[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30622]


[[Page Unknown]]

[Federal Register: December 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20758; 812-9214]

 

Alex. Brown Cash Reserve Fund, Inc., et al.; Notice of 
Application

December 7, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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APPLICANTS: Alex. Brown Cash Reserve Fund, Inc.; Flag Investors 
Telephone Income Fund, Inc.; Flag Investors International Fund, Inc.; 
Total Return U.S. Treasury Fund, Inc.; Flag Investors Emerging Growth 
Fund, Inc.; Flag Investors Quality Growth Fund, Inc.; Managed Municipal 
Fund, Inc.; Flag Investors Intermediate-Term Income Fund, Inc.; Flag 
Investors Value Builder Fund, Inc.; Flag Investors Maryland 
Intermediate Tax Free Income Fund, Inc.; Flag Investors Real Estate 
Securities Fund, Inc. (collectively, the ``Funds''); Alex. Brown & Sons 
Incorporated (``Alex. Brown''); and Armata Financial Corp. 
(``Armata''); on behalf of themselves and all investment companies (and 
portfolios thereof) that (a) are advised or distributed in the future 
by Alex. Brown or Armata, or entities controlling, controlled by, or 
under common control (as defined in section 2(a)(9) of the Act) with 
Alex. Brown or Armata, or (b) become a part of the same ``group of 
investment companies'' as that term is defined in rule 11a-3 under the 
Act.

RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from the 
provisions of section 2(a)(32), (2(a)(35), 18(f), 18(g), 18(i), 22(c), 
and 22(d), and rule 22c-1 thereunder.

SUMMARY OF APPLICATION: Applicants seek a conditional order to amend 
prior orders under section 6(c) of the Act. The prior orders permit 
applicants to issue multiple classes of shares representing interests 
in the same investment portfolio, assess a contingent deferred sales 
load (``CDSL'') on certain redemptions of shares, and waive or reduce 
the CDSL in certain instances. As amended, the order would permit 
applicants to assess a CDSL on certain additional redemptions of 
shares, waive or reduce the CDSL in certain instances, and offer a 
class of shares that converts into another class of shares.

FILING DATE: The application was filed on September 8, 1994, and 
amended on December 2, 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 29, 
1994, and should be accompanied by proof of service on applicants, in 
the form of an affidavit or, for lawyers, a certificate of services. 
Hearing requests would 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, N.W., Washington, D.C. 
20549. Applicants, 135 East Baltimore Street, Baltimore, Maryland 
21202.

FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Attorney, 
at (202) 942-0583, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations and Legal Analysis

