[Federal Register Volume 60, Number 182 (Wednesday, September 20, 1995)]
[Notices]
[Pages 48741-48743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23295]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21357; 812-9612]


Sierra Trust Funds, et al.; Notice of Application

September 13, 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: Sierra Trust Funds, The Sierra Variable Trust 
(collectively, the ``Existing Funds''), any registered investment 
companies, or series thereof, for which Sierra Investment Advisors 
Corporation (``Sierra Advisors'') or any entity controlling, controlled 
by, or under common control with Sierra Advisors, acts in the future as 
investment adviser or principal underwriter (``Future Funds,'' and 
together with the Existing Funds, the ``Funds''), and Sierra Advisors.

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from sections 13(a)(2), 13(a)(3), 18(a), 18(c), 
18(f)(1), 22(f), 22(g), and 23(a) and rule 2a-7 thereunder, under 
sections 6(c) and 17(b) of the Act for an exemption from section 
17(a)(1), and under section 17(d) of the Act and rule 17d-1 thereunder 
to permit certain joint arrangements.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
each applicant investment company to enter into deferred compensation 
arrangements with its trustees who are not interested persons of the 
company.

FILING DATES: The application was filed on May 19, 1995 and amended on 
August 18, 1995 and September 8, 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 October 10, 
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, NW., Washington, DC 20549. 
Applicants, 9301 Corbin Avenue, Suite 333 Northridge, California 91324.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or C. David 
Messman, 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.

Applicants' Representations

    1. Each of the Existing Funds is a Massachusetts business trust 
registered under the Act as an open-end management investment company. 
The Sierra Trust Funds continuously offers its shares for sale to the 
general investing public and has three money market series. The Sierra 
Variable Trust continuously offers its shares for sale to insurance 
company separate accounts that fund variable annuity contracts and has 
one money market series. Sierra Advisors is the investment adviser to 
each Fund and is registered under the Investment Advisers Act of 1940.
    2. Each Existing Fund has a board of trustees (collectively, the 
``Boards''), a majority of the members of which are not ``interested 
persons'' (the ``Independent Trustees'') of such Existing Fund within 
the meaning of section 2(a)(19) of the Act. Each Independent Trustee or 
one or more of the Funds receives fees each year which collectively 
are, and are expected to continue to be, insignificant in comparison to 
the total net assets of the Funds. Applicants request an order to 
permit the Independent Trustees to elect to defer receipt of 50% or 
more of their trustees' fees pursuant to a deferred compensation plan 
(the ``Plan'') and related election agreement entered into between each 
Independent Trustee and the appropriate Fund. Under the Plan, the 
Independent Trustees could defer payment of trustees' fees (the 
``Deferred Compensation'') in order to defer payment of income taxes, 
or for other 

