[Federal Register Volume 60, Number 116 (Friday, June 16, 1995)]
[Notices]
[Pages 31738-31740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14749]



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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 21128; 812-9486]


SEI Financial Management Corp. and SEI Financial Services Co.; 
Notice of Application

June 9, 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: SEI Financial Management Corporation and SEI Financial 
Services Company (collectively, ``SEI'').

RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) of 
the Act exempting applicants from sections 17(a) of the Act and under 
section 17(d) of the Act and rule 17d-1 thereunder.

SUMMARY OF APPLICATION: Applicants request an order to permit bank-
sponsored collective investment funds to transfer their assets to open-
end management investment companies advised by the bank and 
administered or distributed by SEI.

FILING DATE: The application was filed on February 16, 1995, and was 
amended on May 10, 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 July 6, 1995 and 
should be accompanied by proof of service on applicants, in the form of 
an affidavit, or, for lawyers, a certification 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 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, c/o SEI Financial Services Company, 680 East 
Swedesford Road, Wayne, Pennsylvania 19087, Attention: Kathryn L. 
Stanton, Esq.; and Wilmer, Cutler & Pickering, 2445 M Street, N.W., 
Washington, D.C. 20037, Attention: Jeremy N. Rubenstein.

FOR FURTHER INFORMATION CONTACT:
Sarah A. Wagman, Staff Attorney, at (202) 942-0654, or Robert A. 
Robertson, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUMMARY INFORMATION: The following is a summary of the application. The 
complete application is available for a fee from the SEC's Public 
Reference Branch.

Applicant's Representations

    1. SEI serves as administrator and distributor for a number of 
registered open-end management investment companies (the ``Funds''), 
including Funds that are advised by banks. SEI requests that the relief 
sought herein apply to any Fund distributed or administered by SEI and 
any Fund that may in the future be distributed or administered by SEI 
or any entity controlling, controlled by, or under common control with 
SEI.
    2. Subject to the supervision of the Funds' respective boards of 
directors or trustees (the ``Board of Directors''), SEI provides or 
procures administrative and other services necessary for the operation 
of the Funds and their portfolios. SEI may provide various services to 
the Funds, although the precise services provided by SEI to a 
particular Fund will depend on SEI's contract with that Fund. For any 
Fund relying on the requested order, however, SEI will perform fund 
accounting services that will include responsibility for maintaining 
the Fund's general ledger and the preparation of Fund financial 
statements, determining the net asset value of both the Fund's assets 
and of the Fund's shares, calculating Fund expenses and controlling 
Fund disbursements, preparing and filing semi-annual reports on Form N-
SAR and notices pursuant to rule 24f-2, coordinating the preparation 
and filing of the Fund's tax returns, and providing the Fund with 
individuals reasonably acceptable to the Fund's Board of Directors for 
nomination, appointment, or election as officers of the Fund.
    3. From time to time, certain Funds participate in the conversion 
of assets from bank-sponsored collective investment funds (``CIFs'') 
into mutual fund shares. As part of the conversion, a Fund typically 
agrees to accept an in-kind transfer of securities from a CIF with 
substantially similar investment objectives in exchange for shares with 
an equal net asset value. Frequently, the bank that sponsors the 
converting CIF (the ``Bank'') also serves as the Fund's investment 
adviser or is affiliated with such adviser. As a result, the Bank may 
be deemed to control both the CIF and the Fund, and the CIF and the 
Fund may be affiliated persons of each other under the Act. In 
addition, some of the assets in the converting CIF may belong to 
employee retirement plans established for employees of the Bank or 
other affiliated persons (the ``Affiliated Plans''). Such employees and 
other affiliated persons of the Bank might be considered second-tier 
affiliates of the Fund.
    4. Although the SEC has taken a no-action position with respect to 
certain CIF conversions, that position is conditioned on affiliated 
persons, or second-tier affiliates, of the Funds having no beneficial 
interest in the proposed transactions. Federated Investors (pub. avail. 
April 21, 1994). A Bank acting as investment adviser to a Fund may be 
deemed to have a beneficial interest in the proposed transactions 
because the Bank's Affiliated Plans invest in the converting CIFs. 
Accordingly, applicants request an exemptive order to permit the Funds 
to accept in-kind transfers of the assets of the Affiliated Plans (the 
``Proposed Transfers'').
    5. Each Fund is or will be registered as an open-end management 
investment company under the Act. Each Fund's shares are or will be 
offered and sold pursuant to an effective registration statement under 
the Securities Act of 

