[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43278-43280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21321]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. IC-22145; 812-10138]


GE Investment Management Incorporated, et al.; Notice of 
Application

August 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (``Act'').

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APPLICANTS: GE Investment Management Incorporated (``GEIM''); GE 
Investment Services Inc. (``GEIS'') and GE Funds, on behalf of 
themselves and each open-end management investment company, or series 
thereof, that is or will be part of a group of investment companies 
that holds itself out to investors as related companies for purposes of 
investment and investor services (a) for which GEIM or any entity 
controlled by or under common control with GEIM now or in the future 
acts as investment adviser, or (b) for which GEIS or any entity 
controlling, controlled by or under common control with GEIS now or in 
the future acts as distributor (collectively, with the GE Funds, the 
``GE Family Funds'' or the ``Funds'').\1\

    \1\ GE Funds is the only existing GE Family Fund that currently 
intends to rely on the requested order. Other existing GE Family 
Funds do not presently intend to rely on the requested order, but 
may do so in the future in accordance with the terms thereof.
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RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from section 12(d)(1) of the Act, and under section 
6(c) and 17(b) of the Act for an exemption from section 17(a) of the 
Act.

SUMMARY OF APPLICATION: The requested order would permit applicants to 
create a ``fund of funds,'' whereby the series of GE LifeStyle Funds 
(``LifeStyle'') would allocate substantially all of their assets among 
the series of the GE Funds.

FILING DATES: The application was filed on May 8, 1996, and amended on 
August 9, 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 September 9, 
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 who wish to 
be notified of a hearing may request such notification by writing to 
the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 3003 Summer Street, Stamford, Connecticut 06905.

FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Counsel, at (202) 942-0583, 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. GE Funds, a Massachusetts business trust, is registered under 
the Act as an open-end management investment company. GE Funds consists 
of eleven series, eight of which are offered currently.
    2. GEIM, a Delaware corporation that is registered as an investment 
adviser under the Investment Advisers Act of 1940, acts as investment 
adviser and administrator to the existing series of GE Funds. GEIM is a 
wholly-owned subsidiary of General Electric Company, a publicly-held 
holding company. GEIS is the distributor of the GE Family Funds.
    3. LifeStyle is organized as a Massachusetts business trust. 
LifeStyle will be registered under the Act as a non-diversified, open-
end management investment company, and will operate as a ``fund of 
funds.'' GEIM will serve as investment adviser to LifeStyle. Initially, 
LifeStyle will consist of six series (the ``Investing Funds''): GE 
Conservative Strategy Fund, GE Moderate Strategy Fund, and GE 
Aggressive Strategy Fund (collectively, the ``Strategy Funds''), and GE 
Conservative Allocation Fund, GE Moderate Allocation Fund, and GE 
Aggressive Allocation Fund (collectively, the ``Allocation Funds''). 
The Strategy Funds will not charge any rule 12b-1 fees, but will impose 
either a front-end sales charge of up to 4.75% or, for purchases in 
excess of $1 million not subject to the front-end sales charge, a 
contingent deferred sales charge of up to 1% on shares held for less 
than one year. The Allocation Funds initially will be sold without a 
front-end or deferred sales charge, and will not charge any rule 12b-1 
fees.
    4. Substantially all of the assets of the Investing Funds will be 
invested in shares of any GE Family Fund that is not itself an 
Investing Fund (a ``Portfolio Fund''). The Portfolio Funds initially 
will consist of the following series of GE Funds: GE U.S. Equity Fund, 
GE International Equity Fund, GE Fixed Income Fund, GE Short-Term 
Government Fund, and, potentially, GE Money Market Fund. Other GE 
Family Funds may be added as Portfolio Funds in the future. The 
Strategy Funds will invest in Class A shares of the Portfolio Funds, 
which generally are offered with a front-end sales charge and are 
subject to service and distribution fees at a combined annual rate of 
.50% of the average net asset value attributable to the class. The 
Allocation Funds will invest in Class D shares of the Portfolio Funds, 
which are offered without a sales charge or rule 12b-1 fees. Neither 
the Strategy Funds nor the Allocation Funds will pay initial sales 
charges in connection with the Investing Funds' investments and 
holdings in Portfolio Fund shares.
    5. Subject to the supervision and direction of LifeStyle's board of 
trustees, allocations of the assets of each Investing Fund among shares 
of the Portfolio Funds will be made in accordance with the investment 
objective of the Fund. Subsequent allocations of these assets will be 
made, consistent with quantitative and other market and economic 
analyses developed by GEIM in its role as investment adviser to 
LifeStyle. It is contemplated that GEIM will engage an investment 
advisory firm to consult periodically with the board of trustees 
concerning changes to: (a) the Portfolio Funds in which the Investing 
Funds may invest; (b) the percentage range of assets that may be 
invested by each Investing Fund in any one Portfolio Fund; and (c) the 
percentage range of

