[Federal Register Volume 61, Number 29 (Monday, February 12, 1996)]
[Notices]
[Pages 5415-5419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3043]
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SECURITIES AND EXCHANGE COMMISSION
[Rel No. IC-21736; Int'l Series Release No. 928; 812-9188]
The CountryBasket Index Fund, Inc., et al.; Notice of Application
February 6, 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: The CountryBasket Index Fund, Inc. (the ``Fund''), Deutsche
Morgan Grenfell/C.J. Lawrence Inc. (the ``Adviser''), and ALPS Mutual
Fund Services, Inc. (the ``Distributor'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of
the Act and rule 22c-1 thereunder and under sections 6(c) and 17(b) of
the Act for an exemption from section 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order permitting the Fund
to issue securities of limited redeemability that are intended to trade
on the New York Stock Exchange (``NYSE'') at negotiated prices. The
order also would permit certain transactions between the Fund and
affiliated persons and permit the Fund to make payment for redeemed
securities more than seven days from the date such securities are
tendered in certain circumstances.
FILING DATE: The application was filed on August 19, 1994 and amended
on October 28, 1994, November 30, 1994,
[[Page 5416]]
January 10, 1995, March 30, 1995, and June 30, 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 March 4, 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, 31 West 52nd Street, New York, NY 10019.
FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563, 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 Fund is an open-end management investment company that
initially will consist of nine series. Each series will invest in a
portfolio of equity securities included in one of the component indexes
of the Financial Times/Standard & Poor's Actuaries World Indices
TM (``FT/S&P Indices'') concentrating in a specific country. The
initial nine series will represent the FT/S&P Indices for Australia,
France, Germany, Hong Kong, Italy, Japan, South Africa, the United
Kingdom, and the United States.
2. The Adviser will serve as adviser to the Fund. The Distributor
will be the principal underwriter and distributor of the Fund's shares.
State Street Bank and Trust Company is expected to provide custodian,
transfer agency and fund accounting services for each series.
3. There will be no sales charge for purchases of shares of any
series. Applicants expect that pursuant to a plan adopted by the board
of directors of the Fund for each series under rule 12b-1 under the
Act, each series will pay the Distributor a distribution services fee
and a fee for marketing and promotional services. The Adviser will
receive an annual fee for its services. Additional fees also will be
charged to compensate the providers of custodian, transfer agency, and
fund accounting services.
4. Each series of the Fund will issue only aggregations of a
specified number of shares (``Creation Units'') that will be separable
at the option of the holder into a specified number of identical
components (each a ``CB TM Share''). The initial net asset value
of the Creation Units are expected to range from approximately
$2,000,000 to $5,000,000. The Creation Unit size of each series will be
chosen to yield an initial per CB TM Share price, expected to be
in the $30 to $50 range, equal to a designated percentage of the value
of the relevant FT/S&P Index. Applicants intend to list CB TM
Shares of each Fund series on the NYSE where the shares would traded in
the secondary market as individual shares in the same manner as other
equity securities.
5. Creation Units will be sold continuously at net asset value
principally in exchange for a portfolio of equity securities (the
``Fund Basket''), substantially corresponding to the securities
represented in the designated component of the FT/S&P Indices and an
amount of cash (the ``Cash Component''), which together constitute the
``Fund Deposit.'' Immediately before the opening of business on the
NYSE on each Business Day, as defined below, the Distributor and the
National Securities Clearing Corporation will announce the securities
and the proportion of such securities that will constitute the Fund
Basket for that particular Business Day. At the same time, the Adviser
will determine, and the Distributor will announce, the amount of the
Cash Component necessary to constitute the Fund Deposit. The Cash
Component will be equal to the difference between the value of the Fund
Basket on that day and the net asset value of the Creation Unit
purchased.
6. In order for payment of the Cash Component to be made on the
same date as the shares are issued, it is necessary for the Fund's
custodian to be open for business for purposes of receiving fund
transfers. Consequently, for each series, other than the United States
series, a Business Day is any day on which the NYSE, the Fund's
custodian and subcustodians, and the relevant stock exchanges are open.
