[Federal Register Volume 59, Number 204 (Monday, October 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26277]
[[Page Unknown]]
[Federal Register: October 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20635; 812-9054]
Great Hall Investment Funds, Inc., et al.; Notice of Application
October 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: Great Hall Investment Funds, Inc.; Insight Investment
Management, Inc. (the ``Adviser''); and Dain Bosworth Incorporated and
Rauscher Pierce Refsnes, Inc. (the ``Distributors'') and such other
registered open-end management investment companies for which the
Adviser, or any person controlled by or under common control with the
Adviser, may serve as investment adviser, or for which either or both
of the Distributors, or any person controlled by or under common
control with the Distributors, may serve as Distributor (collectively,
the ``Funds'').
Relevant Act Sections: Order requested pursuant to section 6(c) for
exemptions 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 seek an order to permit the Funds to
offer an unlimited number of classes of shares representing interests
in the same portfolio of securities, and to assess and, under certain
circumstances, waive a contingent deferred sales charge (``CDSC'').
Filing Date: The application was filed on June 15, 1994 and amended on
October 17, 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 14,
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 who wish to
be notified of the date of a hearing may request notification by
writing to the SEC's Secretary.
Addresses: Secretary, SEC, 450 Fifth Street NW., Washington, D.C.
20549. Applicants, 60 South Sixth Street, Minneapolis, Minnesota 55402.
For Further Information Contact: Marianne H. Khawly, Law Clerk, at
(202) 942-0562, or C. David Messman, 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
1. The Fund is an open-end diversified management investment
company and is organized as a Minnesota corporation. The Fund's charter
authorizes the Fund to issue its shares in more than one series, each
series representing a separate portfolio of assets and liabilities. The
Adviser serves as the investment adviser of each series of the Fund.
The Distributors serve as the principal underwriters of the Fund's
shares.
2. The Fund currently consists of five series. Three series are
money market series; Great Hall Prime Money Market Fund, Great Hall
U.S. Money Market Fund, and Great Hall Tax-Free Money Market Fund. The
other two series are non-money market series: Great Hall National Tax-
Exempt Fund and Great Hall Minnesota Insured Tax-Exempt Fund.
3. Each non-money market series of the Fund currently offers its
shares at net asset value plus a front-end sales charge in connection
with investments of up to $1 million. Investments of $1 million are not
subject to a front-end sales charge, but a CDSC is deducted in certain
cases upon redemption of the Funds' shares.\1\ Each money market series
currently offers its shares at net asset value without the imposition
of any front-end sales charge or CDSC.
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\1\See Investment Company Act Release Nos. 19461 (May 6, 1993)
(notice) and 19512 (June 4, 1993) (order). This order will be
superseded by the order requested hereby as to each Fund that
implements a multi-class structure.
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4. Applicants request an order pursuant to section 6(c) for
exemptions 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 to permit the
Funds to issue and sell multiple classes of shares, assess a CDSC on
certain redemptions, and waive the CDSC in certain instances.
5. The Funds initially propose to offer up to four different
classes of shares. Class A shares will be subject to a conventional
front-end sales load, except that investments of $1 million or more
will not be subject to a front-end sales load but will be subject to a
CDSC. Class A shares also will be subject to service and/or
distribution fees at an aggregate annual rate of up to 0.30% of average
daily net assets. The service fee portion may not exceed 0.25% of
average daily net assets. The plan of distribution will be adopted
pursuant to rule 12b-1 under the Act (a ``rule 12b-1 plan'') and/or, in
the case of service fees only, pursuant to a shareholder service plan
not subject to rule 12b-1 (a ``non-rule 12b-1 plan'').\2\ Existing
shares of the Funds will be designated Class A shares upon
implementation of the multiple distribution structure (the ``multi-
class system'').
