[Federal Register Volume 60, Number 218 (Monday, November 13, 1995)]
[Notices]
[Pages 57040-57043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27883]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21473; 812-9670]
Smith Barney Adjustable Rate Government Income Fund, et al.;
Notice of Application
November 3, 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: Smith Barney Adjustable Rate Government Income Fund, Smith
Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Arizona Municipals Fund Inc., Smith Barney
California Municipals Fund Inc., Smith Barney Equity Funds, Smith
Barney Florida Municipals Fund Inc., Smith Barney Fundamental Value
Fund Inc., Smith Barney Funds, Inc., Smith Barney Income Funds, Smith
Barney Investment Trust (formerly, Smith Barney Income Trust), Smith
Barney Investment Funds Inc., Smith Barney Institutional Cash
Management Fund Inc., Smith Barney Managed Governments Fund Inc., Smith
Barney Managed Municipals Fund Inc., Smith Barney Massachusetts
Municipals Fund, Smith Barney Money Funds, Inc., Smith Barney Municipal
Money Market Fund, Inc., Smith Barney Muni Funds Inc., Smith Barney New
Jersey Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney Oregon Municipals Fund, Smith Barney Precious Metals
and Minerals Fund Inc., Smith Barney Principal Return Fund, Smith
Barney Series Fund, Smith Barney Telecommunications Trust, Smith
Barney/Travelers Series Fund, Inc., Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc. The Consulting Group Capital
Markets Funds, Greenwich Street California Municipal Fund Inc.,
Greenwich Street Municipals Fund Inc., High Income Opportunity Fund
Inc., Managed High Income Fund Inc., Managed Municipals Portfolio Inc.,
Managed Municipals Portfolio II Inc., Municipal High Income Fund Inc.,
Smith Barney Intermediate Municipal Fund, Inc., Smith Barney Municipal
Fund, Inc., The Italy Fund Inc., The Inefficient Market Fund, Inc. and
Zenix Income Fund Inc.
[[Page 57041]]
(collectively, the ``Investment Companies'') and Smith Barney Holdings
Inc. (``Holdings'').
relevant act sections: Exemption requested pursuant to 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) of the Act and rule 2a-7 thereunder; pursuant to
sections 6(c) and 17(b) from section 17(a)(1); and pursuant to section
17(d) and rule 17d-1 thereunder.
summary of application: The Applicants seek an order to allow the
Investment Companies, and all subsequently registered investment
companies for which any entity controlling, controlled by or under
common control with Holdings serves as investment adviser or principal
underwriter (such subsequently registered investment companies,
together with the Investment Companies, the ``Funds'') to enter into
deferred fee arrangements with their trustees or directors who are not
``interested persons,'' as that term is defined in the Act (the
``Directors''), and effect certain transactions incidental thereto with
participating Directors.
FILING DATES: The application was filed on July 18, 1995, and amended
and restated applications were filed on August 25 and November 1, 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 November 28,
1995, and should be accompanied by proof of service on the 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, N.W., Washington, D.C.
20549. Applicants, 388 Greenwich Street, 22nd Floor, New York, New York
10013.
FOR FURTHER INFORMATION CONTACT:
H.R. Hallock, Jr., Special Counsel, at (202) 942-0564 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. Each Investment Company is organized as either a Maryland
corporation or a Massachusetts business trust and is registered under
the Act as either an open-end or a closed-end management investment
company. Smith Barney Inc. (the ``Distributor''), the principal
underwriter of the open-end Investment Companies, is an affiliated
person of Holdings. Holdings is a wholly-owned subsidiary of Travelers
Group Inc., a diversified financial services holding company.
2. All of the Investment Companies, except for one portfolio of
Smith Barney Series Fund, are advised by investment advisers that are
affiliated persons of Holdings (such advisers are collectively referred
to herein as the ``Managers''). An entity controlling, controlled by or
under common control with Holdings will serve as investment adviser or
principal underwriter (as such terms are defined in the Act) for each
of the Funds.
3. The board of directors of each Investment Company includes a
majority of Directors who are not ``interested persons,'' as that term
is defined in section 2(a)(19) of the Act, of any of the Managers, the
Distributor or any of the Investment Companies. Each Director who is
not an interested person receives an annual retainer fee and an
additional fee for each Directors' meeting attended. All such fees are
collectively referred to herein as the ``Director's Fees.''
