[Federal Register Volume 59, Number 210 (Tuesday, November 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27040]


[[Page Unknown]]

[Federal Register: November 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20657; File No. 812-9144]

 

Salomon Brothers Capital Fund, Inc. et al.; Notice of Application

October 26, 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: Salomon Brothers Capital Fund, Inc., Salomon Brothers 
Investors Fund, Inc., and Salomon Brothers Series Funds, Inc. 
(collectively, the ``Funds''), Salomon Brothers Asset Management, Inc. 
(the ``Adviser''), Salomon Brothers, Inc. (the ``Distributor'').

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 DATES: The application was filed on August 3, 1994, and amended 
on September 28, 1994, and October 7, 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 21, 
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 NW., Washington, D.C. 20549. 
Applicants, c/o Michael S. Hyland, Salomon Brothers Asset Management, 
Inc., Seven World Trade Center, New York, New York 10048; copy to Gary 
Schpero, Esq., Simpson Thatcher & Bartlett, 425 Lexington Avenue, New 
York, New York 10017.

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.

Applicant's Representations

A. Multi-Class Distribution System

    1. Each Fund is an open-end management investment company 
registered under the Act. The term ``Fund'' refers to the registered 
investment company while the term ``Portfolio'' refers to a particular 
portfolio of a Fund. For a single series investment company, the terms 
``Fund'' and ``Portfolio'' are interchangeable. The Adviser provides 
investment advisory services to each Fund. The Distributor acts as 
distributor for the shares of each Fund. Applicants request that the 
relief granted extend to any open-end investment company that is or may 
become a member of Salomon Brothers Asset Management, Inc.'s ``group of 
investment companies'' as defined in rule 11a-3 under the Act. Existing 
Funds that intend to rely on the requested order have been named as 
applicants.
    2. Applicants propose to establish a multiple class distribution 
system. Each Portfolio proposes to offer investors the option of 
purchasing shares that are either subject to a conventional front-end 
sales load (``Front-End Option''), subject to a CDSC (``Deferred 
Option''), or not subject to any such sales charge. Shares offered 
pursuant to any of these options could be offered in conjunction with a 
rule 12b-1 plan or non-rule 12b-1 shareholder services plan. The 12b-1 
plans and shareholder services plans collectively are referred to as 
the ``Plans.'' The sum of any initial sales charge, 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. Under the proposed distribution system, a Fund (on behalf of a 
Portfolio) or the Fund's distributor may enter into agreements with 
service agents for services pursuant to a 12b-1 plan or pursuant to a 
shareholder services plan. The expense of payments made pursuant to a 
12b-1 plan agreement or a shareholder services plan agreement (``Plan 
Payments'') will be borne entirely by the beneficial owners of the 
class to which the particular agreement relates.
    4. A Portfolio's gross income will be allocated pro rata to each 
class on the basis of the net assets of each class. Expenses incurred 
by a Fund that are not attributable to a particular Portfolio of the 
Fund or to a particular class of a Portfolio (``Fund Expenses''), and 
expenses incurred by a particular Portfolio of a Fund that are not 
attributable to any particular class of the Portfolio (``Portfolio 
Expenses'') will be allocated to each class on the basis of relative 
net assets. Expenses specifically attributable to a particular class of 
a Portfolio (``Class Expenses'') will be allocated directly to such 
class. Class Expenses will consist only of those expenses specified in 
condition one, below. Because Plan Payments and Class Expenses will be 
borne by the class to which they are attributable, the net investment 
income of (and dividends payable to) the classes may differ. As a 
result, the net asset value per share of different classes may differ 
for Portfolios that do not declare dividends daily.
    5. Under the proposed distribution system, each Portfolio's shares, 
regardless of class, will represent a pro rata interest in its 
portfolio securities and will have identical voting, dividend, 
liquidation, and other rights, preferences, powers, restrictions, 
limitations, qualifications, designations, terms, and conditions, 
except that: (a) each class will have a different designation; (b) each 
class will bear its own Plan Payments and Class Expenses; (c) only 
shareholders of affected classes will be entitled to vote on matters 
pertaining to the 12b-1 plan and 12b-1 plan agreements relating to such 
class; (d) each class will have different exchange privileges; and (e) 
certain classes will have a conversion feature.
    6. Shares of each class may be exchanged only for shares of the 
same class in another Portfolio. The exchange privileges will operate 
in accordance with rule 11a-3 under the Act.