[[Page 31739]]
1933 (the ``Securities Act''). The overall management of each Fund, 
including the negotiation of investment advisory and other service 
contracts, rests with the members of the Board of Directors of the 
Fund, at least 40% of whom are not interested persons (as defined in 
section 2(a)(19) of the Act) of the Fund.
    6. The CIFs are sponsored by Banks as investment vehicles for 
employee retirement plans. The CIFs are excluded from the definition of 
investment company under section 3(c)(11) of the Act, which excepts 
CIFs that consist solely of the assets of employee retirement plans 
qualified under section 401 of the Internal Revenue Code or similar 
governmental plans described in section 3(a)(2)(C) of the Securities 
Act (each, a ``Plan''). Some of the assets in the CIFs may belong to 
Affiliated Plans.
    7. In addition to sponsoring a CIF, a Bank or its affiliate also 
may serve as the Fund's investment adviser, and may receive investment 
advisory fees from the Fund. Banks frequently determine that Plan 
holders would be better served if sponsored CIFs were converted into 
Funds with substantially similar investment objectives so that Plan 
holders may enjoy the enhanced disclosure and other protections of the 
Securities Act and the Act. In addition, investment of Plan assets 
through the Funds allows the sponsors of, and participants in, the 
Plans to monitor more easily the performance of their investments daily 
(since information concerning the investment performance of the Funds 
generally will be available in daily newspapers of general 
circulation). Finally, by permitting more active marketing of 
investment services, conversion also may promote sales of Fund shares 
and thereby allow better diversification and risk spreading among all 
shareholders.
    8. The procedures for transferring CIF assets to a Fund include a 
number of requirements to protect the interests of Plan holders. First, 
each Affiliated Plan will have an employee benefit review committee 
(the ``Committee'') or equivalent body that serves as a fiduciary for 
the Plan. In addition to the Bank, each unaffiliated Plan will have an 
independent or ``second'' fiduciary, independent of the Bank or its 
affiliates, that supervises the investment of that Plan's assets. This 
second fiduciary generally will be the unaffiliated Plan's named 
fiduciary, trustee, or sponsoring employer and will be subject to 
fiduciary responsibilities under the Employee Retirement Income 
Security Act of 1974 (``ERISA''). Under section 404(a) of ERISA, such 
fiduciaries must ensure that the investment of the Plans' assets is 
prudent and operates exclusively for the benefit of participating 
employees of the particular corporation and its subsidiaries and of the 
participating employees' beneificaries.
    9. Before transferring a CIF's assets to a Fund, a Bank will be 
required to seek and obtain the approval of the Committee, the Plan's 
second fiduciary, or both, as the case may be. The Bank will provide 
the Committee and the second fiduciaries with a current prospectus for 
the relevant portfolio(s) of the Fund and a written statement given 
full disclsoure of the fee structure and the terms of the Proposed 
Transfer. Such disclosure will explain why the Bank believes that the 
investment of Plan assets in the Fund is appropriate. The disclosure 
statement also will describe the limitations on the Bank, if any, 
regarding which Plan assets may be invested in shares of the Fund.
    10. On the basis of such information, the Committee, the second 
fiduciary, or both, as the case may be, will decide whether to 
authorize the Bank to invest the relevant Plan's assets in the Fund and 
to receive fees from the Fund (subject to the Bank's agreement to 
waiver, credit, or rebate relevant fees). A Bank will not collect fees 
at both the Plan level and the Fund level for managing the same assets. 
Depending on the Plan, the Bank either will charge a fee only to the 
Fund or will rebate or credit its management fees at the Plan level.
    11. Subject to obtaining the approvals discussed above and the 
order requested herein, SEI will assist a Bank, in SEI's capacity as 
administrator, to effect the acquisition of Fund shares by a Plan 
currently invested in a CIF. On the date of each transfer, the 
converting CIF will deliver to the corresponding Fund securities equal 
in value to the interest of each participating Plan, in exchange for 
Fund shares, using market values as of the time that the Fund 
calculates its net asset value at the close of business on that day. 
The Fund shares received by the CIF then will be distributed, pro rata, 
to all Plans who interests were converted as of that date. All 
securities transferred to a Fund will be securities for which market 
quotations are readily available, within the meaning of rule 17a-7(a) 
under the Act, and will be consistent with the investment objectives 
and fundamental policies of the corresponding Fund.

