[Federal Register Volume 61, Number 167 (Tuesday, August 27, 1996)]
[Notices]
[Pages 44094-44097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21754]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22153; 812-10122]


The One Group, et al.; Notice of Application

August 20, 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: The One Group (the ``Trust''), Banc One Investment Advisors 
Corporation (the ``Adviser''), The One Group Services Company (the 
``Distributor''), BISYS Fund Services Limited Partnership, BNY Hamilton 
Distributors, Inc., Concord Financial Group, Inc., Emerald Asset 
Management, Inc., Pilot Funds Distributors, Inc., 231 Broker-Dealer 
Services, Inc., UST Distributors, Inc., Victory Broker/Dealer Services, 
Inc., Vista Fund Distributors, Inc., Branch Banking and Trust Company, 
First Chicago Investment Management Company, and NBD Bank.

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 certain portfolios of 
the Trust (the ``Portfolios'') to operate as ``funds of funds'' by 
investing substantially all of their assets in other portfolios (the 
``Underlying Portfolios'') of the Trust. The order also would allow 
other groups of investment companies that are distributed by the 
Distributor (the ``Distributor Funds'') to operate a ``fund of funds'' 
arrangement within their respective fund complexes (``Distributor Funds 
of Funds''), whereby the Distributor Funds of Funds will invest in 
shares of underlying Distributor Funds (the ``Underlying Distributor 
Funds'').

FILING DATES: The application was filed on May 3, 1996 and was amended 
on August 16, 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 16, 
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, 774 Park Meadow Drive, Westerville, Ohio 43081.

FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Robert A. 
Robertson,

[[Page 44095]]

