[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29356]


[[Page Unknown]]

[Federal Register: November 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20723; 812-9064]

 

The Charles Schwab Family of Funds, et al.; Notice of Application

November 22, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: The Charles Schwab Family of Funds, Schwab Investments, 
Schwab Capital Trust, and Schwab Annuity Portfolios, on behalf of 
themselves and all subsequent registered open-end management investment 
companies advised by Charles Schwab Investment Management, Inc. 
(collectively, the ``Funds''), and Charles Schwab Investment 
Management, Inc. (the ``Adviser'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
exempting the Funds from sections 13(a)(2), 18(f)(1), 22(f), 22(g), and 
23(a), and rule 2a-7, and exempting certain existing money market Funds 
from section 13(a)(3); under sections 6(c) and 17(b) exempting the 
Funds from section 17(a)(1); and pursuant to section 17(d) and rule 
17d-1.

SUMMARY OF APPLICATION: Applicants seek an order (a) to permit the 
Funds to enter into deferred fee arrangements with their trustees, and 
(b) to permit the Funds and their participating trustees to effect 
transactions incident to such deferred fee arrangements.

FILING DATES: The application was filed on June 23, 1994, and amended 
on September 20, 1994, and November 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 December 19, 
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 writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, 101 Montgomery Street, San Francisco, California 94104.

FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or Barry D. Miller, 
Senior Special Counsel, 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. Each existing Fund is a registered open-end management 
investment company and organized as a Massachusetts business trust. 
Each Fund offers shares in one or more series. The Adviser serves as 
investment adviser for the Funds. Charles Schwab & Co., Inc., an 
affiliate of the Adviser, serves as the principal underwriter of the 
Funds.
    2. The board of trustees\1\ of each Fund currently consists of 
seven persons, four of whom are not ``interested persons'' of any of 
the Funds within the meaning of section 2(a)(19) of the Act. The 
disinterested trustees are entitled to receive fees for their services 
as trustees and members of the Funds' compliance committees.
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    \1\The term ``trustee,'' as used herein, also refers to 
directors of a Fund that is organized as a corporation.
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    3. Applicants propose to implement deferred fee arrangements by 
means of a plan (the ``Plan'') entered into by each Fund. The Plan 
would permit the individual trustees who are not interested persons of 
the Funds to elect to defer receipt of all or a portion of their 
meeting and/or retainer fees to enable the trustees to defer payment of 
income taxes on such fees, or for other reasons.
    4. Under the Plan, the deferred trustees' fees will be credited to 
a book reserve account established by the Fund as of the date such fees 
would have been paid to the trustee. The value of the account will 
equal the value the account would have had if the amounts credited to 
it had been invested and reinvested in certain securities (the 
``Underlying Securities''). The Underlying Securities will be shares of 
any of the Funds designated by the participating trustee on his or her 
election form.\2\
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    \2\The trustees, however, are not eligible to purchase shares of 
Schwab Annuity Portfolios, because only certain tax-advantaged 
investors may invest in such shares.
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    5. The total fees paid to each trustee will be de minimis in 
relation to the size of each Fund, and will have no effect on net 
assets and net income per share. The obligations of a Fund to make 
payments from the accounts will be general unsecured obligations of the 
Fund, and payments made pursuant to the Plan will be made from the 
Fund's general assets and property. The relationship of a trustee to 
the Fund with respect to a Fund's obligation to make payments under the 
Plan will be only that of a general unsecured creditor. As a matter of 
risk management, each Fund intends and, with respect to any money 
market Fund that values its assets by the amortized cost method, 
undertakes, to purchase and maintain the Underlying Securities in 
amounts equal to the deemed investment of the accounts of its trustees.
    6. Under the Plan, a trustee may specify that the deferred fees be 
distributed in whole or in part beginning on the date the trustee 
ceases to be a trustee of the Fund or another date that is at least 
five years after the election to defer fees but not later than the date 
he or she ceases to be a trustee of the Fund. Notwithstanding a 
trustee's election, deferred fees shall be distributed upon (a) the 
death of the trustee, (b) the dissolution, liquidation, or winding up 
of the Fund, or the disposition of all of or substantially all of the 
Fund's assets (unless the Fund's obligations under the Plan have been 
assumed by a financially responsible party purchasing such assets), or 
(c) the merger or consolidation of the Fund (unless, prior to such 
merger or consolidation, the board of trustees determines that the Plan 
shall survive the merger or consolidation).\3\
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    \3\Applicants acknowledge that the requested order would not 
permit a party acquiring a Fund's assets to assume a Fund's 
obligations under the Plan if such assumption of obligations would 
violate the Act. Accordingly, such assumption would be permitted 
only if the assuming party is (1) another Fund, (2) another 
registered investment company that has received exemptive relief 
similar to that sought by the application, or (3) not a registered 
investment company.
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    7. Payments shall be made in a lump sum or in a number of quarterly 
installments, not to exceed 40, elected by the trustee at the time of 
entering into the Plan. Each quarterly payment will be made as of the 
first day of each calendar quarter. Upon a showing by the trustee of 
severe financial hardship resulting from an unanticipated emergency 
caused by an event beyond the control of the trustee, the trustee may 
receive all or part of his or her deferred fees in a single lump sum. 
The trustee's right to receive payments will be nontransferable, except 
that, in the event of a trustee's death, amounts payable to him or her 
thereafter will be payable to his or her designated beneficiary.
    8. The Plan will not obligate a Fund to retain the services of a 
trustee, nor will it obligate a Fund to pay any particular level of 
fees to any trustee.
    9. The board of trustees may amend the Plan from time to time. Such 
amendments will be limited to immaterial amendments or amendments made 
in order to conform to any applicable laws.
    10. The Funds will disclose the existence of the deferred 
compensation arrangement pursuant to exemptive relief and explain that, 
for this limited purpose, the money market Funds will be permitted to 
invest in Underlying Securities without shareholder approval in the 
section of the Statement of Additional Information where investment 
policies are described.