4. Certain Directors who are not interested persons have entered
into a ``Deferred Compensation Agreement'' (each an ``Agreement''), an
unfunded, nonqualified deferred compensation arrangement with certain
Investment Companies for all or part of 1995. Under an Agreement, a
Director may elect to defer receipt of his Director's Fees earned from
the effective date of the Agreement through December 31, 1995 until a
later date specified by the Director. Each Investment Company with
respect to which one or more Agreements have been entered into by
Directors has established an account on behalf of each electing
Director (each a ``Deferred Fee Account''). On the dates that each such
Investment Company would otherwise pay these deferred fees, the
Investment Company credits such amounts into the Deferred Fee Account.
Interest on each Deferred Fee Account is credited at 90 day intervals,
calculated based on the balance of the Deferred Fee Account as of the
first day of each rolling 90 day period and the prevailing 90 day U.S.
Treasury Bill rate in effect at such time.
5. Under each Agreement, deferral of the Director's Fees
essentially maintains the parties in the same position as if the fees
were paid on a current basis. For income tax purposes, however, a
Director's inclusion of the Director's Fees in his or her gross income
and interest credited with respect to such Fees, and the individual
Investment Company's deduction of its share of the Director's Fees, are
both deferred until actual receipt by the Director or his or her
beneficiary. Deferral of Director's Fees also has a negligible effect
on each Investment Company's assets, liabilities and net income per
share. Because the Investment Companies believe such Agreements are
substantially similar to deferred compensation arrangements that have
been the subject of previous no-action letters, they have not obtained
any exemptive relief in connection with the Agreements. See, e.g., The
North Carolina Cash Management Trust (pub. avail. Jan. 23, 1992).
6. Each Investment Company now proposes to adopt, and if the
requested exemptive relief is granted each other Fund will adopt, a
formal plan (each a ``Proposed Plan'') to allow eligible Directors to
defer receipt of all or a portion of future Director's Fees. Each
Proposed Plan will be identical (except for the identity of the
adopting Fund). As is the case with the existing Agreements, the
Director's Fees deferred by an electing Director under the Proposed
Plans will be credited to the Director's Deferred Fee Account as of the
date the Fund otherwise would have paid them.
7. Under the Proposed Plans, however, the value of the Deferred Fee
Account as of any date will be periodically adjusted by treating the
Deferred Fee Account as though an equivalent dollar amount had been
invested and reinvested in certain designated securities (the
``Underlying Securities''). In addition, if the requested exemptive
relief is granted, Directors who have entered into Agreements may
designate amounts credited to their Deferred Fee Account under their
Agreements as being deemed invested in Underlying Securities. The
Underlying Securities for a Deferred Fee Account will be shares of any
of the Funds as designated by the participating Director. Unless a Fund
actually purchases the Underlying Securities to cover its obligation
under a Proposed Plan, each Deferred Fee Account shall be credited or
charged monthly with book adjustments to reflect any increase or
decrease in the value of the Underlying Securities.
[[Page 57042]]
8. The Proposed Plans provide that a participating Fund's
obligation to make payments from a Deferred Fee Account will be a
general obligation of the Fund and payments made pursuant to the
Proposed Plan will be made from such Fund's general assets and
property. The relationship of a Director to the Fund will be only that
of a general unsecured creditor. Each Proposed Plan also provides that
the adopting Fund will be under no obligation to the Director to
purchase, hold or dispose of any investments. Nonetheless, if the Fund
chooses to purchase investments, including Underlying Securities, to
cover its obligations under such Proposed Plan, such investments will
continue to be a part of the general assets and property of the Fund.
Decisions on whether to purchase and maintain Underlying Securities to
cover a Fund's obligation will be made by the Fund's senior management
personnel. With respect to any money market Fund that values its assets
by the amortized cost method or the penny-rounding method, such money
market Fund has undertaken to purchase and maintain Underlying
Securities in an amount equal to the deemed investments of the Deferred
Fee Accounts of its Directors.
