[Federal Register Volume 59, Number 221 (Thursday, November 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28363]


[[Page Unknown]]

[Federal Register: November 17, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20695; 812-9108]

 

Portico Funds, Inc., et al.; Notice of Application

November 10, 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: Portico Funds, Inc. (the ``Fund''), Firstar Investment 
Research & Management Company (``FIRMCO''), and Sunstone Financial 
Group, Inc. (``Sunstone'').

Relevant Act Sections: Exemption requested under section 6(c) of the 
Act from sections 2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c), and 
22(d) of the Act and rule 22c-1 thereunder.

Summary of Application: Applicants request an order to permit the Fund 
to issue multiple classes of shares representing interests in the same 
portfolio of securities and assess a contingent deferred sales charge 
on redemptions of shares.

Filing Dates: The application was filed on July 8, 1994, and amended on 
September 14, 1994, and November 10, 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 December 5, 
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 Fund, 615 East Michigan Street, P.O. Box 3011, 
Milwaukee, WI 53201-3011; FIRMCO, Firstar Center, 777 East Wisconsin 
Ave., 18th Floor, Milwaukee, WI 53202; and Sunstone, 207 East Buffalo 
St., Suite 400, Milwaukee, WI 53202.

FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0572, 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 may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. The Fund is a open-end management investment company. The Fund 
consists of multiple investment portfolios or series, each of which has 
separate investment objectives and policies. FIRMCO serves as the 
Fund's investment adviser and Sunstone serves as the distributor.
    2. Applicants request that any relief granted also apply to other 
open-end management investment companies for which FIRMCO or any person 
controlling, controlled by, or under common control with FIRMCO acts in 
the future as investment adviser (collectively, with the Fund, the 
``Companies'').
    3. Under the current distribution arrangements, shares of each of 
the Fund's portfolios are offered to investors without a sales charge. 
Some portfolios are, however, subject to a purchase adjustment fee of 
up to .50%. This fee is imposed at the time of purchase to prevent a 
portfolio from being adversely affected by the transaction costs 
associated with share purchases. It is anticipated that this fee will 
be discontinued after the requested order is granted.
    4. Applicants propose that each Company be permitted to offer an 
unlimited number of classes of shares. Classes of shares may be offered 
in connection with a plan or plans adopted pursuant to rule 12b-1 under 
the Act (the ``Distribution Plan'') and/or in connection with a non-
rule 12b-1 administrative plan (the ``Administrative Services Plan,'' 
and, collectively with the Distribution Plan, the ``Plans''). Services 
under the Plans may be provided by a Company's distributor and/or 
administrator, or by organizations that have entered into agreements 
(collectively, ``Plan Agreements'') with the Company, its distributor, 
or it administrator concerning the provision of services to the 
organization's clients who may be the record or beneficial owners of 
shares of a particular class. The Companies also may offer classes of 
shares that would be subject to front-end sales loads and/or CDSCs. The 
sum of any front-end load, asset based sales charge, and CDSC paid by a 
shareholder for a single investment 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. 
(``NASD'').
    5. Expenses of a Company that could not be attributed directly to 
any one portfolio would be allocated to each portfolio based on the 
relative net assets of the portfolio or as otherwise determined under 
the supervision of its directors (``Company Expenses''). Expenses 
attributable to a portfolio but not to a particular class would be 
allocated on the basis of the relative net asset value of the 
respective classes in the portfolio (``Portfolio Expenses''). Each 
class will bear certain expenses attributable specifically to such 
class, as set forth in condition 1 (``Class Expenses''). The net asset 
value of all shares of a portfolio would be computed on the same days 
and at the same times.
    6. FIRMCO or another service contractor may choose to reimburse or 
waive 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 are expected to vary from one class to another. Applicants 
believe that it is acceptable and consistent with shareholder 
expectations to reimburse or waive Class Expenses at different levels 
for different classes of the same portfolio.
    7. In addition, FIRMCO or another service contractor may waive or 
reimburse Company Expenses and/or Portfolio Expenses (with or without a 
waiver or reimbursement of Class Expenses) but only if the same 
proportionate amount of Company Expenses and/or Portfolio Expenses are 
waived or reimbursed for each class. Thus, any Company Expenses and/or 
Portfolio Expenses that are waived or reimbursed would be credited to 
each class of a portfolio according to the relative net assets of the 
classes. Company Expenses and Portfolio Expenses apply equally to all 
classes of a given portfolio. Accordingly, it may not be appropriate to 
waive or reimburse Company Expenses or Portfolio Expenses at different 
levels for different classes of the same portfolio.
    8. Applicants propose that share exchange privileges may be 
available to shareholders to permit (a) the exchange of shares of one 
portfolio for shares of another portfolio, (b) the exchange of shares 
of an equity portfolio or a fixed income portfolio for shares of a 
money market portfolio (or vice versa), and/or (c) the exchange of 
shares of one class of a portfolio for shares of another class of the 
same portfolio. Any exchange of shares will comply with rule 11a-3 
under the Act.
    9. Shares of some classes of shares subject to a CDSC 
(``Convertible CDSC Shares'') could automatically convert into shares 
of non-CDSC shares (``Non-CDSC Shares'') after a prescribed period 
following the purchase of Convertible CDSC Shares. Shares acquired 
through the reinvestment of dividends and other distributions paid with 
respect to Cnvertible CDSC Shares will also be Convertible CDSC Shares. 
These 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 Shares which 
were not acquired through the reinvestment of dividends or other 
distributions.
    10. Applicants also request an exemption to permit the Companies to 
impose a CDSC on redemptions of shares of the Company, and to waive the 
CDSC under certain circumstances. No CDSC will be imposed on an amount 
that represents an increase in the shareholder's account resulting from 
capital appreciation, on shares acquired through the reinvestment of 
income dividends or capital gain distributions, or on those shares 
purchased more than a specified period prior to redemption. 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 other purchased. No CDSC will be imposed on shares purchased 
before the effective date of the requested order.
    11. Applicants also 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) of rule 22d-1 
of 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 issue multiple 
classes of shares representing interests in the same portfolio of 
securities. Applicants believe that by implementing the multiple class 
distribution system, the Company would be able to 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 
in the manner described above is equitable and would not discriminate 
against any group of shareholders.
    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 assess and, under certain circumstances, waive a CDSC on 
redemptions of shares. Applicants believe that their request to permit 
the CDSC arrangement would permit shareholders the option of having 
more investment dollars working for them from the time of their share 
purchases than if they chose a class with a front-end sales load.

Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. Each class of shares will represent interests in one portfolio 
of a Company, and 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 agency fees identified by the transfer 
agent as being attributable to a specific class of shares, (B) printing 
and postage expenses related to preparing and distributing materials 
such as shareholder reports, prospectuses, and proxies to current 
shareholder of a class, (C) blue sky registration fees incurred by a 
class of shares, (D) SEC registration fees incurred by a class of 
shares, (E) the expense of administrative personnel and services as 
required to support the shareholders of a specific class, (F) 
litigation or other legal expenses or audit or other accounting 
expenses relating solely to one class of shares, and (G) directors' 
fees incurred as a result of issues relating to one class of shares; 
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; (b) the fact that the classes will 
vote separately with respect to a portfolio's Plans and any other 
matter submitted to shareholders relating to Class Expenses, except as 
provided in condition 17 below; (c) the different exchange privileges 
of the classes of shares; (d) the designation of each class of shares 
of a portfolio; and/or (e) certain conversion features offered by some 
of the classes.
    2. The board of directors of a Company, including a majority of the 
independent directors, will approve the multiclass distribution system. 
The minutes of the meetings of the directors regarding the 
deliberations of the directors with respect to the approvals necessary 
to implement a multi-class system will reflect in detail the reasons 
for the directors' determination that the proposed multi-class 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 directors of a 
Company, including a majority of the directors 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 directors, and the directors 
shall review, at least quarterly, a written report of the amounts so 
expended and the purposes for which such expenditures were made.
    4. On an ongoing basis, the directors of a Company, pursuant to 
their fiduciary responsibilities under the Act and otherwise, will 
monitor each portfolio having a multi-class system for the existence of 
any material conflicts among the interests of the various classes of 
each portfolio. 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. A portfolio's investment 
adviser and distributor will be responsible for reporting any potential 
or existing conflicts to the directors. 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.
    5. Any 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 directors of a Company will receive quarterly and annual 
statements concerning distributions 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 
expenditure 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.
    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 Plan Payments relating to each respective class of 
shares and the Class Expenses relating to each class of shares 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 multi-class distribution system and the proper 
allocation of expenses among the various classes in each such portfolio 
have been reviewed by an expert (the ``Expert'') who has rendered a 
report to the Company involved, which report has been 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 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 
the Company involved (which the Company agrees to provide), will be 
available for inspection by the SEC staff upon the 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 SAS 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 and this representation has been concurred with by the Expert 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 above. Applicants will take immediate corrective 
measures if this representation is not concurred in by the Expert or 
appropriate substitute Expert.
    10. The prospectuses of each portfolio having a multi-class 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 may receive different compensation with respect to one 
particular class of shares over another in the same portfolio.
    11. The distributor for a Company having a multi-class system will 
adopt compliance standards for any portfolio which has a multi-class 
system, which standards will relate to when each class of shares may 
appropriately be sold to particular investors. Applicants will require 
all persons selling shares of a portfolio having a multi-class 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 directors with respect to 
the multi-class system will be set forth in guidelines which will be 
furnished to the directors of a Company having a multi-class system.
    13. Each portfolio having a multi-class system will disclose the 
respective expenses, performance data, distribution arrangements, 
services, fees, sales loads, conversion features, CDSCs, and exchange 
privileges applicable to each class of shares 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. 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 will also 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 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 the 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, applicants agree to 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.
    16. Any class of shares with a conversion feature will convert into 
another 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.
    17. If a Company implements any amendment to its Distribution 
Plan(s) (or, if presented to shareholders, adopts or implements any 
amendment to an Administrative Plan or Plans) that would increase 
materially the amount that may be borne by the Non-CDSC Shares under 
the Plan, existing 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 directors shall take 
such action as is necessary to ensure that Convertible CDSC Shares are 
exchanged or converted into a new class of shares (``New Non-CDSC 
Shares''), identical in all material respects to the Non-CDSC Shares as 
they existed prior to 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 directors 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 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 Non-CDSC 
Shares or New Convertible CDSC Shares shall be borne solely by the 
Company's adviser and/or 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 Shares plan and the relationship of 
such plan to the Convertible CDSC Shares are disclosed in an effective 
registration statement.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-28363 Filed 11-16-94; 8:45 am]
BILLING CODE 8010-01-M