[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