[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: 94-27041]


[[Page Unknown]]

[Federal Register: November 1, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No 20660; 812-8586]

 

The Galaxy Fund, 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 (``Act'').

-----------------------------------------------------------------------

APPLICANTS: The Galaxy Fund (the ``Trust''), Fleet Investment Advisors, 
Inc. (the ``Advisers''), and Fleet Securities, Inc. (``Fleet 
Securities'').

RELEVANT ACT SECTIONS: Exemption requested under sections 6(c), 10(f), 
and 17(b) from sections 10(f) and 17(a).

SUMMARY OF APPLICATION: Applicants seek an order to let the Trust's 
Rhode Island Municipal Bond Fund (the ``Portfolio'') purchase certain 
debt securities issued by the State of Rhode Island from Fleet 
Securities when such securities are underwritten solely by Fleet 
Securities or when Fleet Securities is a member of the underwriting 
syndicate. The order also would let the Portfolio purchase such 
securities from a syndicate manager of an underwriting syndicate of 
which Fleet Securities is a member when such securities are designated 
as group sales.

FILING DATES: The application was filed on September 20, 1993, and 
amended on February 10, 1994, May 6, 1994, and June 30, 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 who wish to 
be notified of a hearing may request such notification by writing to 
the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
The Trust, 440 Lincoln Street, Worcester, Massachusetts 01605-1959. The 
Adviser, 45 East Avenue, Rochester, New York 14604. Fleet Securities, 
14 Wall Street, 27th Floor, New York, New York 10005.

FOR FURTHER INFORMATION CONTACT: 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 may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. The Trust is an open-end management investment company organized 
as a Massachusetts business trust. The Portfolio is a series of the 
Trust that has not yet commenced operations. The Adviser will act as 
investment adviser to the Portfolio. The Adviser is a wholly-owned 
subsidiary of Fleet Financial Group, Inc. (``Fleet Financial''), a 
multi-bank holding company.
    2. The Portfolio's investment objective is to seek as high a level 
of current interest income exempt from federal income tax, and, to the 
extent possible, from Rhode Island personal income tax, as is 
consistent with relative stability of principal. To achieve this 
objective, the Portfolio's assets will be invested in debt securities 
of the State of Rhode Island, its political sub-divisions, authorities, 
agencies, instrumentalities, and corporations, the interest on which is 
exempt from Federal and Rhode Island personal income taxes (``Rhode 
Island Tax-Exempt Securities''), and in debt securities of other 
governmental issuers such as Puerto Rico, the interest on which is tax-
exempt.
    3. Fleet Securities, a whooly-owned subsidiary of Fleet Financial, 
is one of the top three underwriters in most types of Rhode Island Tax-
Exempt Securities based on both dollar volume and number of new issues. 
From 1988 through 1993. Fleet Securities served as underwriter of 
approximately $5.1 billion in principal amount of Rhode Island Tax-
Exempt Securities. This number represented approximately 57% of the 
total dollar amount, and approximately 76% of the total number, of new 
issues of Rhode Island Tax-Exempt Securities during those years.
    4. Applicants assert that the supply of Rhode Island Tax-Exempt 
Securities in the secondary market historically has been limited, both 
as to the number of available issues and their size. Even when the 
amount available in the secondary market is relatively high, many of 
the issues available may be unsuitable for purchase by the Portfolio 
due to their credit quality or other characteristics. Consequently, 
applicants have an increased need to acquire Rhode Island Tax-Exempt 
Securities in underwritten offerings.
    5. Applicants request relief from: (a) section 17(a) to permit the 
Portfolio to purchase Rhode Island Tax-Exempt Securities from Fleet 
Securities when such securities are underwritten solely by Fleet 
Securities; (b) sections 17(a) and 10(f) to permit the Portfolio to 
purchase Rhode Island Tax-Exempt Securities from Fleet Securities when 
Fleet Securities is a member of an underwriting syndicate; and (c) 
sections 17(a) and 10(f) to permit the Portfolio to purchase Rhode 
Island Tax-Exempt Securities from a syndicate manager when such 
securities are designated as group sales. The requested order would not 
permit principal transactions between Fleet Securities and the 
Portfolio in other securities or for Rhode Island Tax-Exempt Securities 
sold in the secondary market.
    6. A ``group order'' is an order submitted to an underwriting 
syndicate which benefits all members of the syndicate according to 
their percentage participation in the syndicate. A group order may be 
distinguished from a ``designated order,'' in which the investor 
designates two or more members of the syndicate to retain that portion 
of the commission not retained by the syndicate manger(s), and from a 
``member order,'' in which an investor places an order directly with a 
member of the syndicate that retains that portion of the commission not 
retained by the manager. Group orders may be filled ``net'' (the 
syndicate retains the entire commission) or ``less the concession'' (a 
dealer who is not a member of the syndicate receives part of the 
commission). An investor who places a ``group net order'' has no power 
to designate particular members of the syndicate to receive that 
portion of the commission not retained by the syndicate manager(s). If 
an offering is oversubscribed, ``group net orders'' are the first 
orders to be filled. Applicants believe that a significant portion of 
all orders submitted for oversubscribed new issues of Rhode Island Tax-
Exempt Securities are submitted as group net orders. Consequently, the 
Portfolio must be able to place group net orders to obtain its proper 
share of oversubscribed new issues. ``Group sales'' result from group 
orders.
    7. Although the terms and conditions of a new issue of tax-exempt 
securities may be negotiated between the issuer and the underwriters, 
the market for Rhode Island Tax-Exempt Securities is very competitive 
and the yield and price of the securities must be satisfactory to the 
issuer as well as to potential purchasers to consummate an offering. 
The issuer and the underwriters have access to current information 
about comparable yields and prices commanded by contemporary new issues 
of similar quality and maturity in Rhode Island and throughout the 
country, and to information about yields and market prices of 
outstanding Rhode Island Tax-Exempt Securities. Because the pricing of 
each new issue is governed by the disciplines of yield and price that 
exist in a competitive market, applicants believe that the pricing of 
securities purchased in reliance on the requested order will be fair 
notwithstanding the dominant position of Fleet Securities in the market 
for Rhode Island Tax-Exempt Securities.
    8. All the transactions conducted under the requested order will 
comply with the provisions of rule 10f-3, other than paragraph (f). In 
addition, the Adviser, Fleet Securities, Fleet Financial and any 
affiliated persons thereof, and all other entities for which investment 
decisions are made by the Adviser, Fleet Securities, Fleet Financial, 
and/or affiliated persons thereof (``Related Purchasers'') will not in 
the aggregate purchase more than the greater of 4% or $500,000, but in 
no event more than 10%, of any class of an issue of Rhode Island Tax-
Exempt Securities purchased pursuant to the requested order. As a 
result, any new issue of Rhode Island Tax-Exempt Securities will have 
to be made on such terms and conditions, including the price, as are 
acceptable in the new issue market.