[[Page 48742]]
reasons. Participation in the Plan will be limited to the Independent 
Trustees.
    3. Under the Plan, the deferred fees payable by a Fund to a 
participating Independent Trustee (a ``Participant'') will be credited 
to a book reserve account established by the Fund (an ``Account''), as 
of the first business day following the date such fees would have been 
paid to the Independent Trustee. The value of an Account will be 
determined by reference to a hypothetical investment in shares of one 
or more of the Funds, as selected by each Participant or the Boards 
from a list as designated from time to time by the committee 
established to administer the Plan, in its sole discretion, as eligible 
for hypothetical investment under the Plan (the ``Investment Funds''). 
Each Participant may elect to have his or her Deferred Compensation 
treated as if it had been invested and reinvested in shares of one or 
more of the Investment Funds (the ``Underlying Securities'').
    4. With respect to open-end Funds, the initial value of Deferred 
Compensation credited to an Account will be effected at the respective 
current net asset value of each such open-end Fund. With respect to 
closed-end Funds, the initial value of Deferred Compensation credited 
to an Account will be effected at the respective current market price, 
less any brokerage fees which would be payable upon the acquisition of 
shares of such closed-end Fund in the open market. Thereafter, the 
value of such Account will fluctuate as the net asset value of the 
shares of each open-end Fund fluctuates or as the market value of the 
shares of each closed-end Fund fluctuates, as the case may be, and will 
also reflect the value of assumed reinvestment of dividends and capital 
gains distributions from each open-end and closed-end Fund in 
additional shares of such Fund.
    5. The Funds' respective obligations to make payments of amounts 
accrued under the Plan will be general unsecured obligations, payable 
solely from their respective general assets and property. The Plan 
provides that the Funds will be under no obligation to purchase, hold 
or dispose of any investments under the Plan, but, if one or more of 
the Funds choose to purchase investments to cover their obligations 
under the Plan, then any and all such investments will continue to be a 
part of the respective general assets and property of such Funds.
    6. As a matter of prudent risk management, to the extent a 
Participant selects an Investment Fund other than the Fund for which 
the Participant is deferring his or her trustee's fees, each Fund 
intends to and, with respect to any money market Fund that values its 
assets by the amortized cost method, will, purchase and hold shares of 
the Underlying Securities in amounts equal in value to the deemed 
investments of the Accounts of its Participants. Thus, in cases where 
the Funds purchase shares of the Underlying Securities, liabilities 
created by the credits to the Accounts under the Plan are expected to 
be matched by an equal amount of assets (i.e., a direct investment in 
Underlying Securities), which assets would not be held by the Fund if 
trustee's fees were paid on a current basis.
    7. Payments under the Plan will be made in one lump sum or in 
generally equal annual installments over a five year period beginning 
as soon as administratively feasible after the Participant's 
termination of service. In the event of Participant's death, amounts 
payable under the Plan will thereafter be payable to the Participant's 
designated beneficiaries. In all other events, a Participant's right to 
receive payments will be nontransferable. In the event of the 
liquidation dissolution, or winding up of a Fund or the distribution of 
all or substantially all of a Fund's assets and property to its 
shareholders (unless the Fund's obligation under the Plan have been 
assumed by a financially responsible party purchasing such assets) or 
in the event of a merger or reorganization of a Fund (unless prior to 
such merger or reorganization, the Fund' Board determines that the Plan 
shall survive the merger or reorganization), all unpaid amounts in the 
Accounts maintained by such Fund shall be paid in a lump sum to the 
Participants on the effective date thereof.\1\ The Plan will not 
obligate any participating Fund to retain a trustee in such a capacity, 
nor will it obligate any Fund to pay any (or any particular level of) 
trustee's fees to any trustee.

    \1\Applicants acknowledge that the requested order would not 
permit a party acquiring a Fund's assets to assume a Fund's 
obligations under the Plan if such obligations would constitute a 
violation of the Act by the assuming party.
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Applicants' Legal Analysis

    1. Applicants request an order which would exempt the Funds 
(including each Fund's successors in interest\2\): (a) under section 
6(c) of the Act from sections 13(a)(2), 13(a)(3), 18(a), 18(c), 
18(f)(1), 22(f), 22(g), and 23(a) and rule 2a-7 thereunder, to the 
extent necessary to permit the Funds to adopt and implement the Plan; 
(b) under sections 6(c) and 17(b) of the Act from section 17(a)(1) to 
permit the funds to sell securities for which they are the issuer to 
participating Funds in connection with the Plan; and (c) under section 
17(d) of the Act and rule 17d-1 thereunder to permit the Funds to 
effect certain joint transactions incident to the Plan.

    \2\``Successors in interest'' is herein limited to entities that 
result from a reorganization into another jurisdiction or a change 
in the type of business organization.
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    2. Sections 18(a) and 18(c) restrict the ability of a registered 
closed-end investment company to issue senior securities.\3\ 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 possesses 
none of the characteristics of senior securities that led Congress to 
enact these sections. The Plan would not: (a) induce speculative 
investments or provide opportunities for manipulative allocation of any 
Fund's expenses or profits; (b) affect control of any Fund; or (c) 
confuse investors or convey a false impression as to the safety of 
their investments. All liabilities created under the Plan would be 
offset by equal amounts of assets that would not otherwise exist if the 
fees were paid on a current basis.

    \3\Although none of the Funds currently are closed-end funds, 
applicants request relief from sections 18(a), 18(c), and 23(a) of 
the Act in the event that Future Funds may include closed-end funds.
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    3. Section 22(f) prohibits undisclosed restrictions on 
transferability or negotiability of redeemable securities issued by 
open-end investment companies. The Plan would set forth all such 
restrictions, which would be included primarily to benefit the 
Participants and would not adversely affect the interests of the 
trustees or of any shareholder.
    4. Sections 22(g) and 23(a) prohibit registered open-end investment 
companies and closed-end investment companies, respectively, from 
issuing any of their securities for services or for property other than 
cash or securities. These provisions prevent the dilution of equity and 
voting power that may result when securities are issued for 
consideration that is not readily valued. Applicants believe that the 
Plan would merely provide for deferral of payment of such 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.

