[Federal Register Volume 61, Number 151 (Monday, August 5, 1996)]
[Notices]
[Pages 40683-40685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19838]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-2111; 812-9760]
The Pilot Funds, et al.; Notice of Application
July 30, 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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[[Page 40684]]
APPLICANTS: The Pilot Funds, Boatmen's Trust Company (``Boatmen's''),
and Kleinwort Benson Investment Management Americas Inc. (``Kleinwort
Benson'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) for an
exemption from sections 12(d)(1)(A) and 12(d)(1)(B), under sections
6(c) and 17(b) for an exemption from section 17(a), and under section
17(d) and rule 17d-1 thereunder permitting certain joint transactions.
SUMMARY OF APPLICATION: Applicants request an order that would permit
certain investment companies to purchase shares of affiliated money
market funds in excess of the limits prescribed in section 12(d)(1).
FILING DATES: The application was filed on September 12, 1995 and
amended on March 22, 1996, on May 31, 1996, and on July 25, 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 26, 1996
and should be accompanied by proof of service on the 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, N.W., Washington, D.C.
20549. Applicants, Pilot Funds, 125 West 55th Street, New York, New
York 10019; Boatmen's, 100 North Broadway, St. Louis, Missouri 63178.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, or Robert A.
Robertson, 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 Pilot Funds is an open-end management investment company
that currently offers fourteen series (each, a ``Pilot Fund''). Four of
the Pilot Funds are money market funds subject to the requirements of
rule 2a-7 under the Act (together with any future money market funds,
the ``Money Market Funds''). The other ten Pilot Funds are non-money
market funds (together with any future non-money market funds, the
``Non-Money Market Funds''). Applicants request relief on behalf of the
Pilot Funds and any other registered investment companies that now or
in the future are advised by Boatmen's (collectively, the
``Funds'').\1\
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\1\ All existing investment companies that presently intend to
rely on the requested order are named as applicants.
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2. Boatmen's serves as investment adviser for each Pilot Fund.
Kleinwort Benson serves as sub-investment adviser for the Pilot
International Equity Fund (together with Boatmen's and any entity
controlling, controlled by, or under common control with Boatmen's,
Kleinwort Benson, and any future sub-investment adviser to a Fund, the
``Investment Advisers''). Pilot Funds Distributors Inc. serves as
distributor for each Fund. BISYS Fund Services Limited Partnership
serves as administrator for each fund.
3. The Money Market Funds seek current income and liquidity
consistent with the preservation of capital by investing exclusively in
short-term money market instruments. The Non-Money Market Funds invest
in a variety of debt and/or equity securities in accordance with their
respective investment objectives and policies. Each of the Funds has,
or may be expected to have, uninvested cash in an account with the
custodian. This cash either may be invested directly in individual
short-term money market instruments or may not be invested in any
portfolio securities.
4. Applicants request an order that would permit (a) each of the
Funds to utilize cash reserves that have not been invested in portfolio
securities to purchase shares of one or more of the Money Market Funds
(each such Fund purchasing shares of the Money Market Funds is an
``Investing Fund'') and (b) each Money Market Fund to sell shares to,
and redeem such shares from, an Investing Fund. By investing cash
balances in the Money Market Funds as proposed, applicants believe that
the Investing Funds will be able to reduce their transaction costs,
create more liquidity, enjoy greater returns, and further diversify
their holdings.
Applicants' Legal Analysis
1. Section 12(d)(1)(A) of the Act 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 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 will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies.
2. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions from any provision of the Act if the 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. Applicants' request would permit the Investing Funds to use
uninvested cash to acquire shares of a Money Market Fund in excess of
the percentage limitations set out in section 12(d)(1)(A). Applicants
proposed that each Investing Fund be permitted to invest in shares of a
Money Market Fund so long as each Fund's aggregate investment in such
Money Market Fund does not exceed 25% of the Investing Fund's total net
assets. Applicants' request also would permit the Money Market Funds to
sell their securities to an Investing Fund in excess of the percentage
limitations set out in section 12(d)(1)(B).
4. The restrictions in section 12(d)(1) were intended to prevent
certain abuses perceived to be associated with the pyramiding of
investment companies, including: (a) undue influence by the fund
holding company over its underlying funds; (b) the threat of large
scale redemptions of the securities of the underlying investment
companies; (c) unnecessary duplication of costs, e.g., sales loads,
advisory fees, and administrative costs; and (d) unnecessary
complexity. For the following reasons, applicants believe that the
proposed arrangement does not entail the type of abuse that Congress
adopted section 12(d) to prevent.
5. Applicants represent that the proposed arrangement would contain
no improper layering of fees. The shareholders of the Investing Funds
would not be subject to the imposition of double management fees.
