[Federal Register Volume 60, Number 229 (Wednesday, November 29, 1995)]
[Notices]
[Pages 61284-61287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29110]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21537; 812-9738]


Smith Barney Inc., et al.; Notice of Application

November 21, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (the ``Act''.

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APPLICANTS: Smith Barney Inc. (``Smith Barney''); Smith Barney Mutual 
Funds Management Inc. (``SBMFM''); Smith Barney Strategy Advisers Inc. 
(``Strategy Advisers''); and Smith Barney Cardinal Investment Fund Inc. 
(``Cardinal''), Smith Barney Aggressive Growth Fund Inc., Smith Barney 
Appreciation Fund Inc., Smith Barney Equity Funds, Smith Barney 
Fundamental Value Fund Inc., Smith Barney Funds, Inc., Smith Barney 
Income Funds, Smith Barney Investment Funds, Inc., Smith Barney Managed 
Governments Fund Inc., Smith Barney Money Funds, Inc., Smith Barney 
World Funds, Inc., and each open-end management investment company, or 
series thereof, that is or 

[[Page 61285]]
will be part of a group of investment companies that holds itself out 
to investors as related companies for purposes of investment and 
investor services (a) for which Smith Barney or any entity controlling, 
controlled by, or under common control with, Smith Barney now or in the 
future acts as principal underwriter or (b) for which Smith Barney, 
SBMFM, Strategy Advisers, or any entity controlling, controlled by, or 
under common control with Smith Barney, SBMFM, or Strategy Advisers now 
or in the future acts as investment adviser (the ``Smith Barney Funds'' 
or the ``Funds'').\1\

    \1\Existing Smith Barney Funds that intend to rely on the 
requested order have been named as applicants. Other Smith Barney 
Funds do not presently intend to rely on the requested order, but 
may do so in the future in accordance with the terms of the 
requested order.
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RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
from section 12(d)(1) of the Act, and under sections 6(c) and 17(b) of 
the Act from section 17(a) of the Act.

SUMMARY OF APPLICATION: Applicants request an order that would allow 
Cardinal to acquire up to 100% of the voting shares of any other Smith 
Barney Fund.

FILING DATES: The application was filed on August 28, 1995, and was 
amended on November 15, 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 December 18, 
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 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 388 Greenwich Street, New York, New York 10013-2996.

FOR FURTHER INFORMATION CONTACT: Sarah A. Wagman, Staff Attorney, at 
(202) 942-0654, 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. Cardinal will be registered under the Act as an open-end 
management investment company. Cardinal initially will consist of five 
funds organized as series or portfolios: (a) Aggressive Growth 
Portfolio, (b) Growth Portfolio, (c) Growth and Income Portfolio, (d) 
Balanced Portfolio, and (e) Income Portfolio. Cardinal will function as 
a ``fund of funds,'' investing substantially all of its assets in 
shares of other Smith Barney Funds (the ``Underlying Funds''). 
Additional funds of funds that may be established in the future in 
accordance with the terms and conditions of the requested order may be 
organized as: (a) Series of Cardinal, (b) series of any other Smith 
Barney Fund, or (c) any other Smith Barney Fund that does not offer its 
securities in separate series (Aggressive Growth Portfolio, Growth 
Portfolio, Growth and Income Portfolio, Balanced Portfolio, Income 
Portfolio, and any future funds of funds are referred to herein as the 
``Cardinal Funds''). The Cardinal Funds currently expect to issue 
shares of each series in multiple classes, as permitted by rule 18f-3 
under the Act or any applicable exemptive order.
    2. Each Smith Barney Fund is organized either as a Maryland 
corporation or a Massachusetts business trust. The Smith Barney Funds 
are principally sold by Smith Barney financial consultants.
    3. Smith Barney is a Delaware corporation and is registered as a 
broker-dealer under the Securities Exchange Act of 1934, and as an 
investment adviser under the Investment Advisers Act of 1940 
(``Investment Advisers Act''). Smith Barney is an indirect wholly-owned 
subsidiary of Travelers Group Inc. Smith Barney is the principal 
underwriter of all of the Funds.
    4. Strategy Advisers and SBMFM are both investment advisers 
registered under the Investment Advisers Act, and are indirect wholly-
owned subsidiaries of Travelers Group Inc. Either Strategy Advisers or 
SBMFM is the investment adviser to each Fund. SBMFM intends to provide 
advisory services to the Cardinal Funds regarding each Cardinal Fund's 
asset allocation, general economic conditions, and other advisory 
services.
    5. SBMFM is considering charging the Cardinal Funds an advisory 
fee, presently expected to be approximately ten basis points (0.1%) 
(which may be waived initially) for providing these services. Although 
SBMFM would also earn advisory fees arising by virtue of its investment 
advisory contracts with the Underlying Funds, these fees would not be 
duplicative of any fee charged directly to the Cardinal Funds. Any 
advisory fee charged at the level of the Cardinal Funds would 
compensate SBMFM for services (e.g., asset allocation) that are unique 
to the Cardinal Funds and would not be provided at the level of the 
Underlying Funds because those Funds would have no need for such 
services. If SBMFM determines to charge an advisory fee for such 
allocation and other advisory services, or to increase any advisory fee 
borne by a Cardinal Fund, it will do so only in conformity with the 
requirements of the conditions to the requested order.
    6. SBMFM is also the administrator for each Fund. As administrator, 
SBMFM provides fund accounting services, calculates each Fund's daily 
net asset value, maintains the Funds' required books and records, and 
provides the Funds with corporate secretarial and clerical services, 
corporate officers and office space.
    7. Pursuant to its investment objectives and policies, each 
Cardinal Fund will invest in shares of the Underlying Funds and, 
possibly, short-term paper. Applicants expect that the Cardinal Funds 
will not pay sales loads or a distribution and service fee charged 
pursuant to a plan adopted in accordance with rule 12b-1 under the Act 
in connection with the Cardinal Funds' investments in shares of the 
Underlying Funds. If, in the future, a Cardinal Fund chooses to invest 
in shares of an Underlying Fund that incurs sales charges, it will do 
so only in accordance with the conditions to the requested order.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) provides that no registered investment 
company may acquire securities of another investment company if such 
securities represent more than 3% of the acquired company's outstanding 
voting stock, more than 5% of the acquiring company's total assets, or 
if such securities, together with the securities of any other acquired 
investment companies, represent more than 10% of the acquiring 
company's total assets. Section 12(d)(1)(B) provides that no registered 
open-end investment company may sell its securities to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 

