[Federal Register Volume 60, Number 189 (Friday, September 29, 1995)]
[Notices]
[Pages 50654-50656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24185]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21371; 812-9266]
T. Rowe Price Spectrum Fund, Inc., et al.; Notice of Application
September 22, 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: T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price New
Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc., T. Rowe Price
New Income Fund, Inc., T. Rowe Price Prime Reserve Fund, Inc., T. Rowe
Price Growth & Income Fund, Inc., T. Rowe Price Short-Term Bond Fund,
Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe Price Equity Income
Fund, T. Rowe Price GNMA Fund, T. Rowe Price International Funds, Inc.,
and each open-end management investment company (1) that in the future
becomes advised by T. Rowe Price Associates, Inc. (``T. Rowe Price'')
and/or Row Price-Fleming International, Inc. (``Price-Fleming'') and
distributed by T. Rowe Price Investment Services, Inc. (``Investment
Services''), and (2) that holds itself out to investors as a related
fund for purposes of investment and investor services (collectively,
the ``Price Funds''); T. Rowe Price Spectrum Fund, Inc. (the ``Spectrum
Fund''); T. Rowe Price Associates, Inc. (``T. Rowe Price''); Rowe
Price-Fleming International, Inc. (``Price-Fleming''); T. Rowe Price
Investment Services, Inc. (``Investment Services''); and T. Rowe Price
Services, Inc. (``Price Services'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) to exempt the
applicants from sections 12(d)(1) (A) and (B), sections 6(c) and 17(b)
to exempt applicants from section 17(a), and rule 17d-1 under the Act
to permit certain joint transactions otherwise prohibited by section
17(d) and rule 17d-1.
SUMMARY OF APPLICATION: The requested order would supersede two prior
orders that permit the T. Rowe Price Spectrum Fund, Inc. (``the
``Spectrum Fund'') to operate as a ``fund of funds.'' The existing
relief imposes a number of restrictions that limit the manner in which
the Spectrum Fund may operate. The requested order would permit the
Spectrum Fund to continue operating as a fund of funds while
eliminating many of the restrictions from the prior order.
FILING DATES: The application was filed on September 29, 1994, and
amended on April 28, 1995, August 16, 1995, and August 23, 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 17,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, D.C. 20549.
Applicants, 100 East Pratt Street, Baltimore, MD 21202.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at
(202) 942-0572, 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.
Applicant's Representation
1. The Spectrum Fund is a registered, no-load, open-end, management
investment company organized as a Maryland corporation. The Spectrum
Fund began offering its shares to the public in 1990 and consists of
two series: the Growth Fund and the Income Fund (the ``Portfolios''),
with assets as of June 30, 1995 of approximately $1.1
[[Page 50655]]
billion and $842 million, respectively. Each Portfolio invests
substantially all of its assets in certain Price Funds (the
``Underlying Funds''). Investments also may be made in money market
instruments for temporary purposes. The Underlying Funds are no-load,
open-end investment companies which have not adopted plans under rule
12b-1 to finance their distribution. Applicants request that the relief
sought herein also apply to any future ``fund of funds,'' whether
organized as an investment company or as a portfolio thereof, which
operates in all material respects in accordance with the conditions to
the requested order, and that is a number of the T. Rowe Price group of
investment companies.
2. Price Associates serves as investment adviser to each of the
Underlying Funds, except for T. Rowe Price International Funds, Inc.
which is advised by Price-Fleming. Investment Services, a wholly-owned
subsidiary of Price Associates, serves as distributor of the Spectrum
Fund and the Underlying Funds. Price Services, a wholly-owned
subsidiary of Price Associates, performs certain shareholder services
for the Spectrum Fund and the Underlying Funds.
3. The Spectrum Fund operates as a ``fund of funds'' under an
exemptive order granted by the Commission (the ``Existing Order'').\1\
The Existing Order exempts applicants under section 6(c) from the
limitations of section 12(d)(1) (A) and (B) to the extent necessary to
permit: (i) The Spectrum Fund to purchase, in the aggregate, up to 15%
of the outstanding voting shares of each underlying Fund, (ii) the
securities of each Underlying Fund to have an aggregate value in excess
of 5% of the value of the total assets of the Spectrum Fund, (iii) the
Spectrum Fund to invest essentially all of its assets in the securities
of the Underlying Funds, and (iv) each of the Underlying Funds to sell
more then 3% of its total outstanding voting stock to the Spectrum
Fund. The Existing Order also exempts applicants under sections 6(c)
and 17(b) from section 17(a)(1) to permit sales by the Underlying Funds
of their shares to the Spectrum Fund. Finally, the Existing Order
permits, under section 17(d) and rule 17d-1, joint arrangements under a
special servicing agreement that includes payments by the Underlying
Funds of Spectrum Fund expenses.