Applicants' Legal Analysis

    1. Applicants believe that the deferred fee arrangements will 
enhance the ability of the Funds to attract and retain qualified 
trustees. Applicants further believe that the proposed Plans are in the 
best interests of the Funds and their shareholders, consistent with the 
purposes fairly intended by the policy and provisions of the Act, 
necessary and appropriate in the public interest, and consistent with 
the protection of investors.
    2. Section 18(f)(1) generally prohibits a registered open-end 
investment company from issuing senior securities. Section 13(a)(2) 
requires that any registered investment company obtain shareholder 
authorization before issuing any senior securities not contemplated by 
the policy recitals in its registration statement. Applicants contend 
that the Plan possesses none of the characteristics of senior 
securities that led Congress to enact these sections. All liabilities 
for deferred fees will be offset by equal amounts of assets that would 
not otherwise exist if the fees were paid on a current basis. The Plan 
would not induce speculative investments by a Fund, provide 
opportunities for manipulative allocation of the expenses and profits 
of a Fund, affect control of a Fund, confuse investors, or convey a 
false impression of safety.
    3. Section 22(f) prohibits undisclosed restrictions on 
transferability or negotiability of redeemable securities issued by 
open-end investment companies. Applicants contend that any restrictions 
created under the Plan clearly will be set forth in the Plan, are 
included primarily to benefit the trustees, and will not adversely 
affect the interests of any Fund or its shareholders.
    4. Section 22(g) generally prohibits registered open-end investment 
companies from issuing any of their securities for services or for 
property other than cash or securities. Applicants assert that the 
section primarily is concerned with the dilutive effect on the equity 
and voting power that can result when securities are issued for 
consideration that is not readily valued. Applicants submit that the 
Plan will not have such effect. Applicants further assert that, while a 
trustee would receive fees for services, such fees would be payable 
independent of the Plan.
    5. Section 13(a)(3) prohibits registered investment companies from 
deviating without a shareholder vote from any investment policy that is 
changeable only if authorized by shareholder vote or from any policy 
recited in its registration statement pursuant to section 8(b)(3). 
Applicants state that each existing money market Fund except Schwab 
Value Advantage Money Fund has a fundamental restriction against 
investing in securities of other investment companies, except in 
connection with a merger, consolidation, reorganization, or acquisition 
of assets. In addition, certain of the money market Funds have 
fundamental investment policies or restrictions that limit (beyond the 
requirements of rule 2a-7) the types of money market instruments 
eligible for purchase. Applicants assert that these policies prevent 
these money market Funds from achieving the matching of the Underlying 
Securities with the deemed investments in the trustees' accounts. 
Applicants submit that such matching is highly desirable because it 
will ensure that the deferred fee arrangements will not affect the net 
asset value of any Fund.\4\
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    \4\The requested exemption from section 13(a)(3) would not be 
available to any future money market Fund, and would be available 
only to the following existing money market Funds: Schwab Money 
Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury 
Money Fund, Schwab Tax-Exempt Money Fund, Schwab California Tax-
Exempt Fund, Schwab Retirement Money Fund, Schwab Institutional 
Advantage Money Fund, and Schwab Money Market Portfolio.
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    6. Rule 2a-7 provides that the current price per share of any money 
market Fund may be computed by using the amortized cost method or 
penny-rounding method, provided that, among other things, the money 
