[Federal Register Volume 60, Number 103 (Tuesday, May 30, 1995)]
[Notices]
[Pages 28198-28200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13079]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC--21091; 812-9554]


Nations Fund, Inc., et al.; Notice of Application

May 23, 1995.
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: Nations Fund, Inc., Nations Fund Trust, Nations Fund 
Portfolios, Inc. and The Capitol Mutual Funds (collectively, the 
Investment Companies''), and NationsBank, N.A. (the ``Adviser'').

relevant act sections: Order requested under section 6(c) of the Act 
for an exemption from sections 13(a)(2), 18(f)(1), 22(f), and 22(g) and 
rule 2a-7 thereunder, under sections 6(c) and 17(b) of the Act for an 
exemption from section 17(a)(1), and pursuant to rule 17d-1 under the 
Act.

summary of application: Applicants request an order that would permit 
the Investment Companies to enter into deferred compensation 
arrangements with their directors.

filing date: The application was filed on March 28, 1995.

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 June 19, 1995, 
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 notification by writing to the SEC's 
Secretary.

addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, Marco E. Adelfio, Morrison & Foerster, 2000 
Pennsylvania Avenue, N.W., Washington, D.C. 20006.

for further information contact: Deepak T. Pai, Staff Attorney, at 
(202) 942-0574, 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 may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicant's Representations

    1. Each Investment Company is a registered open-end management 
investment company comprised of several investment portfolios. Nations 
Fund trust and Capitol Mutual Funds are organized as Massachusetts 
business trusts. Nations Fund, Inc. and Nations Fund Portfolios, Inc. 
are organized as Maryland corporations. The Adviser serves as the 
investment adviser for each investment portfolio of each Investment 
Company. Applicants request that the proposed relief apply to the 
Investment Companies and all subsequent registered open-end investment 
companies advised by the Adviser (such registered open-end 
[[Page 28199]] investment companies, together with the Investment 
Companies, are referred to collectively as the ``Funds'').
    2. The board of directors of each Investment Company currently 
consists of seven persons, five of whom are not ``interested persons'' 
of that Investment Company. The membership of each of the boards is 
identical. Each director\1\ is entitled to receive annual fees plus 
meeting attendance fees from each Investment Company. The chairman of 
the board receives an additional fee from each Investment Company. A 
deferred fee arrangement for the directors that has been adopted by the 
existing Funds is implemented through a deferred compensation plan (the 
``Plan''). The purpose of the Plan is to permit individual directors to 
elect to defer receipt of all or a portion of the fees otherwise 
payable for their services, to enable them to defer payment of income 
taxes on such fees or for other reasons.

    \1\ ``Director'' refers to a trustee or director of a Fund, as 
the case may be.
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    3. The Plan became effective with respect to each Investment 
Company upon adoption by its board of directors. The Plan was adopted 
prior to the receipt of any exemptive relief requested. An exemptive 
order is required for the Plan because the Funds wish to use returns on 
portfolios of the Fund to determine the amount of earnings and gains or 
losses allocated to a director's deferred compensation account 
(``Deferral Account''); this feature will not be implemented without 
the issuance of an order. Pending receipt of an order, the Plan 
provides that the compensation deferred by a participant 
(``Compensation Deferrals'') will be credited to the participant's 
Deferral Account in the form of cash and credited with earnings in an 
amount equal to the yield on 90-day U.S. Treasury Bills.
    4. Under the Plan, Compensation Deferrals will be credited, as of 
the date such fees would have been paid, to a separate book reserve 
account established with respect to each participating Fund. The 
director may select one or more investment portfolios from a list of 
available portfolios of the Funds that will be used to measure the 
hypothetical investment performance of the director's Deferral Account. 
The value of a Deferral Account will be equal to the value such account 
would have had if the amount credited to it had been invested and 
reinvested in shares of the investment portfolios designated by the 
director (the ``Designated Shares''). Each Deferral Account will be 
credited or charged with book adjustments representing all interest, 
dividends and other earnings and all gains and losses that would have 
been realized had the amounts credited to such account actually been 
invested in the Designated Shares.
    5. A participating Fund's obligation to make payments with respect 
to a Deferral Account is and will remain a general obligation of the 
Fund to be made from the general assets and property of each portfolio. 
With respect to the obligations created under the Plan, each director 
will remain a general unsecured creditor. The Plan does not create an 
obligation of any Fund to any director to purchase, hold or dispose of 
any investments, and if a Fund or portfolio should choose to purchase 
investments in order to exactly ``match'' its obligations, all such 
investments will continue to be part of the general assets and property 
of such Fund.
    6. Each Fund may, and with respect to any money market fund that 
values its assets by the amortized cost method will, purchase and 
maintain Designated Shares in an amount equal to the deemed investments 
of the Deferral Accounts. Except in the case of money market funds, 
applicants expected to effect matching transactions only if 
circumstances warrant, based upon a consideration of a Fund's total 
assets and the amount of deferred compensation subject to the Plan.