\1\ Investment Company Act Release Nos. 17198 (Oct. 31, 1989)
(notice) and 17242 (Nov. 29, 1989) (order).
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4. The Existing Order was amended in 1992 (the ``Amended Order'')
\2\ to modify a condition of the Existing Order that had limited
investments in the Spectrum Fund to individuals investing an aggregate
of $30,000 per calendar year. The Amended Order removed this
restriction.
\2\ Investment Company Act Release Nos. 18816 (June 29, 1992)
(notice) and 18865 (July 24, 1992) (order).
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5. The Existing Order imposed a number of conditions that restrict
the manner in which the Spectrum Fund may operate. These conditions
require applicants to sell shares of the Spectrum Fund only to certain
``long-term investors,'' require the Spectrum Fund to allocate its
assets to specified Underlying Funds only in predetermined and set
ranges, prohibit the Spectrum Fund from acquiring more than 15% of the
outstanding securities of any Underlying Fund, limit redemptions made
by the Spectrum Fund from the Underlying Funds to 1% in any 30-day
period (unless the redemptions are made to satisfy redemption requests
by the Spectrum Fund's shareholders), limit shareholder exchanges into
or out of the Spectrum Fund, the prevent the Spectrum Fund from
creating new portfolios without further exemptive relief from the
Commission (the ``Redemption Conditions''). In addition, the Existing
Order prohibits any of the Spectrum Fund's non-interested directors
from serving on the board of directors of any Underlying Fund, requires
the Spectrum Fund to vote its shares in each Underlying Fund in
proportion to the vote of all shareholders of the Underlying Fund,
prohibits the Spectrum Fund and/or the Underlying Funds from imposing
certain distribution and advisory fees, and requires the Spectrum
Fund's board of directors to monitor for ``wash transactions'' \3\
among the Underlying Funds (the ``Order Conditions,'' collectively with
the Redemption Conditions, the ``Existing Conditions''). The requested
order would supersede the Existing and Amended Orders, and would
eliminate the Existing Conditions and replace them with the conditions
set forth below.
\3\ A ``wash transaction'' is a purchase of a security by one
underlying fund that is offset by a contemporaneous sale of the same
security by another underlying fund.
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Applicant's Legal Analysis
A. Section 12(d)(1)
1. Absent the Existing Order, section 12(d)(1)(A) of the Act would
prohibit the Spectrum Fund from purchasing more than 3% of the
outstanding voting securities of an Underlying Fund, securities issued
by all Underlying Funds having an aggregate value in excess of 5% of
the value of the total assets of the Spectrum Fund, or securities
issued by the Underlying Funds and all other investment companies
having an aggregate value in excess of 10% of the value of the total
assets of the Spectrum Fund. Section 12(d)(1)(B) would prohibit the
Underlying Funds from selling more than 3% of their outstanding voting
securities to the Spectrum Fund and more than 10% to the Spectrum Fund
and other investment companies.
2. Section 12(d)(1) is intended to prevent the pyramiding of
investment companies, the layering of fees, and undue organizational
complexities. Applicants state that none of these abuses associated
with fund holding companies are present with respect to the current and
proposed arrangement, and that the Spectrum Fund will provide the
benefits of diversification and cost savings to its investors.
B. Section 17(a)
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and any
affiliated person of that company. Absent the Existing Order, the sale
by the Underlying Funds of their shares to the Spectrum Fund could be
deemed to be a principal transaction between affiliated persons that
are prohibited under section 17(a). Because the Spectrum Fund and the
Underlying Funds are each advised by Price Associates, they could be
deemed to be affiliates of one another. Therefore, applicants requested
the Existing Order to permit the Underlying Funds to sell their shares
to the Spectrum Fund.
C. Section 17(d) and Rule 17d-1
1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an
affiliated person of an investment company, acting as principal, from
participating in or effecting any transaction in connection with any
joint enterprise or joint arrangement in which the investment company
participates. Applicants requested the Existing Order under section
17(d) and rule 17d-1 to permit the Spectrum Fund to enter into a joint
arrangement pursuant to a special servicing agreement, as more fully
described in the application.