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\2\Rule 12b-1 plans and non-rule 12b-1 plans are hereinafter
referred to generically as a ``plan'' or ``plans.'' Applicants
currently anticipate that all shareholder servicing fees will be
imposed under rule 12b-1 plans. Nevertheless, applicants may impose
a shareholder servicing fee pursuant to a non-rule 12b-1 plan in
accordance with condition 16 below.
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6. Class B shares will not be subject to a front-end sales charge
but will be subject to a CDSC which will decline over time. Applicants
expect the CDSC to range from 4% on redemptions made during the first
two years following purchase to 1% on redemptions made during the sixth
year following purchase. Class B shares will be subject to a service
fee at an annual rate of up to 0.25%, and a distribution fee at an
annual rate of up to 0.75%, of average daily net assets. Class B shares
will automatically convert into Class A shares after a specified period
of time.
7. Class C shares will not be subject to a front-end sales charge
but will be subject to a CDSC of up to 1% on redemptions made during
the first two years following purchase. Class C shares will be subject
to a service fee at an annual rate of up to 0.25%, and a distribution
fee at an annual rate of up to 0.75%, of average daily net assets.
Class C shares will not be convertible into any other class of shares.
8. Investors meeting minimum investment and/or other eligibility
requirements established by applicants will be eligible to purchase
certain exclusive shares (``Class Y shares''). Class Y shares will not
be subject to a front-end sales load or a CDSC. They will be subject to
a plan initially providing for combined service and/or distribution
fees of up to 0.25% per annum of average daily net assets.\3\
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\3\Applicants intend that upon the initial public offering of
Class Y shares of a Fund, shareholders of any existing classes of
such Fund who would qualify for investment in Class Y shares would
have such existing classes automatically convert into Class Y shares
on the basis of the relative net asset values of such classes of
shares at the time of conversion.
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9. Each money market series of a Fund may offer shares in two or
more classes without a front-end sales charge or CDSC and with
variations among classes only in service fees and or distribution fees
(if any) and certain other class-specific expenses, as discussed below.
The Funds also may establish one or more additional classes to be sold
with different sales load, service, and distribution fee structures, as
described below.
10. The net asset value of all outstanding shares of all classes
will be computed on the following basis. For daily-dividend money
market funds, net investment income and fund-level expenses will be
allocated daily based upon the relative value of net assets of all
dividend-eligible (``settled'') shares of each class at the beginning
of the day, after the net assets of each such class are adjusted for
the prior day's capital share activity. For all other funds, income and
fund level expenses will be allocated to each class based on the
relative value of the net assets of all shares in each class at the
beginning of the day, after the net assets of each such class are
adjusted for the prior business day's capital share activity. For all
funds, realized and unrealized gains and losses will be allocated to
each class based on the relative percentage of net assets at the
beginning of the day, after such net assets are adjusted for the prior
business day's capital share activity of each class of shares. Class-
specific expenses will be calculated and charged to the appropriate
class.
11. The Funds will not impose front-end sales charges, CDSCs,
service fees (or any combination thereof) in excess of amounts
permitted by Article III, Section 26 of the rules of Fair Practice of
the National Association of Securities Dealers, Inc. (``NASD'').
12. Any CDSC imposed by a class of shares will be based on the
lesser of the aggregate net asset value of the shares being redeemed
either at the time of purchase or redemption. No CDSC will be imposed
on shares acquired through reinvestment of income dividends or capital
gains distributions. Upon any request for redemption of Class A, Class
B, or Class C shares, it will be assumed that shares subject to no CDSC
will be redeemed first in the order purchased. If a shareholder owns
Class A, Class B, and Class C shares, then, absent a shareholder choice
to the contrary, Class C shares not subject to a CDSC will be redeemed
in full prior to any redemption of Class A or Class B shares not
subject to a CDSC, and thereafter Class B shares not subject to a CDSC
will be redeemed in full prior to any redemption of Class A shares not
subject to a CDSC. It is expected that the CDSC schedule of the Funds
will vary depending in part on the front-end sales load (if any)
applicable to the shares and the compensation paid to a dealer for
selling shares of the Fund. Any variation in the CDSC schedules will be
set forth in the applicable prospectus. No CDSC will be imposed
pursuant to the requested order on shares issued prior to the date of
the order.