For the United States series, a Business Day is any day on which the
NYSE and the Fund's custodian are open.
7. An investor making a Fund Deposit will be charged a cash
transaction fee on the cash portion of the purchase to cover brokerage
and other transaction costs. In addition, investors purchasing or
redeeming shares in-kind will bear the costs of transferring the
securities to or from the Fund.
8. In the event that the Adviser determines, in its discretion,
that a particular security is likely to be unavailable or available in
insufficient quantity for delivery to the Fund as part of a Fund Basket
on the date of purchase, the cash equivalent value of such security may
be required or permitted to be included as part of the Cash Component
in lieu of the particular security.
9. To purchase Creation Units, an investor must be, or place its
order through, a participant organization (a ``DTC Participant'') in
the Depository Trust Company, a limited purpose trust company organized
under the laws of the State of New York (the ``Depository''). All
orders to purchase Creation Units from the Fund must be placed with the
Distributor. The Distributor will be responsible for distributing
prospectuses to purchasers of Creation Units.
10. Broker-dealers and other persons will be cautioned in the
prospectus and/or the Fund's statement of additional information
(``SAI'') that some activities on their part may, depending on the
circumstances, result in their being deemed statutory underwriters and
subject them to the prospectus delivery and liability provisions of the
Securities Act of 1933. For example, a broker-dealer firm may be deemed
a statutory underwriter if it purchases Creation Units from the Fund,
breaks them down into the constituent CBTM Shares, and sells the
CBTM Shares directly to its customers; or if it chooses to couple
the creation of a supply of new CBTM Shares with an active selling
effort involving solicitation of a secondary market demand for
CBTM Shares. The prospectus and/or the SAI will state that whether
a person is an underwriter depends upon all the facts and circumstances
pertaining to that person's and his client's activities. The prospectus
and/or the SAI will explain that dealers who are not statutory
underwriters, but are participating in a distribution (as contrasted to
ordinary secondary trading transactions), and thus dealing with
CBTM Shares that are part of an ``unsold allotment'' within the
meaning of section 4(3) of the Securities Act of 1933, would be unable
to take advantage of the prospectus-delivery exemption provided by
section 4(3) of the Securities Act of 1933.
11. Redemption requests will be accepted on each day that the NYSE
is
[[Page 5417]]
open. An investor redeeming a Creation Unit generally will receive a
Fund Basket of securities and cash equal to the difference in value
between such Fund Basket and the net asset value of the Creation Unit
aggregation of shares next determined after receipt of the redemption
request. A redeeming beneficial holder or DTC Participant acting on
behalf of such beneficial holder must maintain appropriate securities
broker-dealer, bank, or other custody arrangements in the jurisdiction
in which the portfolio securities are customarily traded to which
account such portfolio securities will be delivered. If neither the
redeeming beneficial holder nor the DTC Participant has appropriate
arrangements to take delivery of the portfolio securities in the
applicable foreign jurisdiction, and it is not possible to make other
such arrangements, or if it is not possible to effect deliveries of the
portfolio securities in such jurisdiction, the Fund will redeem such
shares in cash. In such circumstances, or if the Fund concludes that
operating on an exclusively in-kind basis presents marketing or
operational problems for a specific series, the Fund reserves the right
to offer a cash option for sales and to make redemptions in cash in
respect of any series. When investors redeem in cash, in whole or in
part, the Fund will charge a cash redemption fee to cover brokerage and
other transactions costs.
12. Fund shares will be registered in book-entry form only;
certificates will not be issued. The Depository or its nominee will be
registered owner of all outstanding Fund shares. Records reflecting the
beneficial owners of Fund shares will be maintained by the Depository
or a DTC Participant.
13. Owner of Creation Units may hold the units or sell them into
the secondary market as CBTM Shares. The CBTM Shares are
intended to be listed on the NYSE and trade in the secondary market in
the same manner as other equity securities. The price of CBTM
Shares on the NYSE will be based on a current bid/offer market.
