[Federal Register Volume 60, Number 122 (Monday, June 26, 1995)]
[Notices]
[Pages 33013-33014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15501]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21144; 812-8756]


Hercules Funds Inc.; Notice of Application

June 19, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'').

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

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APPLICANT:  Hercules Funds Inc.

RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) 
granting an exemption from section 17(a).

SUMMARY OF APPLICATION: Applicant seeks an exemption to permit certain 
securities dealers that are affiliated persons of affiliated persons 
(``second-tier affiliates'') of each present or future portfolio of 
applicant (each a ``Fund'') to engage in principal transactions with a 
Fund solely because of subadvisory relationships with one or more other 
Funds.

FILING DATES: The application was filed on January 4, 1994, and amended 
on January 17, 1995, and June 16, 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 
applicant 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 17, 1995, 
and should be accompanied by proof of service on applicant, 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. Applicant, 222 South Ninth Street, Minneapolis, Minnesota 55402-
3804.

FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or C. David Messman, 
Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

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. Applicant is a Minnesota corporation registered under the Act as 
an open-end management investment [[Page 33014]] company. Applicant has 
eight existing Funds: Hercules European Value Fund, Hercules Pacific 
Basin Value Fund, Hercules Latin American Value Fund, Hercules World 
Bond Fund, Hercules Global Short-Term Fund, Hercules North American 
Growth and Income Fund, Hercules Emerging Markets Debt Fund, and 
Hercules Money Market Fund.
    2. Hercules International Management L.L.C. (``Hercules'') serves 
as investment adviser for each Fund. Hercules was organized under 
Delaware law and is owned equally by Piper Jaffray Companies Inc. 
(``Piper'') and Midland Walwyn Capital Corporation (``MWCC'').
    3. Hercules has retained the services of several advisory 
organizations to serve as subadvisers to the individual Funds (each a 
``Subadviser''). The current Subadvisers are Pictet International 
Management Ltd., Edinburgh Fund Managers plc, Bankers Trust Company 
(``Bankers Trust''), Salomon Brothers Asset Management Limited, Salomon 
Brothers Asset Management Inc, Piper Capital Management Incorporated 
(``PCM''), Acci, and AGF Investment Advisors, Inc. Each Subadviser, 
pursuant to an agreement with Hercules, directs the investments of the 
Fund it subadvises in accordance with applicable law and the Fund's 
investment objectives, policies, and restrictions. The activities of 
the Subadvisers are subject to the supervision of Hercules, which has 
ultimate responsibility to select the Subadvisers.
    4. On April 13, 1995, applicant's board of directors approved 
applicant entering into a new investment advisory and management 
agreement with PCM, subject to approval by shareholders of the Funds. A 
new agreement is necessary because Piper and MWCC have determined to 
dissolve Hercules. On the same date, the board approved PCM entering 
into new subadvisory agreements with the current Subadvisers, subject 
to approval by the shareholders of each Fund. The new agreement will be 
identical to the existing agreements in all material respects except 
that PCM will be substituted for Hercules as a party to the agreements. 
The term ``Adviser'' as used herein refers to Hercules, PCM, or such 
person that in the future serves as principal investment adviser to the 
Funds.
    5. Applicant requests relief to permit an ``Eligible Dealer,'' as 
defined below, to engage in principal transactions with a Fund in the 
ordinary course of business. An Eligible Dealer is a Subadviser of one 
or more Funds not engaging in the transaction that conducts advisory 
and securities dealer operations via the same legal entity that is a 
second-tier affiliate of the Fund engaging in the transaction solely by 
reason of being a Subadviser of one or more of the other Funds. An 
Eligible Dealer is not (a) an affiliated person of the Fund engaging in 
the transaction, (b) the Adviser, or an affiliated person of the 
Adviser, or (c) an officer, director, employee, promoter, or principal 
underwriter of any Fund, or an affiliated person of such officer, 
director, employee, promoter, or principal underwriter. Bankers Trust, 
as the only Subadviser that conducts advisory and dealer operations 
through the same legal entity, is currently the only Subadviser that 
satisfies the definition of an Eligible Dealer.

Applicant's Legal Analysis

    1. Section 17(a), among other things, prohibits an affiliated 
person, principal underwriter, or promoter of a registered investment 
company, or any affiliated person of such persons, acting as principal, 
from (a) selling to or purchasing from such registered company, or any 
company controlled by such company, any security or other property, or 
(b) borrowing money or other property from such company. Section 
2(a)(3) defines ``affiliated person'' of another person as including a 
person controlling, controlled by, or under common control with such 
other person, and, when such other person is an investment company, the 
investment adviser thereof.
    2. Applicant asserts that the Funds may be affiliated persons of 
each other because they may be under the common control of (a) the 
Adviser, which makes decisions and fashions policies that impact all of 
the Funds, and (b) a single board of directors that overseas such 
policies. A Subadviser is an affiliated person of the Fund or Funds 
that it subadvises, and a second-tier affiliate of each other Fund. 
When such a Subadviser conducts dealer operations via the same entity, 
the dealer component also would be a second-tier affiliate of the Funds 
not subadvised by the Subadviser. Accordingly, relief from section 
17(a) is required for an Eligible Dealer to engage in principal 
transactions with a Fund.
    3. Applicant submits that the primary purpose of section 17(a) is 
to prevent persons with the power to control an investment company from 
using that power to such person's own pecuniary advantage, i.e., to 
prevent self-dealing. Applicant believes that no element of self-
dealing would be involved in the proposed transactions because the 
Subadviser recommending the transaction would be dealing with an entity 
that in economic reality is a competitor of the Subadviser. Each 
transaction between a Fund and an Eligible Dealer would be the product 
of arms-length bargaining, and the Subadviser recommending the 
transaction can neither lose nor gain financially on the basis of 
whether the transaction is beneficial or detrimental to the Eligible 
Dealer.
    4. Section 17(b) provides that the SEC may exempt a transaction 
from the provisions of section 17(a) if evidence establishes that the 
terms of the proposed transaction, including the consideration to be 
paid, 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 the registered investment company 
concerned and with the general purposes of the Act. Applicant believes 
that the proposed transactions will meet the standards of section 
17(b). Because the pecuniary interests of a Subadviser would be solely 
and directly aligned with those of the Fund it subadvises, it is 
reasonable to conclude that the consideration to be paid to or received 
by such Fund in connection with a principal transaction with an 
Eligible Dealer will be reasonable and fair.
    5. Section 6(c) provides that the SEC may exempt any person, 
security, or transaction, or any class or classes of persons, 
securities, or transactions, from any provisions of the Act or of any 
rule thereunder, if and to the extent that such exemption is necessary 
or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicant asserts that the proposed 
transactions would be consistent with the policies of the Fund 
involved. Further, applicant submits that the broader the universe of 
persons with which a Fund may engage in principal transactions, the 
easier it is to achieve best price and execution on such transactions 
and the better will be the Fund's overall investment performance.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15501 Filed 6-23-95; 8:45 am]
BILLING CODE 8010-01-M