[Federal Register Volume 61, Number 51 (Thursday, March 14, 1996)]
[Notices]
[Pages 10602-10604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6057]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21812; 812-9724]
The Flex-Partners and Mutual Fund Portfolio; Notice of
Application
March 7, 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 Flex-Partners (the ``Trust'') and Mutual Fund Portfolio
(the ``Portfolio'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from section 12(d)(1)(F) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
the TAA Fund (the ``Fund''), a series of the Trust, to offer a class of
shares to the public with a sales load that exceeds the 1.5% sales load
limitation of section 12(d)(1)(F)(ii) of the Act.
FILING DATE: The application was filed on August 14, 1995 and amended
on November 20, 1995 and January 22, 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 April 1, 1996,
and should be
[[Page 10603]]
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, N.W., Washington, D.C.
20549. Applicants, 6000 Memorial Drive, Box 7177, Dublin, Ohio 43017;
cc: James B. Craver, Esq., 266 Summer Street, Boston, MA 02210.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Staff Attorney, at
(202) 942-0547, or Alison E. Baur, 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 Trust is organized as a Massachusetts business trust. The
Fund, a series of the Trust, is a newly organized investment company
established to provide investors with a means of investing in a
diversified pool of open-end investment companies through a structure
frequently referred to as a ``master/feeder.'' The Fund's investment
objective is growth of capital through investment in the shares of
other mutual funds (``underlying funds''). The Fund proposes to achieve
its investment objective by investing all of its assets in the
Portfolio under section 12(d)(1)(E) of the Act, which in turn would
invest in the underlying funds under section 12(d)(1)(F) of the Act.
The Portfolio's investment adviser is R. Meeder & Associates, Inc. (the
``Adviser''). Neither the Trust nor the Fund has an investment adviser.
Roosevelt & Cross Incorporated is the Fund's distributor (the
``Distributor'').
2. Applicants propose that the Fund offer a class of shares
(``Class A Shares'') to the public subject to a sales load up to 4% of
the public offering price. Applicants state that the Class A Shares
would incur an asset-based fee under rule 12b-1 under the Act.\1\ The
Portfolio has no distribution expense or 12b-1 plan of its own, and
none is contemplated or ever likely to be implemented. The maximum
aggregate of fees proposed to be borne by the Fund and the Portfolio
together would be 4.5% of assets.
\1\ Under rule 12b-1, funds are permitted to finance the
distribution of their shares from fund assets subject to certain
conditions.
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Applicants' Legal Analysis
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.
2. Sections 12(d)(1)(E) and 12(d)(1)(F) provide specific exceptions
from the provisions of section 12(d)(1). Section 12(d)(1)(E) provides,
in pertinent part, that section 12(d)(1) shall not apply where the
investment company invests in a single investment security. Section
12(d)(1)(F) permits an acquiring company to own up to 3% of the
acquired company's securities, provided that the acquiring company does
not impose a sales load of more than 1.5% on its shares. In addition,
no issuer of any security shall be obligated to redeem such security in
any amount exceeding 1% of such issuer's total outstanding securities
during any period of less than 30 days.
3. Applicants' proposal combines the exceptions provided under
sections 12(d)(1)(E) and 12(d)(1)(F). Applicants request relief from
the 1.5% sales load limitation of section 12(d)(1)(F)(ii) so that the
Fund can offer Class A Shares subject to a sales load of no more than
4% of the public offering price.
4. Applicants argue that section 12(d)(1) is intended to (a)
prevent unregulated pyramiding of investment companies, (b) prevent
control of underlying funds by an acquiring fund, (c) protect
underlying funds from the negative impact of sudden large redemptions,
and (d) prevent the imposition on investors of excessive costs and fees
attendant upon multiple layers of investments. Applicants believe that,
because they seek relief only from the sales load limitation of section
12(d)(1)(F)(ii), these regulatory concerns are adequately addressed by
their proposed structure. Applicants state that pyramiding does not
arise because the Portfolio, and all affiliated persons of the
Portfolio, cannot own more than 3% of the total outstanding stock of
any underlying fund. Applicants contend that undue control over
underlying funds does not arise because the Portfolio will remain
subject to the redemption and voting limitations of section
12(d)(1)(F). Applicants assert that the underlying funds are protected
from the negative impact of large redemptions by the funds' ability to
invoke section 12(d)(1)(F)'s redemption limitation. The Adviser can
determine, in such a situation, to spread the redemption transaction
out over a long enough period to be consistent with such statutory
limitation, or to accept redemptions in kind.
5. Applicants contend that granting the requested relief will not
result in layering of fees, as beneficial interests in the Portfolio
are sold at net asset value without any sales load, and the Portfolio
generally does not pay a sales load on its fund investments. Applicants
state that the total asset-based sales charges of 4.5% will be well
within the limits established by the NASD. Applicants assert that the
condition subjecting any sales charges or service fees to the limits
established by the NASD will provide ongoing regulation with the
flexibility to accommodate continuing developments in the industry.
6. Applicants believe that sales of Class A Shares will increase
the assets held by the Portfolio, thereby increasing the likelihood
that the Portfolio will successfully realize the economies of scale
available in the master/feeder structure, and leading to overall lower
fees. Applicants also believe that the higher level of assets in the
Portfolio will enable them to purchase more ``load'' funds that
eliminate their sales charge on purchases of a certain size.
7. Applicants assert that the requested exemption is appropriate in
the public interest because it will enable investors, and particularly
investors who use the services of broker-dealers, to consider
applicants' proposed fund of funds structure as an option among the
growing number of competing investment arrangements. Applicants believe
that, because the number and variety of mutual funds has increased
dramatically since 1970, investors can benefit increasingly from the
professional investment advice that a fund of funds structure provides,
including a fund of funds that is not limited to funds managed by a
single investment adviser. Due to the sales load limitation in section
12(d)(1)(F), however, unaffiliated funds of funds are generally
available to investors only through no-load distribution channels.
Moreover, applicants assert that the Distributor has met with
substantial sales resistance from broker-dealers who decline to market
shares of funds unless a front-end load is available Applicants
therefore contend that, for investors who seek advice through broker/
dealers, the Fund provides a practical means of investing in a
diversified pool of
[[Page 10604]]
unaffiliated open-end investment companies.
8. Section 6(c) provides that the SEC may exempt any person or
transaction from any provisions 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 believe that the requested order
satisfies this standard.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Portfolio and the Fund will comply with section 12(d)(1)(F)
in all respects except for the sales load limitation of section
12(d)(1)(F)(ii).
2. Any sales charges or service fees charged with respect to
securities of the Fund, when aggregated with any sales charges or
service fees paid by the Portfolio with respect to securities of the
underlying funds, shall not exceed the limits set forth in Article III,
section 26, of the NASD's Rules of Fair Practice.
3. A majority of the trustees or directors of each of the Fund, the
Portfolio and each other feeder fund investing in the Portfolio will
not be ``interested persons'' as defined in section 2(a)(19) of the
Act.
4. Before approving any advisory contract under section 15 of the
Act, the Board of Trustees of the Portfolio, including a majority of
the Trustees who are not ``interested persons,'' as defined in section
2(a)(19) of the Act, shall find that advisory fees charged under such
contract are based on services provided that are in addition to, rather
than duplicative of, services provided pursuant to any underlying
fund's advisory contract. Such finding, and the basis upon which the
finding was made, will be recorded fully in the minute books of the
Portfolio.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6057 Filed 3-13-96; 8:45 am]
BILLING CODE 8010-01-M