[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

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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