13. Applicants request relief to permit each Fund to waive or
reduce the CDSC in certain circumstances. Any waiver or reduction will
comply with the conditions in paragraphs (a) through (d) or rule 22d-1
under the Act.
14. Applicants intend to provide a one time credit for any CDSC
paid upon redemption, the proceeds of which are reinvested in the same
class of shares of a Fund within 90 days of redemption. The Distributor
will provide this credit from its own assets.
15. Class B shares of a Fund held for a specified number of years
will automatically convert to Class A shares of such Fund at the
relative net asset values of each of the classes. For purposes of
calculating the holding period, Class B shares will be deemed to have
been issued on the sooner of: (a) the date on which the issuance of
Class B shares occurred; or (b) for Class B shares obtained through an
exchange, or a series of exchanges, the date on which the issuance of
the original Class B shares occurred. Class B shares in a shareholder's
Fund account that were purchased through the reinvestment of dividends
and other distributions paid in respect of Class B shares will be
considered to be held in a separate sub-account. Each time any Class B
shares in the shareholder's Fund account (other than those held in the
sub-account) convert to Class A shares, a pro rata portion of the Class
B shares then in the sub-account will also convert to Class A shares.
The portion will be determined by the ratio that the shareholder's
Class B shares converting to Class A shares bears to the shareholder's
total Class B shares not acquired through dividends and distributions.
The automatic conversion feature will be subject to the continuing
availability of a ruling from the Internal Revenue Service (or an
expert's opinion) that the conversion will not constitute a taxable
event under the Code.
16. Applicants anticipate that a given class of shares will be
exchangeable only for shares of the corresponding class of other Funds.
Applicants will comply with rule 11a-3 as to all exchanges.
Applicants' Legal Analysis
1. Applicants request an order exempting them from the provisions
of sections 18(f)(1), 18(g), and 18(i) of the Act to the extent that
the proposed issuance and sale of various classes of shares
representing interests in the same Fund might be deemed: (a) to result
in a ``senior security'' within the meaning of section 18(g); (b)
prohibited by section 18(f)(1); and (c) to violate the equal voting
provisions of section 18(i).
2. Applicants believe that the proposed multi-class arrangement
will better enable the Funds to meet the competitive demands of today's
financial services industry. Under the multi-class arrangement, an
investor will be able to choose the method of purchasing shares that is
most beneficial given the amount of his or her purchase, the length of
time the investor expects to hold his or her shares, and other relevant
circumstances. The proposed arrangement would permit the Funds to
facilitate both the distribution of their securities and provide
investors with a broader choice as to the method of purchasing shares
without assuming excessive accounting and bookkeeping costs or
unnecessary investment risks.
3. The proposed allocation of expenses and voting rights relating
to any rule 12b-1 plans and/or non-rule 12b-1 plans in the manner
described is equitable and would not discriminate against any group of
shareholders. In addition, such arrangements should not give rise to
any conflicts of interest because the rights and privileges of each
class of shares are substantially identical.
4. Applicants believe that the proposed multi-class arrangement
does not present the concerns that section 18 of the Act was designed
to address. The multi-class arrangement will not increase the
speculative character of the shares of the Fund. The multi-class
arrangement does not involve borrowing, nor will it affect the Funds'
existing assets or reserves, and does not involve a complex capital
structure. Nothing in the multi-class arrangement suggest that it will
facilitate control by holders of any class of shares.
5. 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, to assess and, under certain circumstances, waive a CDSC
on redemptions of shares. Applicants submit that the requested
exemption to permit the Funds to implement the proposed CDSCs is
appropriate in the public interest, consistent with the protection of
investors, and consistent with the purposes fairly intended by the
policy and provisions of the Act. The proposed CDSC arrangements will
provide shareholders with the option of having their full payment
invested for them at the time of their purchase of shares of the Funds
with no deduction of an initial sales charge.