    1. The Funds are open-end management investment companies, 
organized as Maryland corporations. Investment Company Capital Corp. 
(``ICC'') and International Strategy and Investment Inc. (``ISI''), 
pursuant to separate advisory agreements, serve as investment advisers 
to the Funds, and supervise and manage the operations of the Funds. ICC 
is a wholly-owned subsidiary of Alex. Brown and an affiliate of Armata.
    2. Alex. Brown Armata are each registered broker-dealers. Alex. 
Brown services as a distributor for all classes and series of the 
Funds, except for the ISI Total Return U.S. Treasury Fund Shares class 
of Total Return U.S. Treasury Fund, Inc. and the ISI Managed Municipal 
Fund Shares class of Managed Municipal Fund, Inc. (the ``ISI 
Classes''), for which classes Armata serves as distributor.
    3. Applicants have two prior orders (the ``Multi-Class Orders''), 
which permit them to issue multiple classes of shares in the same 
portfolio (the ``Multiple Distribution System'').1 Under the 
Multi-Class Orders, the Funds may offer classes of shares which differ 
in that certain classes would be offered in connection with (a) a 12b-1 
plan adopted by the Fund involved pursuant to rule 12b-1 under the Act; 
(b) a shareholder services plan adopted by the Fund involved pursuant 
to all requirements of rule 12b-1 except those relating to shareholder 
voting rights and automatic termination of the plan upon its 
assignment; or (c) no plan.
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    \1\Investment Company Act Release Nos. 14656 (Aug. 2, 1985) 
(notice) and 14695 (Aug. 27, 1985); as amended by Investment Company 
Act Release Nos. 15570 (Feb. 6, 1987) (notice) and 15592 (Feb. 27, 
1987).
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    4. Each Fund has a class of shares designated as its Flag Investors 
class of shares (the ``Flag Investors Classes''), which are offered 
with a front-end sales charge and bear a rule 12b-1 fee of .25%.2 
No front-end sales charge is imposed on sales of $1 million or more. 
Four of the Funds have issued additional classes of shares, the Flag 
Investors Class D Shares (``Class D Shares''), which are offered with a 
lower front-end sales charge on all sales of less than $1 million and 
have a rule 12b-1 fee of .60%.3 Class D shares impose no sales 
charge or CDSL on purchases of $1 million or more. In addition to the 
Flag Investors Classes, Class D, and ISI classes described above, the 
Alex. Brown Cash Reserve Fund, Inc. offers Alex. Brown Cash Reserve 
Shares, Institutional Shares (which are offered only to institutional 
entities), and Quality Cash Reserve Prime Shares (which are offered 
only as a sweep vehicle for customers of broker-dealers who use Alex. 
Brown for clearance of securities transactions). Alex, Brown Cash 
Reserve Shares bear a rule 12b-1 fee of .25%, and Quality Cash Reserve 
Prime Shares bear a rule 12b-1 fee of .60%; Institutional Shares bear 
no rule 12b-1 fee.4
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    \2\The ISI Classes differ from the Flag Investors Classes in 
that they are distributed by Armata and impose a lower initial sales 
load.
    \3\In the prior applications, this class was called Class B, but 
will be redesignated as Class D.
    \4\The Institutional Shares and the Quality Cash Reserve Prime 
Shares together are referred to herein as the ``Institutional 
Classes.''
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    5. The Funds also have two prior orders that permit them to assess 
a CDSL on certain redemptions of shares.5 Pursuant to the 1991 
Order, the Funds impose a CDSL on purchases of $1 million or more of 
Flag Investors Classes in the event of redemption of such shares within 
24 months of purchase. Pursuant to the 1993 Order, three of the Funds 
are permitted to assess a CDSL of 1% on the redemption of Class D 
shares for a period of four years. Both the 1991 Order and the 1993 
Order permit the Funds to waive the CDSL in certain instances, as set 
forth in the prospectus of each Fund at the time of purchase.
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    \5\Investment Company Act Release No. 18228 (July 8, 1991) 
(notice) and 18261 (Aug. 7, 1991) (the ``1991 Order''); as amended 
by Investment Company Act Release No. 19707 (Sept. 13, 1993) 
(notice) and 19776 (Oct. 12, 1993) (order) (the ``1993 Order'').
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    6. Applicants proposed to create an additional class of shares 
(``Class B shares''), which at first would be offered by only three of 
the Funds: Flag Investors Value Builder Fund, Inc., Flag Investors 
Telephone Income Fund, Inc., and Flag Investors Real Estate Securities 
Fund, Inc.6 Class B shares would be offered at net asset value 
