[Federal Register Volume 61, Number 71 (Thursday, April 11, 1996)]
[Notices]
[Pages 16147-16149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9020]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21874; 812-9878]
Qualivest Funds, et al.; Notice of Application
April 5, 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: Qualivest Funds (the ``Trust''); Qualivest Capital
Management, Inc. (``QCM''); and BISYS Fund Services (``BISYS'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
from section 12(d)(1) of the Act and under sections 6(c) and 17(b) of
the Act from section 17(a) of the Act.
SUMMARY OF APPLICATION: The order would permit series of the Qualivest
Funds to operate as ``funds of funds'' by
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investing substantially all of their assets in other series of
Qualivest Funds.
FILING DATES: The application was filed on December 8, 1995 and amended
on March 1, 1996. Applicants have agreed to file an amendment, the
substance of which is incorporated herein, 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 30, 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, 3435 Stelzer Road, Columbus, Ohio 43219.
FOR FURTHER INFORMATION CONTACT: David W. Grim, Staff Attorney, at
(202) 942-0571, or David M. Goldenberg, 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 a registered open-end management investment company
organized as a Massachusetts business trust with several series. The
Trust intends to establish four new series, which are referred to
herein as the ``Parent Funds.'' The Trust currently has thirteen
existing series. The existing series, along with each open-end
management investment company or series thereof to be organized in the
future and which is advised by, or to be advised in the future by, QCM,
are referred to herein as the ``Underlying Funds.''
2. QCM, the adviser to the Funds, is an Oregon corporation and is
registered as an investment adviser under the Investment Advisers Act
of 1940. QCM is an affiliate of United States National Bank of Oregon,
which is a wholly owned subsidiary of U.S. Bancorp. BISYS is the
administrator for each of the Funds, and also acts as the principal
underwriter and distributor for the Funds.
3. Each Underlying Fund offers multiple classes of shares. One of
these classes of shares, Class Y shares, is sold to certain
institutional investors and bank trust departments, is not subject to a
sales load, and does not bear distribution or servicing expenses under
a 12b-1 plan. Each Parent Fund will offer three separate classes of
shares.
4. The Parent Funds are designed to allow investors to diversify
their investments among a number of mutual funds. Each Parent Fund,
pursuant to its investment objective, will invest exclusively (except
for short-term money market instruments) in Class Y shares of the
Underlying Funds and will allocate its assets among such funds in
accordance with predetermined percentage ranges. The permissible
ranges, as well as the identity of the Underlying Funds, are non-
fundamental policies of each Parent Fund and may be changed by the
Parent Fund's board of trustees. As new series of the Trust are
established in the future, it is anticipated that the board of trustees
of one or more of the Parent Funds will authorize investment in shares
of such new Underlying Fund.
5. The Parent Funds are structured so as to avoid unnecessary
duplication or layering of fees and expenses. QCM will provide advisory
services to each of the Parent Funds for an annual fee equal to 0.05%
of each Parent Fund's average daily net assets. These advisory services
will consist primarily of asset allocation services, and the fees
charged will be for services that are provided in addition to, rather
than in duplication of, the services provided to the Underlying Funds.
Applicants' Legal Analysis
A. Section 12(d)(1)
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. Section 12(d)(1)(B) provides that no registered
open-end investment company may sell its securities to another
investment company if the sale would cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
would cause more than 10% of the acquired company's voting stock to be
owned by investment companies.
2. Section 6(c) provides that the SEC may exempt persons or
transactions if, and 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. Applicants request an order under section 6(c)
exempting them from section 12(d)(1) to permit the Parent Funds to
invest in the Underlying Funds in excess of the percentage limitations
of section 12(d)(1).
3. Section 12(d)(1) was intended to mitigate or eliminate actual or
potential abuses that might arise when an investment company acquires
shares of another investment company. These abuses include the
acquiring fund imposing undue influence over the management of the
acquired funds through the threat of large-scale redemptions, the
acquisition by the acquiring company of voting control of the acquired
company, the layering of sales charges, advisory fees, and
administrative costs, and the creation of a complex pyramidal structure
which may be confusing to investors.
4. Applicants believe that none of these potential or actual abuses
are present in their proposed fund of funds structure. Applicants state
that there is no basis for the concern that the Parent Funds would
exercise influence over the management of the Underlying Funds by the
threat of redemptions. Because the Parent Funds will acquire only
shares of Underlying Funds, a redemption from one Underlying Fund will
simply lead to the placing of the proceeds into another Underlying
Fund. Further, the concern that shareholder redemption requests may
frequently require a larger scale redemption is minimal. The Parent
Funds are designed for persons investing for retirement and other long-
term investment purposes. Also, the diversification of the Parent Funds
lessens the need for investors to exchange between and among Qualivest
Funds, which effectively decreases the rate of redemptions. Applicants
also assert that the Parent Funds will pose no threat of excessive
voting control over the Underlying Funds.