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 Fund and be identical in all respects,
except as set forth below. The only differences among various classes
of shares of the same Fund will relate solely to: (a) The designation
of each class of shares of the Fund; (b) expenses assessed to a class
as a result of one or more plans providing for a service and/or
distribution fee (as set forth above); (c) different expenses which the
Board of Directors of a Fund may in the future determine to allocate to
a specific class (``class-specific expenses''), which will be limited
to: (i) Transfer agency 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 current shareholders;
(iii) Blue Sky registration fees incurred by a class of shares; (iv)
SEC registration fees incurred by a class of shares; (v) the expenses
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 of shares; and (vii) directors'
fees incurred as a result of issues relating to one class of shares;
(d) voting rights on matters exclusively affecting one class of shares
(e.g., the adoption, amendment, or termination of a rule 12b-1 plan in
accordance with the procedures set forth in rule 12b-1) except as
provided in condition 15 below; (e) the different exchange privileges
of the various classes of shares; and (f) the different conversion
features of the various classes of shares. 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 SEC pursuant to
an amended order.
2. The directors of each of the Funds, including a majority of the
independent directors, shall have approved the multi-class system,
prior to the implementation thereof by a particular Fund. The minutes
of the meetings of the directors of each of the Funds regarding the
deliberations of the directors with respect to the approvals necessary
to implement the Variable Pricing System will reflect in detail the
reasons for determining that the proposed multi-class system is in the
best interest of the Fund and its shareholders.
3. The initial determination of the class-specific expenses, if
any, that will be allocated to a particular class of a Fund and any
subsequent changes thereto will be reviewed and approved by a vote of
the directors of the affected Fund, including a majority of the
independent directors. Any person authorized to direct the allocation
and disposition of monies paid or payable by a Fund to meet class-
specific expenses shall provide to the directors, and the directors
shall review, at least quarterly, a written report of the amounts so
expended and the purpose for which the expenditures were made.
4. On an ongoing basis, the directors of the Funds, pursuant to
their fiduciary responsibilities under the Act and otherwise, will
monitor each Fund for the existence of any material conflicts among the
interests of the various classes of shares. The directors, including a
majority of the independent directors, shall take such action as is
reasonably necessary to eliminate any such conflicts that may develop.
The Adviser and the Distributors will be responsible for reporting any
potential or existing conflicts to the directors. If a conflict arises,
the Adviser and the Distributors at their own cost will remedy such
conflict up to and including establishing a new registered management
investment company.
5. The directors 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 directors
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 directors in the exercise of
their fiduciary duties.
6. Dividends paid by a Fund with respect to each class of 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 fee payments made under the plans relating to a
particular class will be borne exclusively by each such class and
except that any class-specific expenses will be borne by the applicable
class of shares.
7. The methodology and procedures for calculating the net asset
value and dividends/distributions of the various classes and the proper
allocation of income and expenses among the classes has been reviewed
by the Independent Examiner. The Independent Examiner has rendered a
report, which has been provided to the staff of the SEC, stating 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 Independent Examiner, or an appropriate
substitute Independent Examiner, 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 Funds that the
calculations and allocations are being made properly. The reports of
the Independent Examiner shall 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 Independent Examiners with respect to such
reports, following request by the Funds which the Funds agree to make,
will be available for inspection by the SEC staff upon the written
request for such work papers by a senior member of the Division of
Investment Management or of a Regional Office of the SEC, 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 Independent Examiner 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 SAS No. 70 of the
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.
8. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends/distributions among the various classes
of shares and the proper allocation of income and expenses among such
classes of shares and this representation has been concurred with by
the Independent Examiner in its initial report referred to in condition
7 above and will be concurred with by the Independent Examiner, or
appropriate substitute Independent Examiner, on an ongoing basis at
least annually in the ongoing reports referred to in condition 7 above.
