[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