[Federal Register Volume 61, Number 25 (Tuesday, February 6, 1996)]
[Notices]
[Pages 4498-4500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2462]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21726; 812-9888]


Schwab Capital Trust, et al.; Notice of Application

January 31, 1996.
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: Schwab Capital Trust (the ``Trust''); Schwab Investments; 
The Charles Schwab Family of Funds; Charles Schwab Investment 
Management, Inc. (``CSIM''); and Charles Schwab & Co., Inc. 
(``Schwab'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
from section 12(d)(1) of the Act, under sections 6(c) and 17(b) of the 
Act from section 17(a) of the Act, and pursuant to section 17(d) of the 
Act and rule 17d-1 thereunder.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
the Trust to operate as a ``fund of funds'' and to acquire up to 100% 
of the voting shares of any acquired fund.

FILING DATE: The application was filed on December 14, 1995. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is included in this notice.

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 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, 101 Montgomery Street, San Francisco, California 
94104.

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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. The Trust is registered as an open-end management investment 
company under the Act. Currently, the Trust consists of five separate 
investment portfolios: Asset Director-High Growth Fund, Asset 
Director-Balanced Growth Fund, and Asset Director-
Conservative Growth Fund (collectively, the ``Asset Director 
Funds''); Schwab International Index FundTM; and Schwab Small-Cap 
Index FundTM.
    2. Each Asset Director Fund seeks to provide 
diversification among major asset categories (e.g., stocks, bonds, and 
cash equivalents) and stock sub-categories (e.g., large company stocks, 
small company stocks, and international stocks). All three Asset 
Director Funds are designed to provide exposure to the growth 
potential of the stock market in varying degrees. A target mix and a 
defined range have been established for each asset category in each of 
the Asset Director Funds. A target mix, but not a defined 
range, has been established for each stock sub-category.
    3. CSIM is registered as an investment adviser under the Investment 
Advisers Act of 1940. CSIM is responsible for the overall management of 
the Asset Director Funds' business affairs, subject to the 
authority of the Trust's board of trustees and officers. CSIM makes all 
portfolio securities selections, places all orders for the Asset 
Director Funds' securities transactions, and has primary 
responsibility for the management of the Asset Director 
Funds' investment portfolios. CSIM is a wholly-owned subsidiary of the 
Charles Schwab Corporation (``Schwab Corporation'') and is the 
investment adviser and administrator for the mutual funds in the 
SchwabFunds family of mutual funds.
    4. Schwab is registered as a broker-dealer and transfer agent under 
the Securities Exchange Act of 1934. Schwab also is a member of the 
National Association of Securities Dealers, Inc. (``NASD''). Schwab 
serves as the Asset Director Funds' principal underwriter and 
transfer and shareholder servicing agent. Schwab is a wholly-owned 
subsidiary of Schwab Corporation.
    5. Applicants propose a fund of funds arrangement whereby each 
Asset Director Fund will invest in shares of portfolios of 
the following investment companies (the ``Underlying Portfolios''): 
Schwab Investments; The Charles Schwab Family of Funds; and the Trust. 
In the Trust's case, the Underlying Portfolios currently are proposed 
to consist of Schwab International Index FundTM and Schwab Small-
Cap Index FundTM. Investments also may be made in money market 
instruments for temporary defensive purposes and to maintain liquidity. 
In addition, any assets that are not invested in Underlying Portfolios 
shares will be invested directly in stocks, bonds, and other types of 
instruments, including money-market instruments. Applicants request 
that any relief granted pursuant to the application also apply to any 
open-end management investment company that currently or in the future 
is part of the same ``group of investment companies,'' as defined in 
rule 11a-3 under the Act, as the Trust (collectively, the `'Schwab 
Funds'').\1\

    \1\ Rule 11a-3 under the Act defines ``group of investment 
companies'' as two or more companies that: (a) hold themselves out 
to investors as related companies for purposes of investment and 
investor services; and (b) that have a common investment adviser or 
principal underwriter. Although certain existing registered 
investment companies, or portfolios thereof, that are Schwab Funds 
do not presently intend to rely on the requested order, any such 
registered investment company, or portfolios thereof, would be 
covered by the order if they later proposed to enter into a fund of 
funds arrangement in accordance with the terms described in the 
application.
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Applicants' Legal Analysis

