[Federal Register Volume 61, Number 61 (Thursday, March 28, 1996)]
[Notices]
[Pages 13903-13906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7543]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21851; 812-9924]


U.S. Trust Corporation, et al.; Notice of Application

March 22, 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: U.S. Trust Corporation, United States Trust Company of New 
York (``U.S. Trust''), the Excelsior Institutional Trust (``Excelsior 
Trust''), the Excelsior Funds, Inc. (``Excelsior Funds, Inc. 
(``Excelsior Funds''),\1\ and any registered open-end management 
investment company that may be advised by U.S. Trust or any entity 
controlling, controlled by, or under common control with U.S. Trust 
(together, with Excelsior Trust and Excelsior Funds, the ``Funds''), 
the United States Trust Company of New York Pooled Pension and Profit 
Sharing Trust (``CIF''), and other collective investment funds that may 
be sponsored by U.S. Trust which U.S. Trust in the future may decide to 
convert into registered open-end investment companies in the manner 
described below, and in which, at that time, pension plans established 
and maintained for the benefit of employees of U.S. Trust and its 
subsidiaries have invested assets.

    \1\ The Excelsior Funds formerly were known as the UST Master 
Funds, Inc. The name was changed, effective January 2, 1996, 
primarily for marketing purposes.
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RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) of 
the Act exempting applicants from section 17(a)

[[Page 13904]]
of the Act and pursuant to section 17(d) of the Act and rule 17d-1 
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thereunder.

SUMMARY OF APPLICATION: The requested order would permit the CIF to 
transfer securities to certain portfolios of the Funds in exchange for 
portfolio shares.

FILING DATES: The application was filed on December 29, 1995. 
Applicant's counsel has stated in a letter dated March 18, 1996 that an 
amendment, the substance of which is incorporated herein, will be filed 
during the notice period.

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 16, 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, NW., Washington, DC 20549. 
Applicants: c/o U.S. Trust Corporation, 114 West 47th Street, New York, 
New York 10043.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. U.S. Trust is a state-chartered bank and trust company and 
wholly-owned subsidiary of U.S. Trust Corporation. U.S. Trust serves as 
trustee, investment manager, and custodian for numerous pension plan 
clients. The assets of some of those pension plans are invested in the 
CIF, which was established by U.S. Trust as an investment vehicle for 
employee retirement plans qualified under section 401 of the Internal 
Revenue Code or similar governmental plans. The CIF includes assets of 
pension plans for the benefit of employees of entities unaffiliated 
with U.S. Trust (``Other Plans'') as well as assets of pension plans 
for the benefit of employees of U.S. Trust and its affiliates 
(``Affiliated Plans'') (Other Plans and Affiliated Plans collectively 
referred to as ``Plans''). Each of the Affiliated Plans has a five 
percent or greater beneficial interest in the CIF. The assets of the 
CIF are invested in one or more investment funds (``CIF Portfolios'') 
with varying investment objectives.
    2. The Excelsior Trust is a Delaware business trust registered 
under the Act as an open-end management investment company. The 
Excelsior Trust currently consists of 10 portfolios. The Excelsior 
Trust is establishing two new portfolios, the Excelsior Trust 
Institutional Optimum Growth Fund and the Excelsior Trust Institutional 
Equity Value Fund, which will be the only portfolios of the Excelsior 
Trust to which Affiliated Plan assets in the CIF will be transferred. 
Excelsior Funds is a Maryland corporation registered under the Act as 
an open-end management investment company. Excelsior Funds is currently 
divided into 20 portfolios. The following portfolios are the only 
portfolios of Excelsior Funds to which Affiliated Plan assets in the 
CIF will be transferred: Excelsior Funds Equity Fund, Excelsior Funds 
International Fund, Excelsior Funds Short-Term Government Securities 
Fund, Excelsior Funds Managed Income Fund, Excelsior Funds Early Life 
Cycle Fund, and Excelsior Funds Money Fund (together with the Excelsior 
Trust Institutional Optimum Growth Fund and the Excelsior Trust 
Institutional Equity Value Fund, the ``Portfolios''). U.S. Trust serves 
as investment adviser to the Portfolios.
    3. U.S. Trust is terminating the CIF and proposes to transfer the 
Affiliated Plans' assets of the CIF in-kind to the Portfolios. Under 
this proposal, each Portfolio will accept a transfer of securities from 
a corresponding CIF Portfolio with substantially similar investment 
objectives, in exchange for Portfolio shares. The conversion may occur 
in stages, with certain transfers occurring before others.
    4. The assets of the CIF representing Other Plans may be converted 
into Funds in accordance with a series of no-action letters in which 
the SEC staff has permitted similar conversions of collective trust 
funds into mutual funds.\2\ The Affiliated Plans are unable to rely on 
the no-action letters, however, because each Affiliated plan has a five 
percent or greater beneficial interest in CIF.\3\ As a result, 
applicants are seeking exemptive relief for the transfer of CIF assets 
into the Funds on behalf of the Affiliated Plans.