Transactions involving the sale of CBTM Shares will be subject to
customary brokerage commissions and charges. Brokers will deliver a
Fund prospectus to each investor in connection with the secondary
market purchase by such investor of CBTM Shares on the NYSE. The
Fund will provide copies of its annual and semi-annual shareholder
reports to beneficial holders of CBTM Shares. Each individual
CBTM Share will have one vote with respect to matters regarding
the Fund or the respective series upon which a shareholder vote is
required.
14. In order to avoid confusion in the public's mind between the
Fund and a conventional ``open-end investment company'' or ``mutual
fund,'' the Fund will limit the designation of the Fund in all
marketing materials, including the Fund's prospectus and SAI, to the
term ``investment company,'' without reference to ``open-end fund'' or
``mutual fund.'' The term ``mutual fund'' will not be used at any time.
The term ``open-end investment company'' will be used in the prospectus
only to the extent required by item 4 of Form N-1A.\1\ The cover page
of the prospectus and the summary will include a distinct paragraph
stating that the CBTM Shares will not be individually redeemable.
The description of the Creation Units and the method of their purchase
and redemption will follow such paragraph on the CBTM Shares. The
SAI will include an explanation of the issuance and redemption
procedures for Creation Units. All marketing materials that describe
the method of obtaining, buying, or selling CBTM Shares, will
state that the CBTM Shares are non-redeemable.
\1\ Item 4 of Form N-1A requires an investment company to state
in its prospectus its classification and subclassification under
sections 4 and 5 of the Act.
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15. Applicants believe that purchasers of Creation Units will
include institutional investors who desire a foreign index-based fund
with the liquidity provided by exchange traded shares. In addition,
arbitrageurs may purchase Creation Units to take advantage of a premium
in the market price of CBTM Shares. Finally, the exchange
specialist, acting in its role to provide a fair and orderly secondary
market for the CBTM Shares, may find it appropriate at times to
create CBTM Shares for use in its market-making activities on the
exchange.
16. Applicants believe that arbitrage activity will enhance the
liquidity of the CBTM Shares in the secondary market and help
ensure that CBTM Shares will not trade at a material discount or
premium in relation to the Fund's net asset value.
Applicants' Legal Analysis
Section 6(c)
1. Applicants request relief under section 6(c) of the Act from
sections 2(a)(32), 5(a)(1), 17(a)(1), 17(a)(2), 22(d), and 22(e) and
rule 22c-1 and under sections 6(c) and 17(b) from sections 17(a)(1) and
17(a)(2). Section 6(c) permits the SEC to exempt any person or
transaction 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
of the Act. Section 17(b) authorizes the SEC to exempt a transaction
from section 17(a) if 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, the
proposed transaction is consistent with the policy of each registered
investment company concerned, and the proposed transaction is
consistent with the general policy of the Act. Section 17(b) could be
interpreted to exempt only a single transaction. However, the SEC,
under section 6(c), may exempt a series of transactions that otherwise
would be prohibited by section 17(a).
Sections 2(a)(32) and 5(a)(1)
1. Section 5(a)(1) defines an ``open-end company'' as a
``management company which is offering for sale or has outstanding any
redeemable security of which it is the issuer.'' The term ``redeemable
security'' is defined in section 2(a)(32) as a security which entitles
the holder to receive, upon presentation of the security to the issuer,
approximately his or her proportionate share of the issuer's current
net assets.
2. Because the Creation Units are separable into CBTM Shares
that are not individually redeemable, a question arises as to whether
the definition of a ``redeemable security'' or an ``open-end company''
under the Act would be met if such shares are viewed as non-redeemable
securities. In light of this question, the Fund requests an order to
permit it to maintain its registration as an open-end investment
company and to issue shares that are redeemable only in Creation Units.
3. Applicants note that owners of CBTM Shares wishing to
redeem may purchase additional CBTM Shares and tender the
resulting Creation Unit for redemption. Moreover, NYSE listing will
afford shareholders the benefit of liquidity. Applicants believe that
because Creation Units always may be purchased and redeemed at net
asset value, arbitrage opportunities will ensure that the price of
CBTM Shares on the secondary market will not vary substantially
from the net asset value of Creation Units. Also, the investor has the
ability to purchase or redeem Creation Unit aggregations of shares
rather than trade in the secondary market.