Applicants' Legal Analysis

    1. Section 2(a)(3) defines the term ``affiliated person of another 
person'' to include, in relevant part, (a) any person directly or 
indirectly controlling, controlled by, or under common control with 
such other person; and (b) if such other person is an investment 
company, any investment adviser thereof. Because Fleet Securities and 
the Adviser are under the common control of Fleet Financial, they are 
affiliated persons of each other within the meaning of section 2(a)(3).
    2. Section 10(f), in relevant part, prohibits an investment company 
from purchasing securities from an underwriting syndicate in which an 
affiliate of the investment company's investment adviser acts as a 
principal underwriter. Under section 10(f), the SEC may exempt any 
transaction or class of transactions from the prohibitions of section 
10(f) if such exemption is consistent with the protection of investors. 
Rule 10f-3 permits purchases otherwise prohibited by section 10(f) 
under certain conditions, including that the investment company does 
not purchase the securities being offered directly from its affiliated 
persons, and that as to municipal securities, purchases from a 
syndicate manager are not designated as group sales or otherwise 
allocated to the account of an affiliated person.
    3. Section 17(a) provides, in relevant part, that it is unlawful 
for any affiliated person of a registered investment company, or any 
affiliated person of such person, acting as principal, knowingly to 
sell any securities or other property to such registered investment 
company. Section 17(b) provides that, notwithstanding section 17(a), 
any person may file an application for an order exempting a proposed 
transaction from the prohibitions of section 17(a). The SEC will grant 
exemptive relief under section 17(b) if evidence establishes that the 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching on the part of any person concerned and that the proposed 
transaction is consistent with the policy of each registered investment 
company concerned and the general policies and purposes of the Act.
    4. Under section 6(c), the SEC may exempt any person or transaction 
from any provision of the Act or any rule thereunder to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    5. Applicants believe that the order will benefit the shareholders 
of the Portfolio by providing the Portfolio with access to the new 
issue market for Rhode Island Tax-Exempt Securities needed to insure 
the availability of suitable portfolio securities. Applicants believe 
that absent the requested relief, the Portfolio will not be able to 
offer its shares to the public due to the limited availability of 
suitable Rhode island Tax-Exempt Securities in the secondary market and 
the substantial portion of new issues of Rhode Island Tax-Exempt 
Securities which Fleet Securities alone underwrites or with respect to 
which Fleet Securities participates as a member of the underwriting 
syndicate.
    6. The procedures to be followed with respect to the proposed 
transactions are structured in such a way as to insure that the 
transactions in all instances will be reasonable and fair and will not 
involve overreaching on the part of any person concerned and that the 
requested exemption is appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act