market Fund (a) limits its investments to securities with a remaining 
maturity of 397 days or less and meet certain credit quality standards, 
and (b) does not maintain a dollar-weighted average portfolio maturity 
that exceeds 90 days. Applicants submit that exempting the money market 
Funds from rule 2a-7 to permit them to invest in Underlying Securities 
and exclude Underlying Securities in calculating the Fund's dollar-
weighted average maturity would permit the money market Funds in 
question to achieve an exact matching of Underlying Securities with the 
deemed investments of the accounts, thereby ensuring that the deferred 
fee arrangements would not affect net asset value.
    7. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company, or any affiliated person of such person, 
from selling any security to such registered investment company. 
Applicants assert that section 17(a)(1) was designed to prevent 
sponsors of investment companies from using investment company assets 
as capital for enterprises with which they were associated or to 
acquire controlling interests in such enterprises. Applicants submit 
that the sale of securities issued by the Funds pursuant to the Plan 
does not implicate the concerns of Congress in enacting this section, 
but merely would facilitate the matching of a series' liability for 
deferred fees with the Underlying Securities that would determine the 
amount of such liability.
    8. Section 17(b) authorizes the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the 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, the transaction is consistent with the policies 
of the registered investment company, and the transaction is consistent 
with the general purposes of the Act. Applicants assert that the 
proposed transaction satisfies the criteria of section 17(b).\5\
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    \5\As described in paragraph 5 above, certain of the money 
market Funds have policies that prevent them from purchasing shares 
of other investment companies. The finding required by section 
17(b)(2) is predicated on the assumption that relief is granted from 
section 13(a)(3).
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    9. Section 17(d) and rule 17d-1 generally prevent a registered 
investment company's joint or joint and several participation with an 
affiliated person in a transaction in connection with any joint 
enterprise or other joint arrangement or profit-sharing plan on a basis 
different from or less advantageous than that of the affiliated person. 
Applicants assert that any adjustments made to the accounts to reflect 
the income, gain, or loss on investments of the assets of a Fund would 
be identical in amount to income, gain, and loss by other shareholders 
in the Fund. A trustee would neither directly or indirectly receive a 
benefit that otherwise would inure to the Funds or their shareholders. 
Deferral of a trustee's fees in accordance with the Plan essentially 
would maintain the parties, viewed both separately and in their 
relationship to another, in the same position as if the fees were paid 
on a current basis. When all payments have been made to a trustee, the 
trustee will be, relative to the Funds, no better off than if he or she 
had received deferred fees on a current basis and invested them in 
share of the Underlying Securities.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. With respect to the requested relief from rule 2a-7, any money 
market series that values its assets by the amortized cost method or 
penny-rounding method will buy and hold Underlying Securities that 
determine the performance of deferred fee accounts to achieve an exact 
match between such series' liability to pay deferred fees and the 
assets that offset that liability.
    2. If a Fund purchases Underlying Securities issued by an 
affiliated Fund, the purchasing Fund will vote such shares in 
proportion to the votes of all other holders of shares of such 
affiliated fund.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-29356 Filed 11-28-94; 8:45 am]
BILLING CODE 8010-01-M