Applicants agree to take immediate corrective action if the Independent
Examiner, or appropriate substitute Independent Examiner, does not so
concur in the ongoing reports.
9. The prospectuses of the Funds will include a statement to the
effect that a salesperson and any other person entitled to receive
compensation for selling or servicing Fund shares may receive different
levels of compensation for selling one particular class of shares over
another in a Fund.
10. Applicants will adopt compliance standards as to when shares of
a particular class may appropriately be sold to particular investors
and will require all persons selling shares of the Funds to agree to
conform to these standards.
11. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the directors of the Funds with
respect to the multi-class system will be set forth in guidelines which
will be furnished to the directors.
12. Each Fund prospectus (regardless of whether all classes of
shares of such Fund are offered through such prospectus) will disclose
the respective expenses, performance data, distribution arrangements,
services, fees, front-end sales charge, CDSC, exchange privileges, and
conversion features applicable to each class of shares. The shareholder
reports of each Fund will disclose the respective expenses and
performance data applicable to each class of shares in every
shareholder report. The shareholder reports will contain, in the
statement of assets and liabilities and statement of operations,
information related to the Fund as a whole generally and not on a per
class basis. Each Fund's per share data and ratios, however, will be
prepared on a per class basis with respect to all classes of shares of
such Fund. To the extent any advertisement or sales literature
describes the expenses or performance data applicable to any class of
shares, it will disclose the expenses and/or performance data
applicable to all classes. The information provided by applicants for
publication in any newspaper or similar listing of the Funds' net asset
values and public offering prices will separately present each class of
shares.
13. 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 Funds may make pursuant to rule 12b-1 distribution plans or
shareholder services plans in reliance on the exemptive order.
14. Any class of shares with a conversion feature (``Purchase
Class'') will convert into another class (``Target Class'') of shares
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 an asset-based
sales charge and/or service fee (as those terms are defined in Article
III, Section 26 of the NASD's rules of Fair Practice), if any, that in
the aggregate are lower than the asset-based sales charge and service
fee to which they were subject prior to the conversion.
15. If a Fund implements any amendment to its rule 12b-1 plan (or,
if presented to shareholders, adopts or implements any amendment of a
non-rule 12b-1 shareholder services plan) that would increase
materially the amount that may be borne by the Target Class shares
under the plan, existing Purchase Class shares will stop converting
into Target Class shares unless the Purchase Class shareholders, voting
separately as a class, approve the proposal. The directors shall take
such action as is necessary to ensure that existing Purchase Class
shares are exchanged or converted into a new class of shares (``New
Target class''), identical in all material respects to the Target Class
as it is existed prior to implementation of the proposal, no later than
the date such shares previously were scheduled to convert into Target
Class shares. If deemed advisable by the directors to implement the
foregoing, such action may include the exchange of all existing
Purchase Class shares for a new class (``New Purchase Class''),
identical to existing Purchase Class shares in all material respects
except that New Purchase Class shares will convert into New Target
Class shares. New Target Class or New Purchase Class may be formed
without further exemptive relief. Exchanges or conversions described in
this condition shall be effected in any manner that the directors
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 Target Class or New Purchase
Class shall be borne solely by the Adviser and the Distributors.
Purchase Class shares sold after the implementation of the proposal may
convert into Target Class shares subject to the higher maximum payment,
provided that the material features of the Target Class plan and the
relationship of such plan to the Purchase Class shares are disclosed in
an effective registration statement.
16. Any non-rule 12b-1 plan will be adopted and operated in
accordance with the procedures set forth in paragraphs (b) through (f)
of rule 12b-1 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.
17. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act, Investment Company Act Release No. 16169 (Nov. 2,
1988), as currently proposed and as it may be reproposed, adopted, or
amended.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26277 Filed 10-21-94; 8:45 am]
BILLING CODE 8010-01-M