Section 22(d) and Rule 22c-1
1. Section 22(d), among other things, prohibits a dealer from
selling a
[[Page 5418]]
redeemable security that is being currently offered to the public by or
through an underwriter except at the current public offering price
described in the prospectus. Rule 22c-1 generally requires that a
dealer selling, redeeming, or repurchasing a redeemable security do so
only at a price based on its net asset value. Secondary market
transactions in CBTM Shares will take place at negotiated prices
and not at a current offering price described in the prospectus or on
the basis of net asset value. Thus, purchases and sales of CBTM
Shares by dealers in the secondary market may not comply with section
22(d) and rule 22c-1.
2. While there is little legislative history regarding section
22(d), its provisions, as well as those of rule 22c-1, appear to have
been enacted (a) to prevent dilution caused by certain risk-free
trading schemes by principal underwriters and contract dealers, (b) to
prevent unjust discrimination or preferential treatment among buyers
resulting from sales at different prices, and (c) to assure an orderly
distribution of investment company shares by eliminating price
competition from dealers offering shares at less than the published
sales price and repurchasing shares at more than the published
redemption price. Applicants believe that the concerns sought to be
addressed by section 22(d) and rule 22c-1 with respect to pricing are
equally satisfied by the proposed method of pricing CBTM Shares.
First, secondary market trading in CBTM Shares, because it does
not involve the Fund as a party, cannot result in dilution of a
beneficial owner's investment. Second, to the extent different prices
exist during a given trading day, or from day to day, such variances
occur as a result of third-party market forces, such as supply and
demand and interest rates, not as a result of unjust or discriminatory
manipulation. Therefore, secondary market trading in CBTM Shares
will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because arbitrage activity will ensure that the
difference between the market price of CBTM Shares and their net
asset value remains narrow.
Section 22(e)
1. Section 22(e) provides that an investment company may not
postpone the date of payment or satisfaction upon the redemption of any
redeemable security for more than seven calendar days following tender
of such security for redemption. To the extent that Creation Units may
be deemed to be redeemable securities, applicants request an exemption
to permit the Japan series to redeem Creation Units within ten days,
and the United Kingdom series to redeem Creation Units within twelve
days at certain times during the calendar year. The custodian has
advised the Fund that local holiday schedules combined with local
settlement periods will require more than seven calendar days for
delivery of redemption proceeds several times during the calendar year
for these two series. Applicants expect, however, that these series
will be able to deliver redemption proceeds within seven days at all
other times. Applicants do not request an exemption from section 22(e)
with respect to the other series.\2\
\2\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may otherwise have under rule 15c6-1 under the Securities Exchange
Act of 1934. Rule 15c6-1 requires that most securities transactions
be settled within three business days of the trade date.
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2. The Fund believes that Congress adopted section 22(e) to prevent
unreasonable, undisclosed or unforeseen delays in the actual payment of
redemption proceeds. The prospectus, SAI, and all relevant sales
literature for the Japan and the United Kingdom series will disclose
that redemption payments will be effected within the specified number
of calendar days following the date on which a request for redemption
is made. Applicants contend that the redemption mechanism described
above will not lead to unreasonable, undisclosed, or unforeseen delays
in the redemption process.
3. Applicants believe that requiring the Fund to deliver securities
upon redemption on a basis other than that utilized by all other
investors trading portfolio securities in the particular local market
(e.g., irrespective of whether a holiday occurs during the relevant
settlement period), would be highly burdensome to the series and
possibly unacceptable to local market participants. The same concerns
are relevant to both redemptions in-kind and redemptions for cash.
Since the Fund will be fully invested at almost all times, generally it
will need to liquidate portfolio holdings in order to generate the cash
needed to finance cash redemptions. It would be highly burdensome if
the Fund were forced to do this outside of the settlement cycles of the
local market for the reasons discussed above.
