[Federal Register Volume 61, Number 20 (Tuesday, January 30, 1996)]
[Notices]
[Pages 3065-3067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1637]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21697; 812-9824]
IDEX Fund, et al.; Notice of Application
January 23, 1996.
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: IDEX Fund (``IDEX''), IDEX II Series Fund (``IDEX II''),
IDEX Fund 3 (``IDEX 3''), WRL Series Fund, Inc. (``WRL''),
(collectively, the ``Existing Funds''), any future registered open-end
management investment company, or series thereof, for which IDEX
Management, Inc (``IMI''), InterSecurities. Inc (``ISI''), or Western
Reserve Life Assurance Co. of Ohio (``Western Reserve,'' and together
with IMI and ISI the ``Investment Advisers'') or any entity
controlling, controlled by, or under common control with the Investment
Advisors, acts as investment adviser (the ``Future Funds,'' and
together with the Existing Funds, the ``Funds''), and the Investment
Advisers.
Relevant Act Sections: Order requested under section 6(c) of the Act
for an exemption from sections 13(a)(2), 18(f)(1), 22(f), and 22(g),
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
the Funds to enter into deferred compensation arrangements with their
independent trustees.
Filing Dates: The application was filed on October 16, 1995 and amended
on January 18, 1996.
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 February 20,
1996, 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, 201 Highland Avenue, Largo, Florida 34640.
For further Information contact: Marianne H. Khawly, Staff Attorney, at
(202) 942-0562, or Robert A. Robertson, 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 Reference Branch.
Applicants' Representations
1. IDEX, IDEX II, and IDEX 3 are Massachusetts business trusts
registered under the Act as open-end management investment companies.
IDEX and IDEX II currently offer one series and eleven series of
shares, respectively, that are continuously offered for sale to the
general investing public. IDEX 3 currently consists of one series of
shares but discontinued its sale to new investors effective June 15,
1990. WRL is a Maryland Corporation registered under the Act as an
open-end management investment company. WRL currently offers eighteen
series of shares, one of which is a money-market series, that are
continuously offered for sale to insurance company separate accounts
that fund variable annuity contracts.
2. Each of the Investment Advisers is registered under the
Investment Advisers Act of 1940. IMI is the investment adviser of IDEX,
IDEX 3, and the following five IDEX II portfolios: Growth Portfolio,
Global Portfolio, Flexible Income Portfolio, Balanced Portfolio, and
Capital Appreciation Portfolio. ISI is the investment adviser to the
remaining six IDEX II portfolios: Tax-Exempt Portfolio, Income Plus
Portfolio, Aggressive Growth Portfolio, Equity Income Portfolio,
Tactical Asset Allocation Portfolio, and C.A.S.E. Portfolio. Western
Reserve is the investment adviser to each of the WRL portfolios.
3. Each Existing Fund has a board of trustees/directors
(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. The
boards of IDEX, IDEX II, and IDEX 3 currently consist of the same seven
persons, five of whom are Independent Trustees. Each of the five
Independent Trustees currently is entitled to receive a total annual
retainer of $13,000 of which IDEX, IDEX II, and IDEX 3 each pay a pro
rata share based on its relative net assets. In addition, each of the
five Independent Trustees receives $1,250 plus reimbursement for
incidental expenses for each IDEX II board meeting attended and $500
plus reimbursement for incidental expenses for each IDEX or IDEX 3
board meeting attended.\1\ The board of WRL currently consists of five
persons, three of whom are Independent Trustees. Each WRL Independent
Trustee is entitled to receive an annual fee of $6,000, and $500 for
each board meeting attended plus reimbursement for incidental expenses.
\1\The boards of IDEX, IDEX II, and IDEX 3 have adopted a policy
whereby any Independent Trustee in office on September 1, 1990 who
has served at least three years may, subject to certain limitations,
elect upon his or her resignation to serve as a trustee emeritus. A
trustee emeritus has no authority, power, or responsibility with
respect to any IDEX, IDEX II, or IDEX 3 matter. A trustee emeritus,
however, is entitled to receive an annual fee equal to one-half the
fee then payable per annum to the Independent Trustees of the Fund
or Funds from which he or she resigned, plus reimbursement of
expenses incurred for attendance at board meetings.
