[Federal Register Volume 61, Number 24 (Monday, February 5, 1996)]
[Notices]
[Pages 4297-4299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2328]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21713; 812-9926]


Lexington Growth and Income Fund, Inc., et al.; Notice of 
Application

January 30, 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: Lexington Crosby Small Cap Asia Growth Fund, Inc., 
Lexington Emerging Markets Fund, Inc., Lexington Global Fund, Inc., 
Lexington GNMA Income Fund, Inc., Lexington Goldfund, Inc., Lexington 
Growth and Income Fund, Inc., Lexington International Fund, Inc., 
Lexington Money Market Trust, Lexington Natural Resources Trust, 
Lexington Ramirez Global Income Fund, Lexington SmallCap Value Fund, 
Inc., Lexington Strategic Investments Fund, Inc., Lexington Strategic 
Silver Fund, Inc., Lexington Tax Free Money Fund, Inc., and Lexington 
Worldwide Emerging Markets Fund, Inc., (collectively, the ``Investment 
Companies''); and Lexington Management Corporation (the ``Adviser'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from sections 13(a)(2), 13(a)(3), 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 pursuant to rule 17d-1 
under the Act to permit certain joint arrangements in accordance with 
section 17(d) of the Act.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain investment companies to enter into deferred compensation 
arrangements with their trustees.

FILING DATE: The application was filed on December 26, 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 February 26, 
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, c/o Lawrence Kantor, Park 80 West, Plaza Two, Saddle Brook, 
New Jersey 07662.

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 Public Reference Branch.

Applicants' Representations

    1. The Investment Companies are registered under the Act as open-
end management investment companies. The Adviser serves as the 
investment adviser for the Investment Companies and Lexington Funds 
Distributor, Inc. serves as their distributor.
    2. Applicants request that relief granted pursuant to the 
application also apply to any subsequently registered open-end 
investment company, or series thereof, advised by the Adviser (together 
with the Investment Companies, the ``Funds'').
    3. Each Investment Company has a board of trustees, a majority of 
the members of which are not ``interested persons'' of such Investment 
Company within the meaning of section 2(a)(19) of the Act. Each of the 
trustees who is not an employee of the Adviser, or of any of the 
Investment Companies, or any of their affiliates (``Eligible 
Trustees'') receives annual fees. Applicants request an order to permit 
the Eligible Trustees to elect to defer receipt of all or a 

[[Page 4298]]
portion of their fees pursuant to a deferred compensation plan (the 
``Plan''). Under the Plan, the Eligible Trustees could defer payment of 
trustees' fees (the ``Deferred Fees'') in order to defer payment of 
income taxes or for other reasons.
    4. Under the Plan, the deferred fees payable by a Fund to a 
participating Eligible Trustee will be credited to a book reserve 
account established by the Fund (a ``Deferred Account''), as of the 
first business day following the date such fees would have been paid to 
the Eligible Trustee. The trustee may select one or more Investment 
Companies from a list of available Investment Companies that will be 
used to measure the hypothetical investment performance of the 
trustee's Deferred Account. The value of a Deferred Account will be 
equal to the value such account would have had if the amount credited 
to it had been invested and reinvested in shares of the investment 
portfolios designated by the trustee (the ``Designated Shares'').
    5. Each Investment Company generally intends to purchase and 
maintain Designated Shares in an amount equal to the deemed investments 
of the Deferred Accounts of its trustees. Any participating money 
market series of a Fund that values its assets by the amortized cost 
method will buy and hold the Designated Shares that determine the 
performance of the Deferral Accounts in order to achieve an exact match 
between such series' liability to pay deferred fees and the assets that 
offset such liability.
    6. 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.
    7. When the deferred fees are paid, payment will be made to 
Eligible Trustees in a lump sum or in generally equal annual 
installments over a period of no more than 10 years as selected by the 
Eligible Trustee at the time of deferral. In the event of death, 
amounts payable to the Eligible Trustee under the Plan will become 
payable to a beneficiary designated by the Eligible Trustee. In all 
other events, the Eligible Trustee's right to receive payments is non-
transferable.
    8. The Plan was adopted prior to receipt of the requested relief. 
Pending receipt of SEC approval, the Plan provides that the 
compensation deferred by an Eligible Trustee will be credited to a 
Deferral Account in the form of cash and credited with an amount equal 
to the yield on 90-day U.S. Treasury Bills.\1\

    \1\ See, e.g., American Balanced Fund, Inc. (pub. avail. Feb. 
13, 1984) (no-action assurances given for deferred compensation plan 
in which the value of the deferred amounts did not depend upon the 
investment company's performance).
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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), 13(a)(3), 
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 section 18(f)(1). 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 generally 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. Applicants state that such restrictions 
are set forth in the Plan, which would be included primarily to benefit 
the Eligible Trustees 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. Section 13(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 existing Investment 
Companies. Applicants believe that relief from the section is 
appropriate to enable the affected Investment Companies to invest in 
Designated Shares without a shareholder vote. Applicants will provide 
notice to shareholders in the prospectus of each affected Investment 
Company of the Deferred Fees under the Plan. The value of the 
Designated Shares will be de minimis in relation to the total net 
assets of the respective Investment Company, and will at all times 
equal the value of the Investment Company's obligations to pay deferred 
fees.
    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 Designated Shares with 
the deemed investments of the Deferral 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, 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 believe 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. Each portfolio may be an affiliated 
person of each other portfolio by reason of being under the common 

[[Page 4299]]
control of the Adviser.\2\ The sale by a portfolio of any security to 
any other portfolio of any Fund would therefore be subject to the 
prohibitions of section 17(a)(1). 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 Plan 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 Designated Shares that would determine the 
amount of such Fund's liability.

    \2\ Section 2(a)(3)(C) of the Act defines the term ``affiliated 
person'' of another person to include any person directly or 
indirectly controlling, controlled by, or under common control with 
such other person.
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    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 Fees under the Plan on an ongoing basis.\3\

    \3\ Section 17(b) may permit only a single transaction, rather 
than a series of on-going transactions, to be exempted from section 
17(a). See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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    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 without SEC approval. Eligible 
Trustees will not receive a benefit that would otherwise inure to a 
Fund or its shareholders. Eligible Trustees 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.

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 that values its assets by the amortized cost method will 
buy and hold Designated Shares that determine the performance of 
Deferral Accounts to achieve an exact match between the liability of 
any such Fund to pay compensation deferrals and the assets that offset 
that liability.
    2. If a Fund purchases Designated Shares 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. 96-2328 Filed 2-2-96; 8:45 am]
BILLING CODE 8010-01-M