[[Page 61286]]
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies.
    2. Section 6(c) provides that the SEC may exempt persons or 
transactions 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. Applicants request an order under section 6(c) 
exempting them from section 12(d)(1) (A) and (B) to permit the Cardinal 
Funds to invest in shares of the Underlying Funds in excess of the 
percentage limitations of section 12(d)(1).
    3. Applicants state that the Cardinal Funds have been created to 
function as an asset allocation mechanism. Applicants believe that the 
Cardinal Funds provide professional investment management for those 
investors who wish to diversify their mutual fund investments, but 
desire professional management to decide which mutual funds to select, 
how much of their assets to commit to each Fund, and when to reallocate 
their investments.
    4. Section 12(d)(1) was intended to mitigate or eliminate actual or 
potential abuses which might arise when one investment company acquires 
shares of another investment company. These abuses include the 
acquiring fund imposing undue influence over the management of the 
acquired funds through the threat of large-scale redemptions, the 
acquisition by the acquiring company of voting control of the acquired 
company, the layering of sales charges, advisory fees, and 
administrative costs, and the creation of a complex pyramidal structure 
which may be confusing to investors.
    5. Applicants believe that none of these potential or actual abuses 
are present in their proposed fund of funds structure. Applicants 
assert that the structure of the Cardinal Funds will not result in 
excessive fees for Cardinal Fund shareholders. Although SBMFM is 
considering charging an advisory fee to the Cardinal Funds, advisory 
fees charged to the Cardinal Funds and the Underlying Funds would not 
be duplicative. If SBMFM determines to charge an advisory fee for such 
allocation services, or to increase any advisory fee charged to a 
Cardinal Fund, such fees, in accordance with the conditions to the 
requested order, would only be for services that augment, rather than 
duplicate, advisory services provided to the Underlying Funds.
    6. Applicants also assert that their proposed fund of funds 
structure does not present any danger of excessive sales charges. 
Although applicants have reserved the right to have different sales 
charge structures in the future, which may include the payment of sales 
charges or service fees at both the Cardinal Fund and Underlying Fund 
level, applicants assert that such structures would not result in 
excessive or duplicative sales charges. In the event that a Cardinal 
Fund would invest in shares of an Underlying Fund that also bears sales 
charges or service fees, it would do so only in accordance with the 
conditions to the requested order, which require that any such sales 
charges or service fees, in the aggregate, be within the limitations 
set forth in section 26 of Article III of the National Association of 
Securities Dealers (``NASD'') Rules of Fair Practice.\2\

    \2\As multiple class funds, the Cardinal Funds will apply the 
NASD restrictions on a class-by-class basis to ensure that no 
investor would pay excessive sales charges.
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    7. Applicants assert that the Cardinal Funds would pose no threat 
of excessive control over the Underlying Funds. The shares of any 
Underlying Fund held by a Cardinal Fund will be voted either in 
proportion to the vote of all other holders of the securities of that 
Underlying Fund, or by pass-through voting by the shareholders of the 
Cardinal Funds. As well, applicants assert that redemption threats and 
a concomitant risk of lost advisory fees are not a problem in the 
context of a fund of funds structure in which all of the funds are 
members of the same fund family. The Cardinal Funds will only acquire 
shares of other Smith Barney Funds. Because Smith Barney affiliates are 
the advisers to the Smith Barney Funds and SBMFM will be the adviser to 
the Cardinal Funds, a redemption from one Smith Barney Fund will simply 
lead to the placing of the proceeds into another Smith Barney Fund. For 
these reasons, applicants submit that the requested order exempting 
applicants from section 12(d)(1) to the extent described in the 
application meets the standards of section 6(c).