Applicant's Conditions

    Applicants agree to the following as conditions to the requested 
order:
    1. Principal transactions effected pursuant to the order will be 
effected in accordance with all of the provisions of rule 10f-3 (other 
than paragraph (f) thereof). Related Purchasers will not in the 
aggregate purchase more than the greater of 4% or $500,000, but in no 
event more than 10%, of any class of an issue of Rhode Island Tax-
Exempt Securities purchased pursuant to the requested order. If the 
aggregate number of securities the Related Purchasers wish to acquire 
exceeds this limit, the securities acquired will be allocated to each 
Related Purchaser in the proportion that the number of securities that 
such Related Purchaser wishes to acquire bears to the total number of 
securities that all Related Purchasers wish to acquire.
    2. Principal transactions may be effected only in Rhode-Island Tax-
Exempt Securities which at the time of purchase have one of the 
following investment grade ratings from at least one nationally 
recognized rating agency: (a) one of the two highest investment grade 
ratings in the case of securities with remaining maturities of one year 
or less; and (b) one of the top three investment grade ratings in the 
case of securities with remaining maturities greater than one year.
    3. Principal transactions effected pursuant to the order will be 
limited so that no such transaction will be effected if, as a result, 
the value of securities held by the Portfolio acquired pursuant to the 
order would exceed 50% of the total net assets of the Portfolio.
    4. Principal transactions will be effected pursuant to the order 
only when the Rhode Island Tax-Exempt Securities acquired are otherwise 
unavailable for purchase. If Fleet Securities is the sole underwriter 
of the securities, this condition is automatically fulfilled because 
there is no other potential seller. When Fleet Securities is a member 
of an underwriting syndicate, the Adviser will observe the following 
procedures to determine when the securities are unavailable from other 
members of the syndicate. Initially, the Adviser will determine the 
aggregate number of securities which the Related Purchasers wish to 
acquire. Next, the Adviser will attempt to purchase as much of this 
number as possible from members of the syndicate other than Fleet 
Securities. After acquiring as many securities as possible from such 
other members, the Adviser will attempt to purchase from Fleet 
Securities the number of securities which the Related Purchasers wish 
to acquire and have been unable to obtain from such other members. The 
securities acquired from such other members will be allocated first to 
the Portfolio to the extent of the number of securities it wishes to 
acquire, or the number of securities it is entitled to acquire based 
upon the relative needs of the Related Purchasers and the total number 
of securities purchased from such other members and from Fleet 
Securities, whichever is less.
    5. When the Portfolio purchases Rhode Island Tax-Exempt Securities 
from a syndicate manager of an underwriting syndicate of which Fleet 
Securities is a member, the Portfolio will not (a) submit designated 
orders to a syndicate manager which are allocated to Fleet Securities, 
(b) submit group orders to a syndicate manager which designate Fleet 
Securities to receive any portion of the commission, or (c) otherwise 
allocate orders to Fleet Securities.
    6. The personnel of Fleet Financial will not have any involvement 
with respect to proposed transactions between the Portfolio and Fleet 
Securities and will not attempt to influence or control in any way the 
Adviser's placement of orders with Fleet Securities.
    7. The exemption will be valid only so long as the Adviser and 
Fleet Securities operate as separate entities within the holding 
company framework of Fleet Financial with their own separate officers 
and employees, separate capitalizations and separate books and records.
    8. The legal departments of Fleet Securities and the Adviser will 
prepare guidelines for personnel of Fleet Securities and the Adviser to 
make certain that transactions conducted pursuant to the order comply 
with the conditions set forth in the application and that the parties 
generally maintain arm's length relationships. The legal departments 
will periodically monitor the activities of Fleet Securities and the 
Adviser to make certain that such guidelines and the conditions set 
forth in the application are adhered to.
    9. The trustees, including a majority of the independent trustees 
of the Trust who are not ``interested persons'' of the Trust and have 
no direct or indirect financial interest in the transaction, will 
review no less frequently than quarterly each transaction conducted 
pursuant to the order since the last review and will determine that the 
terms of such transaction were reasonable and fair to the shareholders 
of the Portfolio and did not involve overreaching of the Portfolio of 
its shareholders on the part of any person concerned. In considering 
whether the price paid for the security was reasonable and fair, the 
price of the security will be analyzed with respect to comparable 
transactions involving similar securities being purchased or sold 
during a comparable period of time.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27041 Filed 10-31-94; 8:45 am]
BILLING CODE 8010-01-M