B. The CDSC

    1. Investors choosing the Deferred Option will purchase shares at 
net asset value, without the imposition of a sales load at the time of 
purchase, but subject to a CDSC that decreases over time. A CDSC will 
not be imposed on redemptions of Deferred Option shares purchased more 
than a specified period before the redemption, or shares derived from 
reinvestment of dividends and distributions. No CDSC will be imposed on 
any amount that represents an increase in the value of the Deferred 
Option shares resulting from capital appreciation above the amount paid 
for such shares. In determining the applicability and rate of any CDSC, 
it will be assumed that a redemption is made first of shares 
representing reinvestment of dividends and capital gain distributions; 
then of amounts representing the increase in net asset value above the 
total amount of payments for the purchase of Deferred Option shares 
currently held by the shareholder; and finally, of other shares held by 
the shareholder for the longest period of time. This order of 
redemption will result in a charge, if any, imposed at the lowest 
possible rate.
    2. After Deferred Option shares are no longer subject to a CDSC, 
the shares (except those purchased through reinvestment of dividends 
and other distribution paid in respect of Deferred Option shares of 
such Portfolio) will automatically convert to non-CDSC shares of such 
Portfolio at the relative net asset values of the two classes. For 
purposes of conversion to Front-End Option shares, all shares in a 
shareholder's Portfolio account that were purchased through the 
reinvestment of dividends and other distributions paid in respect of 
Deferred Option shares (and which have not converted to Front-End 
Option shares) will be considered to be held in a separate sub-account. 
Each time any Deferred option shares in the shareholder's Portfolio 
account (other than those in the sub-account referred to in the 
preceding sentence) convert to Front-End Option shares, a pro rata 
portion of the Deferred Option shares then in the sub-account also will 
convert to Front-End Option shares. The portion will be determined by 
the ratio that the shareholder's Deferred Option shares converting to 
Front-End Option shares bears to the shareholder's total Deferred 
Option shares not acquired through dividends and distributions.
    3. Applicants request relief to permit each Fund to waive or reduce 
the CDSC under certain circumstances. Any waiver or reduction will 
comply with the conditions in paragraphs (a) through (d) of rule 22d-1 
under the Act.

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 to the extent that 
the proposed issuance and sale of multiple classes of shares 
representing interests in a Fund's Portfolios could be deemed: (A) to 
result in a ``senior security'' within the meaning of section 18(g) and 
to be prohibited by section 18(f)(1), and (B) to violate the equal 
voting provisions of section 18(i). Applicants believe that the 
proposed allocation of expenses and voting rights in the manner 
described above is equitable and would not discriminate against any 
group of shareholders. The proposed arrangement does not involve 
borrowings, and does not affect the Funds' existing assets or reserves. 
The proposed arrangement also will not increase the speculative 
character of the shares of a Fund.
    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 to permit the Funds to assess and, under certain 
circumstances, waive a CDSC on redemptions of shares.

