[Federal Register Volume 61, Number 149 (Thursday, August 1, 1996)] [Notices] [Pages 40263-40266] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-19567] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Rel. No. IC-22104; 812-9100] Scudder Global Fund, Inc., et al; Notice of Application July 26, 1996. AGENCY: Securities and Exchange Commission (``SEC''). ACTION: Notice of application for exemption under the Investment Company Act of 1940 (the ``Act''). ----------------------------------------------------------------------- SUMMARY: Scudder Global Fund, Inc., Scudder International Fund, Inc., Scudder Mutual Funds, Inc., Scudder Equity Trust, Scudder Investment Trust, Scudder Funds Trust, Scudder Portfolio Trust, Scudder Securities Trust, Scudder GNMA Fund, Scudder Cash Investment Trust, Scudder Pathway Series (``Pathway Series,'' collectively the foregoing are the ``Scudder Funds''), Scudder, Stevens & Clark, Inc. (``SSC''), Scudder Service Corporation (``Scudder Service''), Scudder Investor Services, Inc. (``SIS''), Scudder Trust Company [[Page 40264]] (``STC''), and Scudder Fund Accounting Corporation (``SFAC''), and Scudder Fund Accounting Corporation (``SFAC''). RELEVANT ACT SECTIONS: Order requested under section 6(c) to exempt the applicants from sections 12(d)(1) (A) and (B), sections 6(c) and 17(b) to exempt applicants from section 17(a), and rule 17d-1 under the Act to permit certain joint transactions. SUMMARY OF APPLICATION: The requested order would permit the Pathway Series to operate as a ``fund of funds.'' FILING DATES: The application was filed on October 24, 1994, and amended on January 27, 1995, June 6, 1996, and July 24, 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 August 22, 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 5th Street, NW., Washington, DC 20549. Applicants: Scudder Global Fund, Inc., Scudder International Fund, Inc., and Scudder Mutual Funds, Inc., 345 Park Avenue, New York, New York 10154-0010 and Scudder Equity Trust, Scudder Investment Trust, Scudder Funds Trust, Scudder Portfolio Trust, Scudder Securities Trust, Scudder GNMA Fund, Scudder Cash Investment Trust, Pathway Series, SSC, Scudder Service, SIS, STC, and SFAC, Two International Place, Boston, Massachusetts 02110-4103. FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at (202) 942-0572, 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. Applicant's Representations 1. The Pathway Series is a registered, No-load, open-end, management investment company organized as a Massachusetts business trust. The Pathway Series will initially consist of six portfolios. Each Portfolio will invest substantially all of its assets in certain Scudder Funds (the ``Underlying Funds''). The Underlying Funds are no- load, open-end investment companies which have not adopted plans under rule 12b-1 to finance their distribution and, in some cases, are organized as series investment companies. Applicants request that the relief sought herein also apply to any future open-end management investment company or series thereof, which is advised by SSC or distributed by SIS which are part of the same group of investment companies as defined in rule 11a-3 under the Act (such funds are also the ``Scudder Funds''). 2. SSC serves as the investment adviser to each of the Scudder Funds. SIS serves as principal underwriter of the Scudder Funds. Scudder Service performs certain shareholder services for the Scudder Funds. SFAC provides fund accounting services for certain Scudder Funds. STC provides recordkeeping services with respect to certain shares of the Scudder Funds. SIS, SFAC, STC, and Scudder Service are all subsidiaries of SSC. 3. Applicants propose that, subject to the conditions to the requested order, the Pathway Series be permitted to purchase and redeem shares of the Underlying Portfolios, and that each Underlying Portfolio be permitted to sell and redeem shares from each of the Pathway Series. The Pathway Series will invest almost exclusively in shares of Underlying Funds. 4. SSC does not currently intend to charge an additional advisory fee for the Pathway Series, earning only those advisory fees accruing to the Underlying Fund holdings. As currently contemplated, the Pathway Series will be sold on a no-load basis and without rule 12b-1 fees, although the Pathway Series and the Underlying Funds may charge sales loads or service fees in the future. It is also currently contemplated that all other expenses (shareholder servicing, legal, accounting, etc.) will be paid for in accordance with a special servicing agreement (``Agreement'') to be entered into between SSC, SIS, Scudder Service, STC, SFAC, the Pathway Series, and the Underlying Funds. 