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4. Applicants request an order to permit the Independent Trustees
to elect to defer receipt of all or a portion of their trustees' fees
pursuant to a deferred compensation plan (the ``Plan'') and related
election agreement (the ``Agreement'') entered into between each
Independent Trustee and the appropriate Fund. Under the Plan, the
Independent Trustee could defer payment of trustees' fees (the
``Deferred Compensation'') in order to defer payment of income taxes,
or for other reasons.
5. 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 date such fees would have been paid to such Independent Trustee.
The value of the Account as of any date will be determined by reference
to a hypothetical investment in Class A shares of one or more
portfolios of IDEX II (``Underlying Securities''), as selected by a
Participant.
6. The election to participate in the Plan must be made on or
before September 30 preceding the calendar year during which the
amounts to be deferred, absent deferral, would be paid to the
Participant. The Plan's effective date is January 1, 1996. In order to
facilitate implementation of the Plan, a
[[Page 3066]]
Participant may elect to defer fees payable during 1996 no later than
January 30, 1996. An individual who becomes a Participant after the
effective date of the Plan may make a deferral election with respect to
fees that, absent deferral, would be paid to him or her during the
remainder of the calendar year in which he or she becomes a Participant
on or before the date that is 30 days after the date on which he or she
becomes a Participant.\2\
\2\Until such time as an order is granted with respect to the
application, Deferred Compensation will be credited to an Account in
the form of cash, and each Account shall be deemed to earn interest
at an annual rate, effective on each January 1, determined by the
committee established by the boards to administer the Plan. The
initial interest rate shall be a rate equal to the yield on 90-day
U.S. Treasury Bills.
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7. The initial value of Deferred Compensation credited to an
Account will be effected at the respective current net asset value of
each Fund. Thereafter, the value of such Account will fluctuate as the
net asset value of the shares of each Fund fluctuates and also will
reflect the value of assumed reinvestment of dividends and capital
gains distributions from each Fund in additional shares of such Fund.
8. 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.
9. As a matter of prudent risk management, to the extent a
Participant selects Underlying Securities of a Fund other than the Fund
for which the Participant is deferring his or her trustee's fees, each
Fund intends in all cases to, and with respect to any money market Fund
or portfolio that values its assets by the amortized cost method will,
purchase and maintain Underlying Securities in amounts equal in value
to the deemed investments of the Account 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 trustees' fees were paid on a current basis.
10. Payments under the Plan will be made in one lump sum or in
quarterly installments (not to exceed 40) as the Independent Trustee
elects. Upon application by an Independent Trustee and a determination
by the board or such person(s) as the board may designate from time to
time (the ``Plan Administrator'') that the Independent Trustee has
suffered a severe financial hardship resulting from an unanticipated
emergency caused by an event beyond the control of the Independent
Trustee, the Plan Administrator shall distribute to the Trustee, in a
single lump sum, an amount equal to the lesser of the amount needed by
the Independent Trustee to meet the hardship, or the balance of the
Trustee's Account.
11. In the event of a 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 obligations 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's 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.\3\ 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) trustees'
fees to any trustee.
\3\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: (a)
under section 6(c) of the Act from sections 13(a)(2), 18(f)(1), 22(f),
and 22(g), 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. 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. 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. Section 22(g) prohibits registered open-end investment companies
from issuing any of their securities for services or for property other
than cash or securities. This provision prevents 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.
5. 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.
6. 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
[[Page 3067]]
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.
7. 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 are ``affiliated persons'' under section 2(a)(3)(C) of the Act
by reason of being under common control. Applicants assert 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.
8. 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 persons concerned, and 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). 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.
9. 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 requested relief from rule 2a-7, any money
market Fund or any money market portfolio thereof that values its
assets by the amortized cost method will buy and hold Underlying
Securities that determine the value of the Accounts to achieve an exact
match between the liability of any such Fund's or portfolio's 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. 96-1637 Filed 1-29-96; 8:45 am]
BILLING CODE 8010-01-M