Before approving any advisory contract, the Investing Fund's board of
trustees,
[[Page 40685]]
including a majority of the trustees who are not ``interested
persons,'' as defined in section 2(a)(19) of the Act, will consider to
what extent the advisory fees charged to the Investing Fund should be
reduced to account for the reduction of these services as a result of a
portion of the assets of the Investing Fund being invested in the Money
Market Fund. Further, no sales load, redemption fee, distribution fee,
or service fee will be charged by the Money Market Funds with respect
to the purchase or redemption of the Money Market Fund shares. If a
Money Market Fund offers more than one class of shares, each Investing
Fund will invest only in the class with the lowest expense ratio at the
time of investment.
6. Sections 17(a)(1) and (2) make it unlawful for any affiliated
person of a registered investment company, acting as principal, to sell
or purchase any security to or from such investment company. Because
each Fund may be deemed to be under common control with the other
Funds, it may be an ``affiliated person,'' as defined in section
2(a)(3) of the Act, of the other Funds. Accordingly, the sale of shares
of the Money Market Funds to the Investing Funds, and the redemption of
such shares from the Investing Funds, would be prohibited under section
17(a).
7. Section 17(b) authorizes the SEC to exempt a transaction from
section 17(a) if the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching on the part of any person concerned, the
proposed transaction is consistent with the policy of each investment
company concerned, and the proposed transaction is consistent with the
general purposes of the Act. Applicants request an exemption under
sections 6(c) and 17(b) to permit the Investing Funds to purchase
shares of a Money Market Fund, and a Money Market Fund to redeem such
shares.\2\
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\2\ Section 17(b) applies to a specific proposed transaction,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c), along
with section 17(b), frequently are used to grant relief from section
17(a) to permit an ongoing series of future transactions.
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8. The Investing Funds will retain their ability to invest their
cash balances directly in money market instruments as authorized by
their respective investment objectives and policies, if they believes
they can obtain a higher return or for any other reason. Each of the
Money Market Funds has the right to discontinue selling shares to any
of the Investing Funds if its board of trustees determines that such
sales would adversely affect the Money Market Fund's portfolio
management and operations. Therefore, applicants believe that the
proposal satisfies the standareds for relief in sections 6(c) and
17(b).
9. Section 17(d) and rule 17d-1 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. Each
Investing Fund, by purchasing shares of the Money Market Funds, each
Investment Adviser of an investing Fund, by managing the assets of the
Investing Funds invested in the Money Market Funds, and each Money
Market Fund, by selling shares to the Investing Funds, could be
participants in a joint enterprise or other joint arrangement within
the meaning of section 17(d) and rule 17d-1.
10. In passing upon applications submitted pursuant to section
17(d) and rule 17d-1, the SEC will consider whether the participation
of such registered or controlled company in such joint enterprise,
joint arrangement or profit-sharing plan on the basis proposed is
consistent with the provisions, policies, and purposes of the Act, and
the extent to which such participation is on a basis different from or
less advantageous than that of other participants. Applicants believe
that the proposal satisfies these standards.
Applicants Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. Shares of the Money Market Funds sold to and redeemed from the
Investing Funds will not be subject to a sales load, redemption fee,
distribution fee under a plan adopted in accordance with rule 12b-1
under the Act, or service fee (as defined in section 26(b)(9) of the
NASDd Rules of Fair Practice).
2. Before the next meeting of the board of trustees of an Investing
Fund is held for the purpose of voting on an advisory contract under
section 15 of the Act, the Investment Adviser to the Investing Fund
will provide the board of trustees with specific information regarding
the approximate cost to the Investment Adviser for, or portion of the
advisory fee under the existing advisory fee attributable to, managing
the assets of the Investing Fund that can be expected to be invested in
the Money Market Fund. Before approving any advisory contract under
section 15 of the Act, the board of trustees of the Investing Fund,
including a majority of the trustees who are not ``interested
persons,'' as defined in section 2(a)(19) of the Act, shall consider to
what extent, if any, the advisory fees charged to the Investing Fund by
the Investment Adviser should be reduced to account for the reduction
of these services to the Fund by the Investment Adviser under the
advisory contract as a result of a portion of the assets of the Fund
being invested in the Money Market Fund. The minute books of the
Investing Fund will record fully the board's consideration in approving
the advisory contract, including the consideration relating to fees
referred to above.
3. Each Investing Fund will invest uninvested cash in, and hold
shares of, the Money Market Funds only to the extent that the Investing
Fund's aggregate investment in the Money Market Funds does not exceed
25% of the Investing Fund's total net assets.
4. Investment in shares of the Money Market Funds will be in
accordance with each investing Fund's respective investment
restrictions, if any, and will be consistent with each Investing Fund's
policies as set forth in its prospectuses and statements of additional
information.
5. Each Investing Fund, each Money Market Fund, and any future fund
that may rely on the order shall be advised by the Investment Adviser,
or a person controlling, controlled by, or under common control with
the Investment Adviser.
6. No Money Market Fund shall acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act.
7. A majority of the directors of an Investing Fund will not be
``interested persons,'' as defined in section 2(a)(19) of the Act.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19838 Filed 8-2-96; 8:45 am]
BILLING CODE 8010-01-M