5. Under the Agreement, SSC will arrange for all of the services pertaining to the operation of the Pathway Series. In addition, the Agreement will provide that, if the officers of any Underlying Fund, at the direction of its board of director/trustees, determine that the aggregate expenses of the Pathway Series are less than the estimated savings to the Underlying Fund from the operation of the Pathway Series, the Underlying Fund will bear those expenses in proportion to the average daily value of its shares owned by each Pathway Series portfolio, provided that no Underlying Fund bears expenses in excess of the estimated savings to it. In the event that the aggregate financial benefits to the Underlying Funds do not exceed the costs of the Pathway Series, the Agreement will provide either that SSC or the Pathway Series will bear that portion of costs determined to be greater than the benefits. The determination of whether and the extent to which the benefits to the Underlying Funds from the organization and operation of the Pathway Series will exceed the costs to the Underlying Funds will be made based on an analysis described in the application. The board of directors/trustees for each Underlying Fund, prior to authorizing its fund to be a party to the Agreement, will review and approve this analysis, and afterwards, upon annual review of the Agreement, determine its continued appropriateness for each Underlying Fund. If the Pathway Series determines not to enter into the Agreement, it will bear its own expenses in connection with fund operations and separately contract with various service providers. Applicants' Legal Analysis 1. Applicants request an order under section 6(c) of the Act for an exemption from section 12(d)(1) of the Act, under sections 6(c) and 17(b) for an exemption from section 17(a), and pursuant to section 17(d) and rule 17d-1 under the Act to permit the Funds to enter into the Agreement, which would otherwise be prohibited by section 17(d) and rule 17d-1. The requested relief would permit the Pathway Series to acquire up to 100% of the voting shares of any Underlying Fund. 2. Section 12(d)(1)(A) of the Act would prohibit the Pathway Series from purchasing more than 3% of the outstanding voting securities of an Underlying Fund, securities issued by all Underlying Funds having an aggregate value in excess of 5% of the value of the total assets of the Pathway Series, or securities issued by the Underlying Funds and all other investment companies having an aggregate value in excess of 10% of the value of the total assets of the Pathway Series. Section 12(d)(1)(B) would prohibit the Underling Funds from selling more than 3% of their outstanding voting securities to the Pathway Series and more than 10% to [[Page 40265]] the Pathway Series and other investment companies. 3. 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 policies of the Act. For the reasons provided below, applicants argue that the requested order meets the section 6(c) standards. 4. Section 12(d)(1) is intended to prevent the pyramiding of investment companies, the layering of fees, and undue organizational complexities. Applicants state that none of these abuses associated with fund holding companies are present with respect to the proposed arrangement, and that the Pathway Series will provide the benefits of diversification and cost savings to its investors. 5. Applicants believe that the concern over potential large scale redemptions is not present in the context of the Funds. Because the Pathway Series will only acquire shares of Underlying Funds that are in the Scudder family of funds, a redemption from one Underlying Fund will simply lead to the investment of the proceeds in another Underlying Fund. Applicants also believe that the proposed arrangement will not result in disruptive redemptions because the Pathway Series will be designed for long-term investors. This will reduce the possibility of the Pathway Series being used as short-term trading vehicles and further protect the Pathway Series and the Underlying Funds from unexpected large redemptions. 6. While applicants currently do not anticipate that the Pathway Series will be subject to sales loads, distribution fees, or shareholder servicing fees, any sales charges or service fees relating to the shares of the Pathway Series will not exceed the limits set forth in Article III, section 26 of the NASD's Rules of Fair Practice, when aggregated with any sales charges or service fees that the Pathway Series may pay relating to the Underlying Portfolio shares. The aggregate sales charges at both levels, therefore, will not exceed the limit that otherwise lawfully could be charged at any single level. 