Applicants' Legal Analysis

    1. Applicants request an order that would exempt the Funds under 
section 5(c) of the Act from sections 13(a)(2), 18(f)(1), 22(f), and 
22(g) of the Act, and rule 2a-7 thereunder to the extent necessary to 
permit the Funds to enter into deferred fee arrangements with their 
directors; under sections 6 (c) and 17(b) of the Act from section 
17(a)(1) of the Act to the extent necessary to permit the Funds to sell 
securities issued by them to participating Funds; and pursuant to rule 
17d-1 under the Act to permit the Funds to engage in certain joint 
transactions incident to such deferred fee arrangements.
    2. Section 18(f)(1) generally prohibits a registered open-end 
investment company from issuing senior securities. Section 13(a)(2) 
requires that a registered investment company obtain shareholder 
authorization before issuing any senior security not contemplated by 
the recitals of policy in its registration statement. Applicants state 
that the Plan does not give rise to any of the ``evils'' that led to 
Congress' concerns. No participating Fund will be ``borrowing'' from 
the directors. The Plan will not induce speculative investments or 
provide opportunities for manipulative allocation of any Fund's 
expenses or profits, affect control of any Fund, confuse investors or 
convey a false impression as to the safety of their investments, or be 
inconsistent with the theory of mutuality of risk.
    3. Section 22(f) prohibits undisclosed restrictions on 
transferability or negotiability of redeemable securities issued by 
open-end investment companies. The Plan sets forth any restrictions or 
transferability or negotiability, and such restrictions are primarily 
to benefit the participating directors and would not adversely affect 
the interests of the director or of any shareholder of any Fund.
    4. Section 22(g) prohibits registered open-end investment companies 
from issuing any of their securities for services or for property other 
than cash or securities. The legislative history of the Act suggests 
Congress was concerned with the dilutive effect on the equity and 
voting power that may result when securities are issued for 
consideration that is not readily valued. The Plan would not have this 
effect. Applicants believe that the Plan merely would provide for 
deferral of payment of fees and thus should be viewed as being issued 
not in return for services but in return for a Fund not being required 
to pay such fees on a current basis.
    5. Rule 2a-7 imposes certain restrictions on the investments of 
``money market funds,'' as defined under the rule, that would prohibit 
a Fund that is a money market fund from investing in the shares of any 
other Fund. Applicants believe that the requested exemption would 
permit the Funds to achieve an exact matching of Designated Shares with 
the deemed investments of the Deferred Fee Accounts, thereby ensuring 
that the deferred fee arrangements would not affect net asset value.
    6. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company from selling any security to such 
registered investment company, except in limited circumstances. Funds 
that are advised by the same entity may be ``affiliated persons'' under 
section 2(a)(3)(C) of the Act. Applicants believe that an exemption 
from this provision would not implicate Congress' concerns in enacting 
section 17(a)(1) but would facilitate the matching of each Fund's 
liability for Compensation Deferrals with Designated Shares that would 
determine the amount of such Fund's liability. Applicants believe that 
the proposed transaction satisfies the criteria of sections 6(c) and 
17(b). [[Page 28200]] 
    7. Section 17(d) and rule 17d-1 generally prohibit 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 without SEC approval. Under the 
Plan, participating directors will not receive a benefit that otherwise 
would inure to a Fund or its shareholders. Deferral of a director's 
fees in accordance with the Plan would essentially maintain the 
parties, viewed both separately and in their relationship to one 
another, in the same position (apart from tax effects) as would occur 
if the fees were paid on a current basis and then invested by the 
director directly in Designated Shares.
Applicants' Conditions
    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. With respect to the requested relief from rule 2a-7, any money 
market Fund that values its assets by the amortized cost method will 
buy and hold Designated Shares that determine the performance of 
Deferral Accounts to achieve an exact match between the liability of 
such Fund to pay Compensation Deferrals and the assets that offset that 
liability.
    2. If a Fund purchases Designated Shares issued by an affiliated 
Fund, the Fund will vote such shares in proportion to the votes of all 
other holders of shares of such affiliated Fund.
    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13079 Filed 5-26-95; 8:45 am]
BILLING CODE 8010-01-M