    \2\ See, e.g., The DFA Investment Trust Company (pub. avail. 
Oct. 17, 1995); Federated Investors (pub. avail. Apr. 21, 1994); and 
Lincoln National Investment Management Company (pub. avail. Apr. 25, 
1976).
    \3\ See The DFA Investment Trust Company (pub. avail. Mar. 21, 
1996) (clarifying the staff's position that a less than five percent 
beneficial interest in a collective trust fund conversion by an 
affiliated person of a fund, or an affiliated person of such 
affiliated person, is not, in and of itself, a disqualifying 
affiliation for purposes of rule 17a-7).
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    5. Affiliated Plan assets of the CIF will be transferred as 
follows: the Short-Term Fixed Income CIF Portfolio into the Excelsior 
Funds Money Fund, the Fixed Income CIF Portfolio into the Excelsior 
Funds Managed Income Fund, the U.S. Government Short/Intermediate Term 
CIF Portfolio into the Excelsior Funds Short-Term Government Securities 
Fund, the International CIF Portfolio into the Excelsior Funds 
International Fund, the Equity CIF Portfolio into the Excelsior Funds 
Equity Fund, the Early Life Cycle CIF Portfolio into the Excelsior 
Funds Early Life Cycle Fund, the Optimum Growth CIF Portfolio into the 
Excelsior Trust Institutional Optimum Growth Fund, and the Equity Value 
CIF Portfolio into the Excelsior Trust Institutional Equity Value Fund.
    6. Applicants will institute the following procedures to ensure the 
protection of Plan participants in the proposed transactions. Each 
Affiliated Plan will have an employee benefit review committee (the 
``Committee'') that serves as fiduciary for the Plan. Also, each 
Affiliated Plan and Other Plan will have a fiduciary, independent of 
U.S. Trust and its affiliates, that will supervise the investment of 
that Plan's assets. This independent fiduciary generally will be the 
Plan's named fiduciary, trustee or sponsoring employee (in the case of 
the Other Plans), and will be subject, as will the Committee, to 
fiduciary responsibilities under the Employee Retirement Income 
Security Act of 1974 (``ERISA''). Under section 404(a) of ERISA, such 
fiduciaries must ensure that the investment of the Affiliated Plans' 
assets is prudent and operates exclusively for the benefit of 
participating employees of U.S. Trust and/or its affiliates and of 
their beneficiaries.
    7. Before transferring the Affiliated Plans' CIF assets to the 
Portfolios, U.S. Trust will seek and obtain the approval of the 
Committee and each Affiliated Plan's independent fiduciary. U.S. Trust 
will provide the Committee and the independent fiduciaries with a 
current prospectus for the relevant Portfolios and a written statement 
giving full disclosure of the fees to be received by U.S. Trust and/or 
its affiliates and the