    1. Section 12(d)91)(A) of the Act 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 

[[Page 4499]]
company's voting stock, or if the sale will cause more than 10% of the 
acquired company's voting stock to be owned by investment companies.
    2. Section 6(c) of the Act provides that the SEC may exempt persons 
or transactions 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 
and provisions of the Act. Applicants request an order permitting the 
Asset Director Funds to acquire shares of the Underlying 
Portfolios beyond the section 12(d)(1) limits.
    3. The restrictions in section 12(d)(1) were intended to prevent 
certain abuses perceived to be associated with the pyramiding of 
investment companies, including: (a) unnecessary duplication of costs, 
e.g. sales loads, advisory fees, and administrative costs; (b) a lack 
of appropriate diversification; (c) undue influence by the fund holding 
company over its underlying funds; (d) the threat of large scale 
redemptions of the securities of the underlying investment companies; 
and (e) unnecessary complexity. For the following reasons, applicants 
believe that the proposed arrangement will not create these dangers 
and, therefore, that the requested relief is appropriate.
    4. The proposed arrangement will not raise the fee layering 
concerns contemplated by section 12(d)(1). The proposed arrangement 
will not involve the layering of advisory fees since, before approving 
any advisory contract under section 15(a) of the Act, the board of 
trustees of the Trust, including a majority of the trustees who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act, will 
find that the advisory fees charged under the contract are based on 
services provided that are in addition to, rather than duplicative of, 
services provided under any Underlying Portfolio advisory contract. In 
addition, the proposed structure will not involve layering of sales 
charges. Any sales charges or service fees relating to the shares of an 
Asset Director Fund will not exceed the limits set forth in 
Article III, section 26 of the Rules of Fair Practice of the NASD when 
aggregated with any sales charges or service fees that the Asset 
Director Fund pays relating to Underlying Portfolio shares. 
The aggregate sales charges at both levels, therefore, will not exceed 
the limit that otherwise lawfully could be charged at any single level. 
Furthermore, the proposed arrangement will not involve the unnecessary 
duplication of administrative and other fees. Applicants expect that 
these expenses will be reduced at both levels under the proposed 
arrangement.
    5. In addition, the proposed arrangement will provide true 
diversification benefits. Each Asset Director Fund will 
pursue a different investment strategy by investing in Underlying 
Portfolios that also pursue distinct investment strategies. The 
proposed arrangement will be structured to minimize undue influence 
concerns. The Asset Director Funds only will acquire shares 
of Underlying Portfolios that are Schwab Funds. Because CSIM is 
investment adviser to the Underlying Portfolios as well as to the 
Trust, a redemption from one Underlying Portfolio will simply lead to 
the investment of the proceeds in another Underlying Portfolio.
    6. The proposed arrangement, furthermore, will be structured to 
minimize large scale redemption concerns. The Asset Director 
Funds will be designed for intermediate and long-term investors. This 
will reduce the possibility of the Asset Director Funds from 
being used as short-term investment vehicles and further protect the 
Asset Director Funds and the Underlying Portfolios from 
unexpected large redemptions. The proposed arrangement will not be 
unnecessarily complex. No Underlying Portfolio will acquire securities 
of any other investment company in excess of the limits contained in 
section 12(d)(1)(A) of the Act.
    7. Section 17(a) of the Act makes it unlawful for an affiliated 
person of a registered investment company to sell securities to, or 
purchase securities from, the company. The Trust and the Underlying 
Portfolios may be considered affiliated persons because they share 
common officers and/or directors/trustees. An Underlying Portfolio's 
issuance of its shares to the Trust may be considered a sale prohibited 
by section 17(a).
    8. Section 17(b) of the Act provides that the SEC shall exempt a 
proposed transaction from section 17(a) if evidence establishes that: 
(a) the terms of the proposed transaction are reasonable and fair and 
do not involve overreaching; (b) the proposed transaction 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 allow the above transactions.
    9. Applicants believe that the proposed transactions meet the 
standards of sections 6(c) and 17(b). The consideration paid for the 
sale and redemption of shares of Underlying Portfolios will be based on 
the net asset value of the Underlying Portfolios, subject to applicable 
sales charges. The Trust's purchase and sale of shares of the 
Underlying Portfolios is consistent with the Trust's policy, as set 
forth in the Trust's registration statements. Applicants also believe 
that the proposed transactions are consistent with the general purposes 
of the Act.
    10. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an 
affiliated person of a registered investment company, acting as 
principal, from effecting any transaction in which such investment 
company is a joint, or joint and several, participant with such person 
unless the SEC has issued an order approving the arrangement. 
Applicants understand that the proposed arrangement may provide 
benefits for both the Asset Director Funds and the Underlying 
Portfolios, including increased diversification, more efficient 
portfolios management, a larger asset base, and reduced expenses. 
Therefore, for the reasons discussed above, applicants believe that the 
proposed arrangement is consistent with the provisions, policies, and 
purposes of the Act. Furthermore, the Asset Director Funds 
and the Underlying Portfolios will not participate in the proposed 
arrangement on a basis that is different from or less advantageous than 
the participants that are not investment companies.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each Asset Director Fund and each Underlying Portfolio 
will be part of the same ``group of investment companies,'' as defined 
in rule 11a-3 under the Act.
    2. No Underlying Portfolio will 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 trustees of the Trust will not be ``interested 
persons,'' as defined in section 2(a)(19) of the Act.
    4. Any sales charges or service fees charged to the shares of an 
Asset Director Fund, when aggregated with any sales charges 
or service fees paid by the Asset Director Fund relating to 
the securities of the respective Underlying Portfolio, shall not exceed 
the limits set forth in Article III, section 26, of the NASD's Rules of 
Fair Practice.
    5. Before approving any advisory contract under section 15 of the 
Act, the board of trustees of the Trust, including 

[[Page 4500]]
a majority of the trustees or directors who are not ``interested 
persons,'' as defined in section 2(a)(19), will find that advisory fees 
charged under the contract are based on services provided that are in 
addition to, rather than duplicative of, services provided under any 
Underlying Portfolio advisory contract. The finding, and the basis upon 
which the finding was made, will be recorded fully in the minute books 
of the Asset Director Fund.
    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 of each Asset 
Director Fund and each underlying Portfolio; monthly 
purchases and redemptions (other than by exchange) for each Asset 
Director Fund and each Underlying Portfolio; monthly 
exchanges into and out of each Asset Director Fund and each 
Underlying Portfolio; month-end allocations of each Asset 
Director Fund's assets among the Underlying Portfolios; 
annual expense ratios for each Asset Director Fund and each 
Underlying Portfolio; and a description of any vote taken by the 
shareholders of any Underlying Portfolio, including a statement of the 
percentage of votes cast for and against the proposal by each Asset 
Director Fund and by the other shareholders of the Underlying 
Portfolio. Such information will be provided as soon as reasonably 
practicable following each fiscal year-end of the Asset Director 
Fund (unless the Chief Financial Analyst shall notify 
applicants in writing that such information need no longer be 
submitted).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2462 Filed 2-5-96; 8:45 am]
BILLING CODE 8010-01-M