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 Portfolio, and be identical in all 
respects, except as set forth below. The only differences among the 
classes of shares of a Portfolio will related solely to: (a) the impact 
of the disproportionate Plan Payments; (b) the method of allocating 
certain Class Expenses, which are limited to (i) transfer agent fees as 
identified by the transfer agent as being attributable to a specific 
class and any shareholder servicing costs not covered by a shareholder 
services plan; (ii) printing and postage expenses related to preparing 
and distributing to the shareholders of a specific class materials such 
as shareholder reports, prospectuses and proxies; (iii) Blue Sky 
registration fees incurred by a class; (iv) SEC registration fees 
incurred by a class; (v) the expense 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; 
(vii) professional fees relating solely to such class; (viii) 
directors' fees, including independent counsel fees, incurred as a 
result of issues relating to one class, and (ix) shareholder meeting 
expenses for meetings of a particular class; (c) the fact that the 
class will vote separately with respect to any matter specifically 
affecting that class, including without limitation rule 12b-1 
distribution plans and shareholder services plans, except as provided 
in condition sixteen below; (d) the different exchange privileges of 
the classes of shares; (e) designation of each class of shares of the 
Portfolio; and (f) certain classes will have a conversion feature. Any 
additional incremental expenses not specifically identified above which 
are subsequently identified and determined to be properly allocable 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 Fund, including a majority of the 
independent directors, will approve the system of the offering of the 
various classes of shares. The minutes of the meetings of the directors 
regarding deliberations of the directors with respect to the approvals 
necessary to implement the multi-class arrangement for any Portfolio 
will reflect in detail the reasons for the directors' determinations 
that the system is in the best interests of that Portfolio and its 
shareholders.
    3. On an ongoing basis, the directors of each Fund, pursuant to 
their fiduciary responsibilities under the Act and otherwise, will 
monitor such Fund for the existence of any material conflicts between 
the interests of the classes of outstanding 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 Distributor of each Fund will be 
responsible for reporting any potential or existing conflicts to the 
directors. If a conflict arises, the Adviser and Distributor at their 
own cost will remedy such conflict up to and including establishing a 
new registered management investment company.
    4. The directors of each Fund 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 such 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.
    5. Dividends paid with respect to each class of shares of a 
Portfolio, 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 Plan Payments and Class Expenses applicable to 
a class will be borne exclusively by that class.
    6. Any shareholder services 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.
    7. The methodology and procedures for calculating the net asset 
value, dividends, and distributions of the various classes, and the 
proper allocation of expenses among the classes, have been reviewed by 
an expert (the ``Expert''). The Expert has rendered a report to 
applicants, a copy of which has been provided to the staff of the SEC. 
The report states that such methodology and procedures are adequate to 
ensure that the calculations and allocations will be made in an 
appropriate manner. The Expert or an appropriate substitute Expert will 
monitor, on an ongoing basis, the manner in which the calculations and 
allocations are being made and, based on that review, will render at 
least annually a report to each Fund that the calculations and 
allocations are being made properly. The reports of the Expert 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 Expert 
with respect to such reports, following request by a Fund (which each 
Fund agrees to provide), will be available for inspection by the SEC 
staff upon the written request to a Fund for such work papers by a 
senior member of the SEC's Divisions of Investment Management, limited 
to the Director, an Associate Director, the Chief Accountant, the Chief 
Financial Analyst, an Assistant Director, and any Regional 
Administrative 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 AICPA's SAS No. 70, 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 and distributions of the various classes 
of shares and the proper allocation of expenses among the classes of 
shares. This representation has been concurred with by the Expert in 
the initial report referred to in condition seven, 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 seven. Applicants will take immediate corrective measures 
if this representation is not concurred in by the Expert, or 
appropriate substitute Expert.
    9. The prospectus of each Fund will contain 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 
compensation with respect to one particular class of shares over 
another.
    10. Each Portfolio will disclose the respective expenses, 
performance data, distribution arrangements, services, fees, sales 
loads, deferred sales loads, conversion features and exchange 
privileges applicable to each class of shares in every prospectus, 
regardless of whether all classes of shares are offered through each 
prospectus. Each Portfolio will disclose the respective expenses and 
performance data applicable to all classes 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 Portfolio as a whole generally and 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 shares of 
such Portfolio. To the extent any advertisement or sales literature 
describes the expenses or performance data applicable to any class of 
shares, it also will disclose the respective expenses and/or 
performance data applicable to all classes of shares. The information 
provided by applicants for publication in any newspaper or similar 
listing of a Portfolio's net asset value and public offering price will 
present each class of shares separately.
    11. The Distributor will adopt compliance standards as to when 
shares of a particular class may appropriately be sold to particular 
investors. Applicants will require all persons selling shares of a Fund 
to conform to these standards.
    12. The conditions pursuant to which the exemptive order is granted 
and the duties and responsibilities of the directors of each Fund with 
respect to the multi-class arrangement will be set forth in guidelines 
that will be furnished to the directors as part of the materials 
setting forth the duties and responsibilities of the directors.
    13. Applicants acknowledge that the grant of the exemptive order 
requested by the application will not imply SEC approval, 
authorization, or acquiescence in any particular level of payments that 
may be made pursuant to a 12b-1 plan or a shareholder services plan in 
reliance on the exemptive order.
    14. 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 directors of the relevant 
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 Expenses shall provide to such Fund's 
directors, and such Fund's directors shall review, at least quarterly, 
a written report of the amounts so expended and the purposes for which 
such expenditures were made.
    15. 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 National Association of Securities Dealers, 
Inc.'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 before the conversion.
     16. If a Fund adopts or implements any amendment to a 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 a 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. Such 
Fund's 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 existed before implementation of the 
proposal, no later than the date such shares previously were scheduled 
to convert into Target Class shares. If deemed advisable by such Fund's 
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. A 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 such Fund's directors reasonably believe will not be subject to 
federal taxation. In accordance with condition three, any additional 
cost associated with the creation, exchange, or conversion of New 
Target Class shares or New Purchase Class shares shall be borne solely 
by the Adviser and Distributor. 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.
    17. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act, Investment Company Act Release No. 16619 (Nov. 2, 
1988), as such rule is currently proposed and as it may be reproposed, 
adopted, or amended.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27040 Filed 10-31-94; 8:45 am]
BILLING CODE 8010-01-M