B. Section 17(a)

    1. Section 17(a) makes it unlawful for an affiliated person of a 
registered investment company, or an affiliated person of such person, 
to sell securities to, or purchase securities from, the company. The 
Cardinal Funds and the Underlying Funds may be considered affiliated 
persons because the funds may be deemed to be controlled by their 
advisers, who are under the common control of Smith Barney. Thus, an 
Underlying Fund's issuance of its shares to a Cardinal Fund may be 
considered a sale prohibited by section 17(a).
    2. Section 17(b) provides that the SEC shall exempt a proposed 
transactions from section 17(a) if evidence establishes that: (a) the 
terms of the proposed transactions are reasonable and fair and do not 
involve overreaching; (b) the proposed transactions is consistent with 
the policies of the registered investment company involved; and (c) the 
proposed transaction is consistent with the general provisions of the 
Act. Applicants request an exemption under sections 6(c) and 17(b) to 
permit the Underlying Funds to sell their shares to the Cardinal 
Funds.\3\ Applicants believe that the proposed transactions meet the 
standards of sections 6(c) and 17(b).

    \3\Section 17(b) applies to specific proposed transactions, 
rather than an ongoing series of future transactions. See Keystone 
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c) 
frequently is used to grant relief from section 17(a) to permit an 
ongoing series of future transactions.
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Applicants' Conditions

    Applicants agree that the order granting the required relief shall 
be subject to the following conditions:
    1. The Cardinal Funds and each Underlying Fund will be part of the 
same ``group of investment companies'' as defined in paragraph (a)(5) 
of rule 11a-3 under the Act.
    2. The Cardinal Funds will not invest in an Underlying Fund unless 
that Fund may not acquire securities of any other investment company in 
excess of the limits contained in section 12(d)(1)(A) of the Act, 
except to the extent permitted by section 12(d)(1)(D).
    3. At least a majority of each Cardinal Fund's directors will not 
be ``interested persons,'' as defined in section 2(a)(19) of the Act 
(``Independent Directors''), and the selection of Independent Directors 
necessary to fill any vacancies on the board of directors, as well as 
the nomination of those persons to be recommended by the board of 
directors in connection with any shareholder vote, will be committed to 
the discretion of such Independent Directors.
    4. Prior to approving any advisory contract under section 15 of the 
Act, the directors of each Cardinal Fund, including a majority of the 
Independent Directors, shall find that the advisory fees charged under 
such contract, if any, are based on services provided that are in 
addition to, rather than duplicative of, services provided under the 
advisory contract of any Underlying Fund in which a Cardinal Fund may 
invest. These findings and their basis will be recorded fully in the 
minute books of the Cardinal Fund. 

[[Page 61287]]

    5. Any Sales Charges or Service Fees, as such terms are defined 
under section 26(b) of Article II of the NASD Rules of Fair Practice, 
as may be charged with respect to securities of a Cardinal Fund, when 
aggregated with any such Sales Charges and/or Service Fees borne by the 
Cardinal Fund with respect to the shares of an Underlying Fund, shall 
not exceed the limits set forth in section 26(d) of Article III of the 
NASD Rules of Fair Practice.
    6. Applicants will provide the following information in electronic 
format to the Chief Financial Analyst of the SEC's Division of 
Investment Management as soon as reasonably practicable following each 
fiscal year-end of each Cardinal Fund, unless the Chief Financial 
Analyst notifies applicants that the information need no longer be 
submitted: (a) monthly average total assets of each Cardinal Fund and 
each Underlying Fund in which a Cardinal Fund invests; (b) monthly 
purchases and redemptions (other than by exchange) for each Cardinal 
Fund and each Underlying Fund in which a Cardinal Fund invests; (c) 
monthly exchanges into and out of each Cardinal Fund and each 
Underlying Fund in which a Cardinal Fund invests; (d) month-end 
allocations of each Cardinal Fund's assets among the Underlying Funds 
in which it invests; (e) annual expense ratios for each Cardinal Fund 
and each Underlying Fund in which a Cardinal Fund invests; and (f) a 
description of any vote taken by the shareholders of any Underlying 
Fund in which a Cardinal Fund invests, including a statement of the 
percentage of votes cast for and against the proposal by the Cardinal 
Fund and by the other shareholders of that Underlying Fund.
    7. Substantially all of the assets of each Cardinal Fund will be 
invested in shares of Underlying Funds. Each Cardinal Fund will not 
hold any investment securities other than shares of Underlying Funds 
and short-term paper.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29110 Filed 11-28-95; 8:45 am]
BILLING CODE 8010-01-M