D. Standard for Relief
1. Applicants state that the Redemption Conditions to the Existing
Order were designed to prevent disruptive redemptions from the
[[Page 50656]]
Underlying Funds. Applicants believe these conditions are no longer
necessary and act as an impediment to the prudent management of the
Spectrum Fund. Specifically, applicants believe that the Redemption
Conditions are unnecessary for the following reasons: The Spectrum Fund
has attracted shareholders investing for retirement, has had a
consistently lower redemption rate than the Underlying Funds, has
shareholders who on the whole remain in the fund longer than
shareholders remain in the Underlying Funds, and has benefited the
Underlying Funds in by increasing assets and reducing redemption
pressure. In addition, the Underlying Funds have maintained sufficient
cash positions to satisfy all redemptions made by the Spectrum Fund,
and applicants believe that the structure of the Spectrum Fund dilutes
Spectrum Fund shareholder redemptions by spreading their effect over
the Underlying Funds.
2. Applicants also believe the Other Conditions are no longer
necessary. Applicants submit that the identity of management between
Spectrum Fund and the Underlying Funds provides assurance to investors
that they will not be treated unreasonably or unfairly. Applicants
further note that any harm to the Underlying Funds would be contrary to
price Associates' business interests.
3. Applicants state that the fact that the boards of directors for
the Spectrum Fund and the Underlying Funds may have common independent
directors does not impede the ability of the independent directors to
perform their oversight function because they have fiduciary
obligations to all funds on whose board of directors they serve.
Further, any conflict among the interests of those funds is no
different from that which, in theory, can arise in any situation where
an individual serves on the boards of directors of multiple funds in
the same fund family.
4. Section 6(c) permits the SEC to exempt any person or transaction
from any provision of the Act, if 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 of the Act.
For the above reasons, applicants argue that the replacement of the
Existing Conditions with the modified conditions meets the section 6(c)
standards.
5. Section 17(b) permits the SEC to grant an order permitting a
transaction otherwise prohibited by section 17(a) if it finds that the
participation of such investment company is consistent with the
provisions, policies, and purposes of the Act and the extent to which
such participation is on a basis different from or less advantageous
than that of other participants. Applicants believe that the terms of
the transactions meet these standards.
6. Rule 17d-1 permits the SEC to approve a proposed joint
transaction. In determining whether to approve a transaction, the SEC
is to consider whether the proposed transaction is consistent with the
provisions, policies, and purposes of the Act, and the extent to which
the participation of the investment companies is on a basis different
from or less advantageous than that of the other participants.
Applicants believe that the requested order meets these standards.
Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
1. The Spectrum Fund and each Underlying Fund will be part of the
same ``group of investment companies,'' as defined in rule 11a-3 under
the Act.
2. No Underlying Fund shall acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act.
3. A majority of the directors of the Spectrum Fund will not be
``interested persons,'' as defined in section 2(a)(19) of the Act.
4. Before approving any advisory contract under section 15, the
board of directors of the Spectrum Fund, including a majority of the
directors who are not ``interested persons,'' as defined in section
2(a)(19), shall find that advisory fees charged under such contract are
based on services provided that are in addition to, rather than
duplicative of, services provided pursuant to any Underlying Fund's
advisory contract. Such finding, and the basis upon which the finding
was made, will be recorded fully in the minute books of the Spectrum
Fund.
5. Any sales charges and other service fees charged with respect to
securities of spectrum Fund, when aggregated with any sales charges and
service fees paid by spectrum Fund with respect to securities of the
Underlying Funds, shall not exceed the limits set forth in Article III,
section 26, of the Rules of Fair Practice of the National Association
of Securities Dealers, Inc.
6. Applicants agree to provide the following information, in
electronic format, to the Chief Financial Analyst of the SEC's Division
of Investment Management: monthly average total assets for each
Spectrum Fund portfolio and each of its Underlying Funds; monthly
purchases and redemptions (other than by exchange) for each Spectrum
Fund portfolio and each of its Underlying Funds; monthly exchanges into
and out of each Spectrum Fund portfolio and each of its Underlying
Funds; month-end allocations of each Spectrum Fund portfolio's assets
among its Underlying Funds; annual expense ratios for each Spectrum
Fund portfolio and each of its Underlying Funds; and a description of
any vote taken by the shareholders of any Underlying Fund, including a
statement of the percentage of votes cast for and against the proposal
by the Spectrum Fund and by the other shareholders of the Underlying
Funds. Such information will be provided as soon as reasonably
practicable following each fiscal year-end of the Spectrum Fund (unless
the Chief Financial Analyst shall notify applicants in writing that
such information need no longer be submitted).
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24185 Filed 9-28-95; 8:45 am]
BILLING CODE 8010-01-M