[[Page 48743]]

    5. Section 13d(a)(3) provides that no registered investment company 
shall, unless authorized by the vote of a majority of its outstanding 
voting securities, deviate from any investment policy that is 
changeable only if authorized by shareholder vote. The relief requested 
from section 13(a)(3) would extend only to Future Funds for which 
Sierra Advisors becomes investment adviser subsequent to such Future 
Fund's initial public offering and that have investment policies 
prohibiting the purchase of investment company shares without 
shareholder approval. Applicants believe that relief from section 
13(a)(3) is appropriate to enable the affected Funds to invest in 
Underlying Securities without a shareholder vote. Applicants will 
provide notice to shareholders in the prospectus of each affected Fund 
of the Deferred Compensation under the Plan. The value of the 
Underlying Securities will be de minimis in relation to the total net 
assets of the respective Fund, and will at all times equal the value of 
the Fund's obligations to pay deferred fees (plus any increase in value 
thereof.)
    6. 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 Underlying Securities 
with the deemed investments of the Accounts, thereby ensuring that the 
deferred fees would not affect net asset value.
    7. Section 6(c) provides, in relevant part, that the SEC may, 
conditionally or unconditionally, by order, exempt any person or class 
of persons from any provision of the Act or from any rule thereunder, 
if such exemption is necessary or appropriate in the public interest, 
consistent with the protection of investors, and consistent with the 
purposes fairly intended by the policy and provisions of the Act. 
Applicants submit that the relief requested from the above provisions 
satisfies this standard.
    8. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company from selling any security to such 
registered investment company. Funds that are advised by the same 
entity may be ``affiliated persons'' under section 2(a)(3)(C) of the 
Act by reason of being under common control. Applicants asserts that 
section 17(a)(1) was designed to prevent, among other things, sponsors 
of investment companies from using investment company assets as capital 
for enterprises with which they were associated or to acquire 
controlling interest in such enterprises. Applicants submit that the 
sale of securities issued by the Funds pursuant to the Agreement does 
not implicate the concerns of Congress in enacting this section, but 
merely would facilitate the matching of each Fund's liability for 
deferred trustees' fees with the Underlying Securities that would 
determine the amount of such Fund's liability.
    9. Section 17(b) authorizes the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the 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, the transaction is consistent with the policies 
of the registered investment company, and the general purposes of the 
Act. Applicants assert that the proposed transaction satisfies the 
criteria of section 17(b). The finding that the terms of the 
transaction are consistent with the policies of the registered 
investment company is predicated on the assumption that relief is 
granted from section 13(a)(3). Applicants also request relief from 
section 17(a)(1) under section 6(c) to the extent necessary to 
implement the Deferred Compensation under the Plan and Agreement on an 
ongoing basis.
    10. 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 or profit-sharing plan ``on a 
basis different from or less advantageous than that of'' the affiliated 
person. Participants will not receive a benefit, directly or 
indirectly, that would otherwise inure to a Fund or its shareholders. 
Participants will receive tax deferral but the Plan otherwise will 
maintain the parties, viewed both separately and in their relationship 
to one another, in the same position as if the deferred fees were paid 
on a current basis. When all payments have been made to a Participant, 
the Participant will be no better off (apart from the effect of tax 
deferral) than if he or she had received trustees fees on a current 
basis and invested them in Underlying Securities.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. With respect to the relief requested from rule 2a-7, any money 
market Fund, or series thereof, that values its assets in accordance 
with a method prescribed by rule 2a-7 will buy and hold Underlying 
Securities that determine the value of the Accounts to achieve an exact 
match between such Fund's or series' liability to pay deferred fees and 
the assets that offset that liability.
    2. If a Fund purchases Underlying Securities issued by an 
affiliated Fund, the Fund will vote such shares in proportion to the 
votes of all other shareholders of such affiliated Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23295 Filed 9-19-95; 8:45 am]
BILLING CODE 8010-01-M