9. Deferral of Director's Fees in accordance with each Proposed
Plan will have no material effect on the net assets and net income per
share of any Fund. This is because the amount of the Fund's liability
for deferred fees may be exactly offset by the value of shares of the
Underlying Securities owned by the Fund (or in cases where the Director
has designated the Fund itself as the Underlying Security, by the
general investment assets of the Fund). In the case where the Fund
purchases the Underlying Securities to cover its obligations, changes
in the amount of the liability will be exactly matched by changes in
the value of the Underlying Securities. At times determined by a Fund's
management, the Fund (other than a money market Fund) may elect to
cover its obligations under a Proposed Plan with the Fund's general
investment assets, rather than with the purchase of Underlying
Securities. Under those circumstances, there will not be an exact match
between the Fund's liability for deferred fees and the value of the
Deferred Fee Accounts. Any such mismatch will be de minimis in relation
to the net assets of the Fund. In such event, the Fund's Board of
Directors would monitor the amount of uncovered liability and consider
whether to continue to permit shares of such other Fund to be
designated as Underlying Securities.
10. Under each Proposed Plan, a Director may specify that the
deferred Director's Fees be distributed in whole or in part commencing
on or as soon as practicable after a date specified by the Director,
which date may not be sooner than the earlier of (a) a date at least
one year following the election of deferral, or (b) the date of the
Director's anticipated retirement as a Director of the Fund.
Notwithstanding any elections by a Director, his or her Deferred Fee
Account shall be distributed (a) in the event of the Director's death
or disability, (b) upon his or her ceasing to be a Director of the Fund
or (c) upon the dissolution, liquidation or winding up of the Fund
(unless the obligations of the Fund shall have been assumed by another
Fund) or the merger of the Fund into another trust or corporation or
its consolidation with one or more other trusts or corporations (unless
the obligations of the Fund are assumed by such surviving entity and
such surviving entity is another Fund). In addition, upon application
and appropriate determination that the Director has suffered a
``Financial Hardship,'' as defined in each Proposed Plan, the Plan
Administrator (the Fund's Board of Directors or such person(s) as the
Board may designate) shall distribute to the Director an amount equal
to the lesser of the amount needed by the Director to meet the
hardship, or the balance of the Director's Deferred Fee Account. The
Director's right to receive payments will be nontransferable, except in
the event of his or her death, in which case amounts payable under the
Proposed Plan will be payable to his or her designated beneficiary.
11. Each Proposed Plan provides that it will not obligate the
adopting Fund to retain the services of a Director, nor will it
obligate such Fund to pay any (or any particular level of) Director's
Fees to any Director. Rather, it will merely permit a Director to elect
to defer receipt of all or part of the Director's Fees which he or she
would otherwise receive for future services from the Fund. Moreover,
the proposed arrangement will not affect the voting rights of the
shareholders of any of the Funds. If a Fund purchases Underlying
Securities issued by another Fund, the purchasing Fund will vote such
shares in proportion to the votes of all other shareholders of such
other Fund.
Applicants' Legal Analysis
1. The Applicants request an order under section 6(c) of the Act
exempting the Funds from sections 13(a)(2), 13(a)(3), 18(a), 18(c),
18(f)(1), 22(f), 22(g) and 23(a) of the Act, and rule 2a-7 thereunder,
to the extent necessary to permit the Funds to enter into deferred fee
arrangements with their Directors pursuant to the Proposed Plans. In
addition, the Applicants request an exemption under sections 6(c) and
17(b) of the Act from section 17(a)(1) to the extent necessary to
permit the Funds to sell securities issued by them to participating
Funds, and under section 17(d) of the Act and rule 17d-1 thereunder to
permit the Funds and participating Directors to effect certain joint
transactions incident to the proposed deferred fee arrangements.
2. Section 6(c) provides, in part, that the SEC may, by order upon
application, conditionally or unconditionally exempt any person,
security or transaction from any provisions of the Act, 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.
Section 17(b) provides that 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. Rule 17d-1(a) provides that the SEC may, by order
upon application, grant exemptions from the prohibitions of section
17(d) regarding certain joint arrangements involving a registered
investment company. Rule 17d-1(b) further provides that, in passing
upon such an application, the SEC will consider whether the
participation of the registered investment company in such arrangement
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.
3. Sections 18(a) and 18(c) restrict the ability of a registered
closed-end investment company to issue senior securities. 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 believe that the Proposed
Plans would possess none of
[[Page 57043]]
the characteristics of the instruments that led to the adoption of
restrictions pertaining to ``Senior securities.'' In this regard, the
Funds would not be ``borrowing'' from their Directors in the manner
that concerned Congress. Liabilities for deferred fees will be de
minimis in relation to Fund net assets. In addition, given the common
existence of deferred compensation agreements, the Proposed Plans would
not confuse investors.
4. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by
open-end investment companies. Sections 22(g) and 23(a) prohibit
registered open-end and closed-end investment companies, respectively,
from issuing securities for services. The Applicants submit that the
restriction on transferability of a Director's benefits under the
Proposed Plans will have no adverse effects on the Director, the
adopting Fund or Fund shareholders. With respect to Sections 22(g) and
23(a), Applicants submit that each Fund's obligation to make payments
under its Proposed Plan would not be issued for services, but in return
for the Fund not being required to pay fees on a current basis.
5. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company, or any affiliated person of such person,
from selling any security to such registered investment company.
Applicants submit that the sale of securities issued by the Funds
pursuant to the Proposed Plans to other Funds do not implicate the
concerns that led to the enactment of section 17(a), but would merely
facilitate that matching of a Fund's liability for deferred Director's
Fees with the Underlying Securities that would determine the amount of
such Fund's liability. Accordingly, Applicants believe that, in
addition to satisfying section 6(c), they also meet the standards of
section 17(b) for exempting a series of transactions from section
17(a).
6. Section 139(a)(3) prohibits registered investment companies
from, among other things, deviating without a shareholder vote from any
investment policy that is changeable only if authorized by shareholder
vote or deviating from any policy recited in its registration statement
pursuant to section 8(b)(3). Certain of the Investment Companies have a
fundamental investment restriction prohibiting them from investing in
securities of other investment companies, except in connection with a
merger, consolidation or acquisition of assets (collectively, the
``Restricted Investment Companies''). Applicants submit that it is
appropriate to exempt the Restricted Investment Companies from the
provisions of Section 13(a)(3), so as to enable the Restricted
investment Companies to invest in Underlying Securities without a
shareholder vote. The value of the Underlying Securities will be de
minimis in relation to the total net assets of each Restricted
Investment Company. Furthermore, the relief requested from section
13(a)(3) would extend only to future Funds for which an affiliated
person of Holdings becomes investment adviser or principal underwriter
subsequent to the future Fund's initial public offering and that have
fundamental investment policies prohibiting the purchase of investment
company shares without shareholder approval.
7. 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. The Applicants submit that exempting each Fund that is a
money market Fund from rule 2a-7 to the limited extent required to
permit it to invest in Underlying Securities (and to exclude Underlying
Securities in calculating such Fund's dollar-weighted average maturity)
is appropriate. Such an exemption would permit the Funds in question to
achieve an exact matching of Underlying Securities with the deemed
investments of the Deferred Fee Accounts, thereby ensuring that the
deferred fee arrangements will not affect net asset value.
8. 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 without prior SEC approval. To
the extent that the Proposed Plans may be deemed to involve joint
transactions between the Funds and their Directors, Applicants submit
that the participation in the Proposed Plans by any Fund will not be on
a basis that is less advantageous than that of any other participant.
Deferral of a Director's Fees in accordance with the Proposed Plans
would essentially maintain the parties, viewed both separately and in
their relationship to one another, in the same position (apart from tax
effects) as if the Fees were paid on a current basis.
9. Applicants believe that, for the reasons set forth above, the
Proposed Plans are in the best interests of each Fund and its
shareholders and are consistent with the purposes fairly intended by
the policy and provisions of the Act. In addition, the Applicants
submit that exemption of the proposed deferred fee arrangement and
transactions related thereto from the foregoing provisions of the Act
is necessary and appropriate in the public interest and consistent with
the protection of investors.
Conditions
Each Applicant agrees that the order of the SEC granting the
requested relief shall be subject to the following conditions:
1. With respect to the requested relief from rule 2a-7, any money
market Fund that values its assets by the amortized cost method or the
penny-rounding method will buy and hold Underlying Securities that
determine the performance of Deferred Fee Accounts to achieve an exact
match between such Fund's liability to pay deferred fees and the assets
that offset that liability.
2. If a Fund purchases Underlying Securities issued by another
Fund, the purchasing Fund will vote such shares in proportion to the
votes of all other shareholders of such other Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27883 Filed 11-9-95; 8:45 am]
BILLING CODE 8010-01-M