without the imposition of a sales load at the time of purchase, 
although they would be subject to an asset-based sales charge (not to 
exceed .75%) pursuant to rule 12b-1, based upon the average daily net 
asset value of the Class B shares. Class B shareholders also would pay 
a service fee, as defined in Article III, Section 26, of the Rules of 
Fair Practice of the National Association of Securities Dealers, Inc. 
(``NASD''), that will not exceed .25% of the average daily net asset 
value of the Class B shares.7 In addition, an investor's proceeds 
from a redemption of Class B shares made within a specified period of 
the purchase of such shares may be subject to a CDSL. The amount of any 
applicable CDSL will be calculated by multiplying the applicable 
percentage charge (currently expected to be 4% for redemptions made 
during the first year after initial purchase, although such percentages 
may vary) by the lesser of the relative net asset value of the shares 
redeemed or the total cost of such shares. The amount of the CDSL to be 
imposed would depend on the number of years since the purchase of the 
shares being redeemed.
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    \6\Although the Funds initially propose to offer only Class B 
shares, they may issue other classes of shares with different CDSL 
arrangements in the future.
    \7\All payments made in connection with the rule 12b-1 and non-
rule 12b-1 plans will comply with the applicable provisions of 
Article III, Section 26 of the Rules of Fair Practice.
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    7. No CDSL would be imposed on redemptions of: (a) Class B shares 
representing amounts attributable to increases in the value of an 
account above the net cost of the shares due to increases in the net 
asset value per share; (b) Class B shares acquired through reinvestment 
of income dividends or capital gain distributions; or (c) Class B 
shares held beyond the time when the CDSL is no longer charged (``CDSL 
Period''). In determining whether a CDSL were payable, it would be 
assumed that shares, or amounts representing shares, that were not 
subject to a CDSL were redeemed first, and that other shares or amounts 
were then redeemed in the order purchased.
    8. Under the proposed arrangement, the CDSL may be waived in 
certain instances, as described in each Fund's prospectus at the time 
of purchase. All CDSL waivers will comply with the conditions set forth 
in paragraphs (a) through (d) of rule 22d-1 of the Act.
    9. All exchanges of shares of any class would be effected in 
compliance with Rule 11a-3 under the Act.
    10. Under the proposed CDSL arrangement, Class B shares 
automatically would convert after the end of the CDSL Period to Flag 
Investors Class shares, as set forth in the prospectus of the Fund at 
the time of purchase. All such conversions would be effected in 
accordance with condition 15 below. Class B shares purchased through 
the reinvestment of dividends and other distributions paid in respect 
of Class B shares would be issued as Class B shares, but would be 
considered to be held in a separate sub-account. Each time any Class B 
shares in the shareholder's Fund account convert to Flag Investors 
Class shares, a pro rata portion of the Class B shares then in the sub-
account also would convert to Flag Investors Class shares. The portion 
would be determined by the ratio that the shareholder's shares 
converting to Flag Investors Class shares bears to the shareholder's 
total Class B shares not acquired through dividends and distributions.
    11. The conversion of one class of shares to another class of 
shares is subject to the availability of a ruling of the Internal 
Revenue Service or an opinion of counsel that payment of different 
dividends on different classes of shares does not result in the 
dividends or distributions of the Fund constituting ``preferential 
dividends'' under the Internal Revenue Code of 1986, as amended, and 
the continuing availability of an opinion of counsel to the effect that 
the conversion of shares does not constitute a taxable event under 
Federal income tax law. The conversion of one class of shares to 
another class of shares would be suspended if such an opinion or ruling 
were no longer available.
    12. For the foregoing reasons, applicants request an exemption from 
sections 2(a)(32), 2(a)(35), 22(c), and 22(d) of the Act, and rule 22c-
1 thereunder to the extent necessary to permit them to implement the 
proposed CDSL arrangement described above and corresponding waiver 
categories. Applicants also request an exemption from the provisions of 
sections 18(f), 18(g), and 18(i) to the extent necessary to amend the 
Multi-Class Orders and permit the Funds to implement a conversion 
feature.

