees with respect to the 
multiclass system will be set forth in guidelines that will be 
furnished to the trustees of a Company having a multiclass system.
    13. Each Portfolio having a multiclass system will disclose the 
respective expenses, performance data, distribution arrangements, 
services, fees, front-end sales loads, CDSCs, and exchange privileges 
applicable to each class in a Portfolio in every prospectus relating to 
such Portfolio, regardless of whether all classes of shares are offered 
through each prospectus. Each such Portfolio will disclose the 
respective expenses and performance data applicable to all classes of 
shares in a Portfolio in every shareholder report relating to such 
Portfolio. Shareholder reports will contain, in the statement of assets 
and liabilities and statement of operations, information related to the 
Portfolio as a whole generally (not on a per class basis). Each 
Portfolio's per share data, however, will be prepared on a per class 
basis with respect to all classes of the Portfolio's shares. To the 
extent any advertisement or sales literature describes the expenses or 
performance data applicable to any class, it will also disclose the 
respective expenses and/or performance data applicable to all classes 
of shares. The information provided by the applicants for publication 
in any newspaper or similar listing of any Portfolio's net asset value 
and public offering price will present each class of shares separately.
    14. Applicants acknowledge that the grant of the exemptive order 
requested by this application will not imply SEC approval, 
authorization, or acquiescence in any particular level of payments that 
the Portfolios may make pursuant to a Plan in reliance on the exemptive 
order.
    15. If a CDSC arrangement is implemented with respect to shares of 
a Portfolio, the applicants will comply with the provisions of proposed 
rule 6c-10 under the Act, Investment Company Act Release No. 16619 
(Nov. 2, 1988) as currently proposed and as it may be reproposed, 
adopted or amended.
    16. Any class with a conversion feature will convert into another 
class on the basis of the relative net asset values of the two classes, 
without the imposition of any sales load, fee, or other charge. After 
conversion, the converted shares will be subject to asset-based sales 
charges and service fees (as those terms are defined in article III, 
section 26 of the National Association of Securities Dealers' Rules of 
Fair Practice), if any, that in the aggregate would be less than any 
asset-based sales charges and service fees to which the CDSC shares 
were subject prior to the conversion.
    17. If a Company implements any amendment to its rule 12b-1 
distribution plan (or, if presented to shareholders, adopts or 
implements any amendment to a non-rule 12b-1 administrative plan) that 
would increase materially the amount that may be borne by the Non-CDSC 
Shares under the Plan, exiting Convertible CDSC Shares will stop 
converting into the Non-CDSC Shares unless the Convertible CDSC Shares, 
voting separately as a class, approve the proposal. The trustees shall 
take such action as it necessary to ensure that Convertible CDSC Shares 
are exchanged or converted into a new class (``New Non-CDSC Shares''), 
identical in all material respects to the Non-CDSC Shares as they 
existed before implementation of the proposal, no later than the date 
such shares previously were scheduled to convert into Non-CDSC Shares. 
If deemed advisable by the trustees to implement the foregoing, such 
action may include the exchange of all existing Convertible CDSC Shares 
for a new class (``New Convertible CDSC Shares''), identical to the 
existing Convertible CDSC Shares in all material respects except that 
the New Convertible CDSC Shares will convert into New Non-CDSC Shares. 
New Non-CDSC Shares or New Convertible CDSC Shares may be formed 
without further exemptive relief. Exchanges or conversions described in 
this condition shall be effected in a manner that the trustees 
reasonably believe will not be subject to federal taxation. In 
accordance with condition 4, any additional cost associated with the 
creation, exchange, or conversion of New Non-CDSC Shares or New 
Convertible CDSC Shares shall be borne solely by the Company's adviser 
and the distributor. Convertible CDSC Shares sold after the 
implementation of the proposal may convert into Non-CDSC Shares subject 
to the higher maximum payment, provided that the material features of 
the Non-CDSC Share plan and the relationship of such plan to the 
Convertible CDSC Shares are disclosed in an effective registration 
statement.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25644 Filed 10-17-94; 8:45 am]
BILLING CODE 8010-01-M