[[Page 13905]]
terms of the proposed transactions. The disclosure will explain why 
U.S. Trust believes that the investment of assets of the Affiliated 
Plans in the Portfolios is appropriate.
    8. On the basis of such information, the Committee and the 
independent fiduciary will decide whether to authorize U.S. Trust to 
invest the relevant Affiliated Plan's assets in the Fund and to receive 
fees from the Fund. U.S. Trust does not charge Plan level fees to 
Affiliated Plans and, therefore, will not collect fees at both the Plan 
level and the Fund level for managing the same assets. However, the 
fees charged to the Affiliated Plans may increase as a result of the 
greater costs of Fund administration as compared to the administration 
of the CIF. Because U.S. Trust does charge Plan level fees to the Other 
Plans, it will credit all Fund level fees back to those Plans.
    9. Because of the need to obtain approval from various fiduciaries, 
and the need to obtain effectiveness of the registration statement 
describing the two new equity Portfolios of the Excelsior Trust, the 
proposed transactions may occur in more than one stage. Only those 
Plans that have received the required approval from the Committee and 
the independent fiduciary will participate at any stage. As of the date 
of each transfer, U.S. Trust, on behalf of the CIF Portfolios, will 
deliver to the corresponding Portfolio securities equal in value to the 
interest of each participating Plan, in exchange for Fund shares with 
total net asset value equal to the market value of the transferred 
assets as of the date of the transfer. All securities transferred to a 
Portfolio in any stage will be securities capable of being priced 
pursuant to rule 17a-7(b) (1) through (4) under the Act, and will be 
consistent with the investment objectives and fundamental policies of 
the corresponding Portfolio. The Fund shares received by the CIF 
Portfolios then will be distributed, pro rata, to all Plans whose 
interests were converted as of that date.
    10. U.S. Trust is terminating the CIF and transferring its assets 
into the Funds because it believes investment of those assets in mutual 
fund will better serve the interests of its employee retirement benefit 
plan clients. Investment of Plan assets in mutual funds will allow the 
sponsors of and participants in the Plans to monitor more easily the 
performance of their investments on a daily basis, as information 
concerning the investment performance of the Portfolios generally will 
be available in daily newspapers. Additionally, the mutual fund vehicle 
will provide other advantages, such as daily pricing, and will afford 
U.S. Trust a better opportunity to market its investment management 
services. Assuming those marketing efforts result in greater assets 
under management, this investment also will allow for greater 
diversification. Also, Plan participants will have the benefit of the 
heightened disclosure applicable to mutual funds under the federal 
securities laws.

Applicants' Legal Analysis

    1. Section 17(a) of the Act, in relevant part, prohibits an 
affiliated person of a registered investment company, or an affiliated 
person of such person, acting as principal, from selling to or 
purchasing from such investment company any security or other property. 
Section 2(a)(3) of the Act, in relevant part, defines ``affiliated 
person'' to include: (a) any person directly or indirectly owning, 
controlling, or holding with the power to vote, 5% or more of the 
outstanding voting securities of such other person; (b) any person 
directly or indirectly controlling, controlled by, or under common 
control with, such other person; and (c) if such other person is an 
investment company, any investment adviser thereof.
    2. Section 6(c) provides that the SEC may exempt any person or 
transaction from any provision of the Act or any rule thereunder to the 
extent that 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.
    3. Section 17(b) 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.
    4. Section 17(d) prohibits an affiliated person of a registered 
investment company, or an affiliated person of such person, acting as 
principal, from effecting any transaction in which such investment 
company is a joint, or joint and several, participant with such person 
in contravention of SEC rules and regulations. Rule 17d-1 under the Act 
provides that no joint transaction covered by the rule may be 
consummated unless the SEC issues an order upon application. In passing 
upon such applications, the SEC considers whether participation by a 
registered investment company is consistent with the provisions, 
policies, and purposes of the Act, and is not on a basis less 
advantageous than that of other participants.
    5. Because the CIF may be viewed as acting as principal in the 
proposed transactions and because the CIF and the Funds may be viewed 
as being under the common control of U.S. Trust within the meaning of 
section 2(a)(3)(C) of the Act, the proposed transactions may be subject 
to the prohibitions contained in section 17(a). For the same reasons, 
the proposed transactions might be deemed to be a joint enterprise or 
other joint arrangement prohibited by section 17(d) and rule 17d-1.
    6. Applicants request an order under sections 6(c) and 17(b) 
granting an exemption from section 17(a), and pursuant to section 17(d) 
and rule 17d-1. Applicants submit that the terms of the proposed 
transactions, as set forth above, satisfy the standards for an 
exemption set forth in sections 6(c) and 17(b) and rule 17d-1.
    7. Applicants believe that the proposed transactions will be on 
terms that are reasonable and fair, and do not involve overreaching on 
the part of any person. The proposed transactions will comply with rule 
17a-7 (b)-(f) under the Act, and also will comply with the policy 
behind the conditions set forth in rule 17a-8. Applicants assert that 
the fact that the proposed transactions are designed as in-kind 
transfers does not negatively affect their fairness. Indeed, if the 
proposed transactions were effected in cash, the Plans would have to 
sell their securities, thereby incurring brokerage commissions or the 
adverse effects of mark-downs. Similarly, following the Plans' 
investment in the Fund, the Fund would purchase similar securities in 
the market, causing a second round of brokerage commissions and the 
adverse effects of mark-ups. In addition, because time could elapse 
between the sale of Plan securities and the repurchase of similar 
securities, no assurance could be given that the Funds would be able to 
purchase those securities at the price for which Plan securities had 
been sold. In contrast, the proposed transactions would not expose the 
Plans' assets to transaction costs or timing risk.
    8. Applicants contend that the requested exemptive relief also 
would be consistent with the purposes intended by the policies and 
provisions of the Act. Applicants believe that the proposed 
transactions do not give rise to the abuses that sections 17 (a) and 
(d) and rule 17d-1 were designed to prevent. A primary purpose 
underlying sections 17 (a) and (d) and rule 17d-1 is to prevent a 
person with a pecuniary interest in a transaction from using his or her 
position with a registered

