[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