Applicants' Conditions

    If the requested order is granted, applicants expressly agree that 
they will comply with the following conditions:\8\
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    \8\Applicants have agreed that, in the event the order requested 
herein is granted, the conditions upon which the order is granted 
will supersede the conditions under which the Funds are currently 
operating, as set forth in the Multi-Class Orders.
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    1. Each class of shares of a Fund will represent interests in the 
same portfolio of investments of that Fund, and will be identical in 
all respects, except as set forth below. The only differences among the 
classes of shares of the fund will relate solely to: (a) The amount of 
fees permitted by different rule 12b-1 plans; (b) the shareholder 
servicing expenses permitted by non-rule 12b-1 shareholder services 
plans; (c) voting rights with respect to a class's rule 12b-1 plan; (d) 
different designations; (e) Class Expenses, which shall be limited to 
any or all of the following: (i) transfer agent fees identified as 
being attributable to a specific class of shares; (ii) stationery, 
printing, postage, and delivery expenses related to preparing and 
distributing materials such as shareholder reports, prospectuses, and 
proxy statements to current shareholders of a specific class; (iii) 
Blue Sky registration fees incurred by a class of shares; (iv) SEC 
registration fees incurred by a class of shares; (v) expenses of 
administrative personnel and services as required to support the 
shareholders of a specific class; (vi) directors' fees or expenses 
incurred as a result of issues relating to one class of shares; (vii) 
account expenses relating solely to one class of shares; (viii) 
auditors' fees, litigation expenses, and legal fees and expenses 
relating to a class of shares, and (ix) expenses incurred in connection 
with shareholder meetings as a result of issues relating to one class 
of shares; and (f) different exchange privileges among Funds or 
conversion features. Any other 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 
unless and until approved by the SEC pursuant to an amended order.
    2. The board of directors of each Fund, including a majority of the 
independent directors, will approve the Multiple Distribution System. 
The minutes of the meetings of the directors regarding the 
deliberations with respect to the approvals necessary to implement the 
Multiple Distribution System will reflect in detail the reasons for the 
directors' determination that the proposed Multiple Distribution System 
is in the best interests of both the Fund and its shareholders.
    3. On an ongoing basis, the boards of 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 distributor of the 
Funds will be responsible for reporting any potential or existing 
conflicts to the directors. If a conflict arises, the adviser and the 
distributor, at their own costs, will take steps to remedy such 
conflict, up to and including establishing a new registered management 
investment company.
    4. The initial determination of the Class Expenses 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 board of 
directors of the Funds, including a majority of the directors who are 
not interested persons of the Funds. Any person authorized to direct 
the allocation and disposition of monies paid or payable by the Funds 
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.
    5. Any shareholder services plan will be adopted and operated in 
accordance with the procedures set forth in rule 12b-1, except that 
shareholders need not enjoy the voting rights specified in rule 12b-1.
    6. 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.
    7. Dividends paid by a Fund 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 (i) distribution and shareholder servicing payments 
associated with any plans relating to each respective class of shares 
(including any costs relating to implementing such plans or any 
amendment thereto) will be borne exclusively by that class; and (ii) 
Class Expenses relating to a particular class 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 and the 
proper allocation of expenses among the various classes have been 
reviewed by an expert (the ``Expert''), who has rendered a report to 
the applicants, a copy of which is attached as Exhibit D to the 
application, 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 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 Funds 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 workpapers of the Expert 
with respect to such reports, following a request by the Funds (which 
the Funds agree to provide) will be available for inspection by the SEC 
staff upon the written request to the Funds for such workpapers by a 
senior member of the Division of Investment Management, or of a 
regional office of the SEC, limited to the Director, and 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 (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.
    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 various 
classes of shares, and this representation will be 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 the Expert, or appropriate substitute Expert, 
does not concur in the ongoing reports.
    10. The prospectuses of the Funds will contain a statement to the 
effect that a salesperson and any other person entitled to receive any 
compensation for selling or servicing Fund shares may receive different 
compensation with respect to one particular class of shares over 
another in the Fund.
    11. The distributors will adopt compliance standards as to when 
each class of shares may appropriately be sold to particular investors. 
The distributors will require all persons selling shares of the Funds 
to agree to conform to such standards.
    12. The conditions pursuant to which the exemptive relief is 
granted and the duties and responsibilities of the directors of the 
Funds with respect to the Multiple Distribution System 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. Each Fund will disclose the respective expenses, performance 
data, distribution arrangements, services, fees, sales loads, 
contingent deferred sales loads, and exchange privileges applicable to 
each class of shares, other than the Institutional Classes, in every 
prospectus, regardless of whether all classes of shares are offered 
through each prospectus. The Institutional Classes will be offered 
solely pursuant to separate prospectuses. The prospectuses for the 
Institutional Classes will disclose the existence of the Fund's other 
classes, and the prospectus for the Fund's other classes will disclose 
the existence of the Institutional Classes and will identify the 
persons eligible to purchase shares of such classes. Each Fund 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 Fund as a whole generally and 
not on a per class basis. Each Fund's per share data, however, will be 
prepared on a per class basis with respect to the 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 also disclose the respective expenses and/or 
performance data applicable to all classes of shares except the 
Institutional Classes. Advertising materials reflecting the expenses or 
performance data for the Institutional Classes will be available only 
to those persons eligible to purchase shares of the Institutional 
Classes. The information provided by applicants for publication in any 
newspaper or similar listing of the Fund's net asset value and public 
offering price will present each class of shares, except the 
Institutional Classes, 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 
each Fund may make pursuant to its rule 12b-1 plan or shareholder 
servicing plan in reliance on the exemptive order.
    15. Any class of shares with a conversion feature (``Purchase 
Class'') will convert into another class of shares (``Target Class'') 
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 or 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.
    16. 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 the Target Class 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''), indentical in all material respects to the Target 
Class as it existed prior to implementation of the proposal, no later 
than the date such shares previously were scheduled to convert into the 
Tartget Class. 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 the New Purchase Class will convert into the New Target 
Class. The New Target Class or the New Purchase Class 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 3, any additional cost associated with the 
creation, exchange, or conversdion of the New Target Class or the New 
Purchase Class shall be borne solely by the adviser and the distributor 
of the Fund. 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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30622 Filed 12-13-94, 8:45 am]
BILLING CODE 8010-01-M