7. Section 17(a) of the Act generally prohibits sales or purchases of securities between a registered investment company and any affiliated person of that company. The sale by the Underlying Funds of their shares to the Pathway Series could be deemed to be a principal transaction between affiliated persons that are prohibited under section 17(a). Because the Pathway Series and the Underlying Funds are each advised by SSC they could be deemed to be affiliates of one another. Therefore, applicants request an order to permit the Underlying Funds to sell their shares to the Pathway Series. 8. Section 17(b) permits the SEC to grant an order permitting a transaction otherwise prohibited by section 17(a) if it finds that the terms of the proposed transaction are fair and reasonable and do not involve overreaching on the part of any person concerned. Section 17(b) could be interpreted to exempt only a single transaction. However, the Commission, under section 6(c) of the Act, may exempt a series of transactions that otherwide would be prohibited by section 17(a). Applicants believe that the terms of the transactions meet the standards of sections 6(c) and 17(b). 9. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an affiliated person of an investment company, acting as principal, from participating in or effecting any transaction in connection with any joint enterprise or joint arrangement in which the investment company participates. The Agreement contemplates the Pathway Series, the Underlying Funds, and various other affiliated ``Scudder'' entities may jointly participate in an arrangement whereby the fees and expenses of operating the Pathway Series would be shared among the Underlying Funds or, in certain cases, borne by SSC. Accordingly, the arrangements contemplated by the Agreement could be viewed as constituting a ``joint or joint and several participation.'' Accordingly, applicants request relief under section 17(d) and rule 17d-1 to permit the Pathway Series to enter into the Agreement. 10. Rule 17d-1 permits the SEC to approve a proposed joint transaction. In determining whether to approve a transaction, the SEC is to consider whether the proposed transaction is consistent with the provisions, policies, and purposes of the Act, and the extent to which the participation of the investment companies is on a basis different from or less advantageous than that of the other participants. Applicants believe that the requested relief meets these standards. 11. The Pathway Series and all of the Underlying Funds will participate in the arrangement on the same, or substantially the same, basis. Under the Agreement, each Underlying Fund and all Underlying Funds in the aggregate will bear the expenses of the Pathway Series only to the extent that such expenses are less than the benefits of the Pathway Series to the Underlying Funds. The payment of Pathway Series expenses by any Underlying Fund will be subject to review and approval by that Fund's board of directors/trustees, including a majority of an Underlying Fund's independent directors/trustees. Shareholders of the Pathway Series will be on the same footing as shareholders of the Underlying Funds in that their proportionate shares of the expenses of the Underlying Funds, as paid indirectly by the Pathway Series, will be no more, or less, than the fund expenses incurred directly by shareholders of the Underlying Funds. Applicants' Conditions Applicants will abide by the following conditions to the relief requested: 1. The Pathway Series 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 the Pathway Series will not be ``interested persons,'' as defined in section 2(a)(19) of the Act (``Independent Trustees''). 4. Before approving any advisory contract under section 15, the board of trustees of the Pathway Series, including a majority of the Independent Trustees, 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 Pathway Series. 5. Any sales charges and other service fees charged with respect to securities of the Pathway Series, when aggregated with any sales charges and service fees paid by the Pathway Series with respect to securities of the Underlying Funds, shall not exceed the limits set forth in Article III, section 26, of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. 6. 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 for each Pathway portfolio and each of its Underlying Funds; monthly purchases and redemptions (other than by exchange) for each Pathway portfolio and each of its Underlying Funds; monthly exchanges into and out of each Pathway portfolio and each of its Underlying Funds; month-end [[Page 40266]] allocations of each Pathway Series portfolio's assets among its Underlying Funds; annual expense ratios for each Pathway portfolio 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 Pathway Series 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 Pathway Series (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, under delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-19567 Filed 7-31-96; 8:45 am] BILLING CODE 8010-01-M