[[Page 43279]]

assets that may be invested by each Investing Fund in equity funds and 
fixed-income funds. Any such agreement will be subject to section 15(a) 
of the Act and condition 4 below.
    6. In general, the only direct expenses (other than portfolio 
brokerage expenses associated with short-term investment of cash, if 
any) payable by the Investing Funds will be the advisory and 
administration fee to be charged by GEIM, which may be waived 
initially, and certain operating expenses. Although GEIM would also 
earn advisory and administration fees arising by virtue of its 
investment advisory and administration contracts with the Portfolio 
Funds, these fees would not be duplicative of any fee charged directly 
to the Investing Funds. Although shareholders of each Investing Fund 
would indirectly pay their proportional share of the advisory and 
administration fees charged to the relevant Portfolio Fund(s), any 
advisory fee charged at the level of the Investing Funds would 
compensate GEIM for services unique to the Investing Funds and not 
provided at the level of the Portfolio Funds.

Applicants' Legal Analysis

A. Section 12(d)(1)

    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 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 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, 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) (A) and 
(B) to permit each Investing Fund to invest in shares of any Portfolio 
Fund in excess of the percentage limitations of section 12(d)(1).
    3. Section 12(d) was intended to prevent unregulated pyramiding of 
investment companies and the negative effects that were perceived to 
arise from such pyramiding. Applicants assert that, in contrast to the 
funds of funds of a previous era, the Investing Funds present no threat 
to the integrity of any other mutual fund and no irreconcilable 
conflicts of interest. They are, rather, a straightforward, sensible, 
cost-effective response to investor demand for simplification and 
diversification. Applicants believe that the fund of funds structure 
will enhance the advantages of diversification because fund managers 
will be able to draw on a wider range of specialized expertise in 
different market areas. Each Investing Fund will allow investors to 
rely on GEIM to determine the portion of the assets of each Investing 
Fund to be invested in each of several Portfolio Funds and the timing 
of such investments. In addition, each Investing Fund will generate 
benefits for the Portfolio Funds in which it invests by providing 
additional assets with which to generate economies of scale.
    4. Applicants assert that the advisory fees charged to the 
Investing Funds and the Portfolio Funds would not be duplicative. If 
GEIM determines to increase any advisory fee borne by an Investing 
Fund, such fees will conform to the requirements of the conditions to 
the requested order, including the requirement for approval by the 
trustees who are not ``interested persons'' of the Investing Fund as 
that term is defined in section 2(a)(19) of the Act (the ``Independent 
Trustees''). This requirement is designed to ensure that any advisory 
fee borne by an Investing Fund would be for services that augment, 
rather than duplicate, those advisory services provided to the 
Portfolio Funds. In addition, any investment consulting fee paid to an 
investment advisory firm engaged by GEIM will be paid by GEIM out of 
its advisory and administrative fee and, consequently, will have no 
effect on shareholders of the Investing Funds.
    5. Applicants also assert that their proposal does not present any 
danger of excessive sales loads. The fact that there may be a payment 
of sales charges or service fees at both the Investing Fund and 
Portfolio Fund level will not permit any excessive or duplicative 
sales-related charges. If the sales charge structure described in the 
application is varied in the future, it will be done only in conformity 
with the NASD's restrictions on aggregate sales charges and service 
fees. Further, the Investing Funds would pay no sales charges with 
respect to their investments in the Portfolio Funds, unless such 
charges had been reviewed and approved by the Investing Fund's 
Independent Trustees.
    6. Applicants believe that the Investing Funds would pose no threat 
of excessive control over the Portfolio Funds. Applicants state that 
redemption threats and the concomitant risk of lost advisory fees would 
not apply in the context of a fund of funds, all of which belong to the 
same family of investment companies. The Investing Funds will be 
internal funds that will acquire only shares of other GE Family 
Funds.\2\ Because GEIM affiliates are the advisers to the GE Family 
funds and GEIM will be the adviser to the Investing Funds, a redemption 
from one GE Family Fund will simply lead to the placing of the proceeds 
into another GE Family Fund. As no Portfolio Fund will be permitted to 
invest in securities of any other investment company in excess of the 
limits contained in section 12(d)(1)(A) of the Act except as permitted 
under the Sweep Application order, there cannot be a ``fund of funds of 
funds'' structure under the terms of the application. For these 
reasons, applicants submit that the requested order exempting 
applicants from section 12(d)(1) to the extent described in the 
application meets the standards of section 6(c).
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    \2\ Applicants, with other parties, have filed a separate 
application seeking relief from the provisions of section 12(d)(1) 
of the Act (The G.E. Funds, File No. 812-9838) (the ``Sweep 
Application''). If the relief requested in the Sweep Application is 
granted, the applicant funds would be able to invest excess cash in 
excess of the limits in section 12(d)(1) in an affiliated fund that 
would be excluded from the definition of an investment company under 
section 3(c)(1) of the Act.
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B. Section 17(a)