Applicants' Legal Analysis

    1. Section 17(a) of the Act, in relevant part, prohibits an 
affiliated person of a registered investment company, or an affiliated 
person of such person, acting as principal, from selling to or 
purchasing from such investment company any security or other property. 
Section 2(a)(3) of the Act, in relevant part, defines an ``affiliated 
person'' to include: (a) any person directly or indirectly owning, 
controlling, or holding with the power to vote, 5% or more of the 
outstanding voting securities of such other person; (b) any person 
directly or indirectly controlling, controlled by, or under common 
control with such other person; and (c) if such other person is an 
investment company, any investment adviser thereof.
    2. Section 17(d) of the Act prohibits any affiliated person of a 
registered investment company, or an affiliated person of such person, 
acting as principal, from effecting any transaction in which such 
investment company is a joint, or joint and several, participant with 
such person in contravention of such rules and regulations as the SEC 
may prescribe. Rule 17d-1 under the Act provides that no joint 
transaction covered by the rule may be consummated unless the SEC 
issues an order upon application. In passing upon such applications, 
the SEC considers whether participation by a registered investment 
company is consistent with the provision, policies, and purposes of the 
Act, and is not on a basis less advantageous than that of other 
participants.
    3. Because a Bank that sponsors a CIF may have legal title to the 
assets of the CIF and therefore may be viewed as acting as a principal 
in the Proposed Transfers, and because a CIF and a Fund may be viewed 
as being under the common control of the Bank within the meaning of 
section 2(a)(3)(C), the Proposed Transfers may violate section 17(a). 
For the same reasons, the Proposed Transfers might be deemed to be a 
joint enterprise or other joint arrangement within the meaning of 
section 17(d).
    4. Section 17(b) of the Act provides that, notwithstanding section 
17(a), any person may file an application for an order exempting a 
proposed transaction from section 17(a) 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. 
Under section 6(c) of the Act, 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 

[[Page 31740]]
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act. Applicants request an order under sections 6(c) and 17(b) 
exempting them from section 17(a), and pursuant to section 17(d) and 
rule 17d-1, to permit the Proposed Transfers of CIF assets.
    5. Applicants believe that the terms of the Proposed Transfers will 
be reasonable and fair to all of the Plans and to the shareholders of 
the Funds, do not involve overreaching on the part of any person, and 
will be consistent with the provisions, policies, and purposes of the 
Act. The Proposed Transfers will comply with rule 17a-7 under the Act 
in most respects, and also will comply with the policy behind the 
conditions set forth in rule 17a-8. Rule 17a-7 exempts certain purchase 
and sale transactions otherwise prohibited by section 17(a) if, among 
other requirements, the transactions are effected at an ``independent 
market price'' and the investment company's Board of Directors reviews 
the transactions for fairness. Rule 17a-8 exempts certain mergers and 
consolidations from section 17(a) if, among other requirements, the 
investment company's Board of Directors determines that the 
transactions are fair.
    6. Applicants will comply with rules 17a-7 and a7a-8 to the extent 
possible, as stated in the conditions to the requested order. The 
investment objectives and policies of the Funds and CIFs will be 
substantially similar. Therefore, it will be consistent with the 
policies of the Funds to acquire securities that the Bank has 
previously purchased for the CIFs on the basis of substantially similar 
objectives and policies. Moreover, the Funds will have the opportunity 
to purchase the portfolio securities of the CIFs at the current market 
price and with lower transaction costs than would have been possible 
purchasing such securities in the open market.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief shall be subject to the following conditions:
    1. The Proposed Transfers will comply with the terms of rule 17a-
7(b) through (f).
    2. The Proposed Transfers will not occur unless and until: (a) the 
Board of Directors of the Fund (including a majority of its 
disinterested directors) and the Committee or the Plans' second 
fiduciaries, as the case may be, find that the Proposed Transfers are 
in the best interests of the Fund and the Plans, respectively; and (b) 
the Board of Directors of the Fund (including a majority of its 
disinterested directors) finds that the interests of the existing 
shareholders of the Fund will not be diluted as a result of the 
Proposed Transfers. These determinations and the basis upon which they 
are made will be recorded fully in the records of the Fund and the 
Plans, respectively.
    3. In order to comply with the policies underlying rule 17a-8, any 
conversion will have to be approved by a Fund's Board of Directors and 
any unaffiliated Plan's second fiduciaries who would be required to 
find that the interests of beneficial owners would not be diluted.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14749 Filed 6-15-95; 8:45 am]
BILLING CODE 8010-01-M