4. Applicants believe that allowing redemption payments for
Creation Units of a series to be made within the number of days
indicated above would not be inconsistent with the spirit and intent of
section 22(e).
Section 17(a)
1. Applicants request an exemption under sections 6(c) and 17(b)
from section 17(a) of the Act to permit affiliated persons of the Fund
to purchase and redeem Creation Units. Section 17(a) generally
prohibits an affiliated person of a registered investment company from
purchasing from or selling to such company any security or other
property. Because purchases and redemptions will be in-kind rather than
cash transactions, section 17(a) may prohibit affiliated persons of the
Fund from purchasing or redeeming Creation Units. Moreover, because the
definition of affiliated person includes anyone owning 5% or more of an
issuer's outstanding voting stock, at least one purchaser of a Creation
Unit will be affiliated with the Fund so long as there are twenty or
fewer holders of Creation Units.
2. Applicants contend that no useful purpose would be served by
prohibiting affiliated persons from making in-kind purchases or
redemptions of Creation Units. In-kind purchases and redemptions will
be valued pursuant to verifiable objective standards. The securities to
be used for the in-kind purchase or redemption will be those in the
Fund Basket, which is based on the FT/S&P Indices. The FT/S&P Indices
are widely publicized and not subject to manipulation by the Fund or
its affiliates. Thus, in-kind purchases and redemptions will afford no
opportunity for affiliated persons to effect a transaction detrimental
to the other shareholders. Applicants believe that in-kind purchases
and redemptions will not result in abusive self-dealing or overreaching
by affiliated persons of the Fund. Accordingly, applicants believe that
the requested relief meets the section 6(c) and section 17(b) standards
for relief.
Applicants' Arguments
1. Applicants assert that CBTM Shares will allow investors to
have a beneficial interest in a standardized portfolio of foreign
equity securities based on a major market index. Applicants believe
that the Fund should be able to track the FT/S&P Indices more closely
than other basket products that must allocate a portion of their assets
for cash redemptions. Even though a series may in some instances redeem
in cash, applicants believe that they can still keep their assets fully
invested; they expect there will be fewer redemptions than would be the
case for a conventional mutual fund in view of the
[[Page 5419]]
need to accumulate a Creation Unit to tender for redemption. In
addition, applicants believe that CBTM shares will provide a
relatively low-cost market-basket security that, unlike open-end index
funds, can be treated at negotiated prices throughout the business day.
Finally, CBTM shares will broaden the trading, investing and
hedging opportunities available to investors with respect to a
significant segment of the international and domestic securities
markets.
2. Applicants state that they will take such steps as may be
necessary to avoid confusion in the public's eye between the Fund and a
conventional ``open-end investment company'' or ``mutual fund.'' In
addition, applicants state that brokers will deliver a prospectus to
each investor in connection with the secondary market purchasers by
investors of CBTM Shares on the NYSE. Thus, applicants believe
that the requested relief meets the section 6(c) standards.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. The Fund will not be advertised or marketed as an open-end
investment company, i.e., as a mutual fund, which offers redeemable
securities. The Fund prospectus will prominently disclose that the
CBTM Shares are not redeemable units of shares and will disclose
that the owners of the CBTM Shares may acquire and tender those
shares for redemption to the Fund in Creation Unit aggregations only.
Any advertising material where features of obtaining, buying, or
selling Creation Units are described or where there is reference to
redeemability will prominently disclose that owners of CBTM Shares
may acquire and tender those shares for redemption to the Fund in
Creation Unit aggregations only.
2. The Fund will provide copies of its annual and semiannual
shareholder reports to beneficial owners of the CBTM Shares.
3. Applicants will not seek to have the Fund's registration
statement declared effective until the SEC has approved such proposed
rule change pursuant to rule 19b-4 under the Securities Exchange Act of
1934 as may be necessary to enable a national securities exchange to
list the CBTM Shares.
4. In addition, as long as the Fund operates in reliance on the
requested order, the CBTM Shares will be listed on a national
securities exchange.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3043 Filed 2-9-96; 8:45 am]
BILLING CODE 8010-01-M