    1. Section 17(a) of the Act makes it unlawful for an affiliated 
person of a registered investment company, or an affiliated person of 
such person, to sell securities to, or purchase securities from, the 
company. Because the Investing Funds and the Portfolio Funds are each 
advised by GEIM, the Investing Funds and the Portfolio Funds may be 
considered ``affiliated persons'' of each other, as defined in section 
2(a)(3). Thus, purchases by the Investing Funds of the shares of the 
Portfolio Funds and the sale by the Portfolio Funds of their shares to 
the Investing Funds could be deemed to be principal transactions 
between affiliated persons under 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

[[Page 43280]]

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 sale of shares of the Portfolio 
Funds to the Investing Funds.\3\ Applicants believe that the proposed 
transactions meet the standards of sections 6(c) and 17(b).
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    \3\ 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 any order granting the requested relief shall 
be subject to the following conditions:
    1. The Investing Funds and the Portfolio Funds will be part of the 
same ``group of investment companies,'' as defined in paragraph (a)(5) 
of rule 11a-3 under the Act.
    2. No Portfolio Fund in which an Investing Fund invests shall 
acquire securities of any other investment company in excess of the 
limits contained in section 12(d)(1)(A) of the Act, except as permitted 
under the Sweep Application order.
    3. At least a majority of the trustees of LifeStyle will be 
Independent Trustees, and the selection of the Independent Trustees 
necessary to fill any vacancies on the board of trustees, as well as 
the nomination of those persons to be recommended by the board of 
trustees in connection with any shareholder vote, will be committed to 
the discretion of such Independent Trustees.
    4. Prior to approving any advisory contract of an Investing Fund 
under section 15 of the Act, the trustees of LifeStyle, including a 
majority of the Independent Trustees, shall find that any advisory fees 
charged under such contract are based on services that will be in 
addition to, rather than duplicative of, the services provided under 
the advisory contract of any Portfolio Fund in which the Investing Fund 
may invest. These findings and their basis will be recorded fully in 
the minute book of LifeStyle.
    5. Any sales charges or service fees, as such terms are defined 
under rule 2830(b) of the NASD Rules of Conduct,\4\ as may be charged 
with respect to securities of an Investing Fund, when aggregated with 
any such sales charges or service fees borne by the Investing Fund with 
respect to the shares of a Portfolio Fund, shall not exceed the limits 
set forth in rule 2830(d) of the NASD Rules of Conduct.
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    \4\ The staff notes that, until recently, rule 2830 of the NASD 
Rules of Conduct was section 26 of Article III of the NASD Rules of 
Fair Practice.
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    6. Applicants will provide the following information in electronic 
format to the Chief Financial Analyst of the SEC's Division of 
Investment Management as soon as reasonably practicable following each 
fiscal year-end of each Investing Fund, unless the Chief Financial 
Analyst notifies applicants that the information need no longer be 
submitted: (a) monthly average total assets for each Investing Fund and 
each Portfolio Fund in which an Investing Fund invests; (b) monthly 
purchases and redemptions (other than by exchange) for each Investing 
Fund and each Portfolio Fund in which an Investing Fund invests; (c) 
monthly exchanges into and out of each Investing Fund and each 
Portfolio Fund in which an Investing Fund invests; (d) month-end 
allocations of each Investing Fund's assets among the Portfolio Funds 
in which it invests; (e) annual expense ratios for each Investing Fund 
and each Portfolio Fund in which an Investing Fund invests; and (f) a 
description of any vote taken by the shareholders of any Portfolio Fund 
in which an Investing Fund invests, including a statement of the 
percentage of votes cast for and against the proposal by the Investing 
Fund and by the other shareholders of that Portfolio Fund.
    7. Substantially all of the assets of each Investing Fund will be 
invested in shares of Portfolio Funds. Each Investing Fund will not 
hold any investment securities other than shares of Portfolio Funds and 
money market instruments.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21321 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M