[[Page 13906]]
investment company to benefit himself or herself to the detriment of 
the company's shareholders. After the proposed transactions, each 
Affiliated Plan will be a shareholder in a Portfolio with substantially 
similar investment objectives to the CIF Portfolio from which their 
assets were transferred. In this sense, the proposed transactions can 
be viewed as a change in the form in which assets are held, rather than 
as a disposition giving rise to section 17 concerns. Moreover, any 
transfer will be subject to extensive review and evaluation by 
independent fiduciaries whose actions are governed by ERISA and by the 
disinterested members of the board of directors (trustees) of the 
Funds. For these reasons, the participation will not be on a basis 
different from or less advantageous than that of other participants for 
purposes of rule 17d-1.
    9. Applicants submit that the proposed transactions meet the 
section 6(c) standards for relief as necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policies and provisions of the Act. 
Shares of the Funds issued as part of the proposed transactions will be 
issued at prices equal to their net asset values. In addition, the 
assets of the Affiliated Plans will be valued pursuant to objective 
standards and are the type that the Portfolios otherwise would purchase 
through market transactions. Furthermore, the proposed transactions are 
subject to independent fiduciary approval. Therefore, the transfers 
will afford no opportunity for affiliated persons of the Funds to 
effect a transaction detrimental to the Affiliated Plans or to the 
other shareholders of the Funds.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The purchase transactions will comply with the provisions of 
rules 17a-7(b)-(f).
    2. The purchase transactions will not occur unless and until: (a) 
the boards of directors (trustees) of the Funds (including a majority 
of their disinterested members) and the Committee and the Affiliated 
Plans' independent fiduciaries find that the proposed transactions are 
in the best interest of the Funds and the Affiliated Plans, 
respectively; and (b) the boards of directors (trustees) of the Funds 
(including a majority of their disinterested members) find that the 
interests of the existing shareholders of the Funds will not be diluted 
as a result of the proposed transactions. These determinations and the 
basis on which they are made will be recorded fully in the records of 
the Funds and the Plans, respectively.
    3. In order to comply with the policies underlying rule 17a-8, any 
conversion will have to be approved by the board of directors 
(trustees) of the Funds and any Affiliated Plan's independent 
fiduciaries who would be required to find that the interests of 
beneficial owners would not be diluted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-7543 Filed 3-27-96; 8:45 am]
BILLING CODE 8010-01-M