5. Applicants state that the proposed fund of funds structure
contains no layering of sales charges, advisory fees, or administrative
costs. Class A and Class C shares of the Parent Funds will be sold
subject, respectively, to a front-end sales load and a CDSC. However,
layering of sales charges will be avoided because the Parent Funds will
invest
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only in the Class Y shares of the Underlying Funds, which are not
subject to a sales load. Similarly, both the Parent Funds and the
Underlying Funds have adopted rule 12b-1 fees for Class A and Class C
shares. Again, however, layering of distribution fees will be avoided
because the Parent Funds will invest only in Class Y shares of the
Underlying Funds, which do not bear any distribution expenses under the
12b-1 plans.
6. QCM will charge an annual advisory fee of 0.05% of each Parent
Fund's average daily net assets. Applicants state that this advisory
fee is based entirely on services that are provided in addition to,
rather than duplicative of, the services provided pursuant to an
Underlying Fund's advisory contract. Moreover, before approving any
advisory contract under section 15 of the Act, the board of trustees of
each Parent Fund, including a majority of the trustees who are not
``interested persons,'' as defined in section 2(a)(19) (``Independent
Trustees''), will have found 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. Applicants assert that layering of advisory
fees will therefore be avoided.
7. Applicants state that shareholder servicing costs, such as costs
for transfer agency functions as well as printing and mailing
prospectuses, shareholders reports, and proxies, will be borne by
investors at the Parent Fund level. Layering will be avoided, however,
because the shareholder servicing costs at the Underlying Fund level
associated with the single account of a Parent Fund will be minimal.
Certain non-shareholder servicing administrative expenses (e.g.,
custodial, accounting, auditing, legal, and trustee fees) will
necessarily be incurred by both the Parent Funds and the Underlying
Funds. BISYS, as administrator of each of the Parent Funds, will be
responsible for providing these services, or arranging for these
services to be provided, to the Parent Funds. These duplicative
expenses are expected to be minimal, are expected to be substantially
offset by the reduction in shareholder servicing costs for the
Underlying Funds, and do not raise the same concerns as the fund or
funds structures Congress sought to limit in enacting section 12(d)(1).
Further, applicants have agreed that any sales charges or service fees
charged with respect to the Parent Funds, including those paid by the
Parent Fund with respect to securities of the Underlying Funds, will
not exceed the limits set forth in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. (``NASD'').
B. Section 17(a)
1. Section 17(a) makes it unlawful for an affiliated person of a
registered investment company, or any affiliated person of such person,
to sell securities to, or purchase securities from, the company. The
Parent Funds and the Underlying Funds may be considered affiliated
persons because they are each advised by QCM. An Underlying Fund's
issuance of its shares to a Parent Fund may be considered a sale
prohibited by section 17(a).
2. 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. Applicants request an exemption under sections 6(c) and 17(b) to
permit the Underlying Funds to sell their shares to the Parent
Funds.\1\ Applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b).
\1\ Section 17(b) applies to specific proposed transactions,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c)
frequently is used to grant relief from section 17(a) to permit an
ongoing series of future transactions.
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Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Parent Funds and each Underlying Fund will be part of the
same ``group of investment companies'' as defined in rule 11a-3 under
the Act.
2. No Underlying Fund shall 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 each Parent Fund will be
Independent Trustees.
4. Before approving any advisory contract under section 15 of the
Act, the board of trustees of each Parent Fund, including the
Independent Trustees, shall find 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
Parent Fund.
5. Any sales charges or service fees charged with respect to
securities of any Parent Fund, when aggregated with any sales charges
or service fees paid by the Parent Fund with respect to shares of the
Underlying Funds, shall not exceed the limits set forth in Article III,
section 26, of the Rules of Fair Practice of the NASD.
6. The 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 Parent
Fund and each of its Underlying Funds; monthly purchases and
redemptions (other than by exchange) for each Parent Fund and each of
its Underlying Funds; monthly exchanges into and out of each Parent
Fund and each of its Underlying Funds; month-end allocations of each
Parent Fund's assets among its Underlying Funds; annual expense ratios
for each Parent Fund and each of its Underlying Funds; and a
description of any vote taken by the shareholders of any Underlying
Fund, including a statement of the percentage of votes cast for and
against the proposal by the Parent Funds and by the other shareholders
of the Underlying Funds. Such information will be provided as soon as
reasonably practicable following each fiscal year-end of the Parent
Funds (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,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9020 Filed 4-10-96; 8:45 am]
BILLING CODE 8010-01-M