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 registered as an open-end management investment 
company under the Act. The Trust is comprised of separate investment 
portfolios, each of which will pursue a distinct set of investment 
objectives and policies.\1\ The Portfolios will initially consist of 
the following eight separately managed portfolios: The One Group 
Aggressive Growth Fund, The One Group Growth Fund, The One Group Growth 
and Income Fund, The One Group Municipal Balanced Fund, The One Group 
Conservative Growth Fund, The One Group Fixed Income Fund, The One 
Group Municipal Balanced Fund, and The One Group Tax-Free Income Fund. 
The Underlying Portfolios are the other investment portfolios of the 
Trust.
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    \1\ Although certain portfolios of the One Group Funds do not 
presently intend to rely on the requested order, any such registered 
investment company, or portfolio therefore, would be covered by the 
order if it later proposed to enter into a fund of funds arrangement 
in accordance with the terms described in the application.
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    2. Applicants request that any relief granted pursuant to this 
application also apply to any open-end management investment company 
that currently or in the future is part of the same ``group of 
investment companies'' as defined in rule 11a-3 as the Trust 
(collectively, the ``One Group Funds'').\2\ Applicants also request 
that any such relief apply to any other ``group of investment 
companies'' distributed by the Distributor (Distributor Funds) or any 
entity that controls, is controlled by, or is under common control with 
the Distributor Fund of Funds would be substantially similar to those 
of the Portfolios.
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    \2\ Rule 11a-3 under the Act defines the ``same group of 
investment companies'' as two or more companies that: (a) hold 
themselves out to investors as related companies for purposes of 
investment and investor services; and (b) that have a common 
investment adviser or principal underwriter.
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    3. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940 and is an indirect, wholly owned 
subsidiary of Banc One Corporation, a bank holding company incorporated 
in the State of Ohio.\3\ The Adviser is responsible for the overall 
management of the Portfolios' investment affairs and also serves as 
investment adviser to the Underlying Portfolios. The Adviser may charge 
the Portfolios, and will charge the Underlying Portfolios, investment 
advisory fees. In certain cases the Underlying Portfolios have one or 
more sub-advisers. The Adviser pays the sub-advisers out of the 
advisory fees paid by the Underlying Portfolios.
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    \3\ The following entities serve as investment advisers to 
investment companies for which the Controlled Distributors serve as 
principal underwriter/distributor and presently intend to rely on 
the order: Branch Banking and Trust Company, First Chicago 
Investment Management Company, and NBD Bank. Other entities which 
serve as investment advisers to investment companies for which the 
Controlled Distributors serve as principal underwriter/distributor 
do not presently intend to rely on the order. However, each such 
investment adviser and the investment company which it advises may 
rely on the order in the future if the adviser and investment 
company determine to establish and operate a fund-of-funds in 
accordance with the representations and conditions in the 
application.
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    4. The Distributor is a broker-dealer registered under the 
Securities Exchange Act of 1934 (``1934 Act'') and is a member of the 
National Association of Securities Dealers, Inc. (``NASD''). The 
Distributor serves as the Portfolios' principal underwriter/distributor 
and administrator. Each Controlled Distributor is, or, in the case of 
Controlled Distributors created in the future will be a broker-dealer 
registered under the 1934 Act and a member of the NASD, and will serve 
as the principal underwriter/distributor for Distributor Funds and may 
serve as the Distributor Funds' administrator. Each Controlled 
Distributor is or will be a wholly owned subsidiary of The BISYS Group, 
Inc. The BISYS Group, Inc. is holding company that furnishes financial 
or informational services to bank proprietary investment companies and 
community banks. The BISYS Group, Inc. has no affiliation (other than 
through the service relationships of its wholly owned subsidiaries) 
with any investment company or its bank sponsor. The BISYS Group, Inc. 
is not affiliated with Bank One Corporation or with the Adviser.
    5. Applicants propose a fund of funds arrangement where each 
Portfolio will invest in shares of Underlying Portfolios that are part 
of the same ``group of investment companies.'' Each Portfolio that will 
make investments in reliance on the proposed order will invest in other 
investment companies only to the extent contemplated by the requested 
relief. However, each Portfolios also may invest directly in stocks, 
bonds, and money market investments. Exemptive relief is not sought 
with respect to such other investments.
    6. Each Portfolio initially proposes to allocate its assets among 
one or more Underlying Portfolios representing the following asset 
classes: cash; fixed income; domestic equity; and international equity. 
The Portfolios will be designed for long-term investors, including tax-
deferred retirement plan participants. The Portfolios will provide an 
efficient and simple method of allowing investors to structure a 
comprehensive asset allocation program. In addition, each Distributor 
Fund of Funds would invest in shares of Underlying Distributor Funds 
that are part of the same ``group of investment companies'' as the 
Distributor Funds of Funds. The structure, investment allocations, 
expenses and purpose of each Distributor Fund of Funds would be similar 
to those of the Portfolios.

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 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 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 permitting the 
Portfolios to acquire shares of the Underlying Portfolios, and the 
Distributor Funds of Funds to acquire shares of the Underlying 
Distributor Funds, beyond the section 12(d)(1) limits.
    3. 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) unnecessary duplication of costs, 
e.g. sales loads, advisory fees, and administrative costs; (b) undue 
influence by the fund holding company over its underlying funds; (c) 
the threat of large scale redemptions of the securities of the 
underlying investment

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companies; and (d) unnecessary complexity.
    4. Applicants believe that the proposed arrangement will not raise 
the fee layering concerns contemplated by section 12(d)(1). Applicants 
contend that the proposed arrangement will not involve the layering of 
advisory fees since, before approving any advisory contract under 
section 15(a) of the Act, the board of trustees of the Trust or the 
board of trustees or directors of the Distributor Fund of Funds, 
including a majority of the trustees or directors who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act, will 
find that the advisory fees charged under the contract are based on 
services provided that are in addition to, rather than duplicative of, 
services provided under any Underlying Portfolio or Underlying 
Distributor Fund advisory contract.
    5. Applicants state that the proposed structure will not raise the 
sales charge layering concerns underlying section 12(d)(1). Any sales 
charges or service fees relating to the shares of a Portfolio or 
Distributor Fund of Funds will not exceed the limits set forth in 
Article III, section 26 of the Rules of Fair Practice of the NASD when 
aggregated with any sales charges or service fees that the Portfolio or 
Distributor Fund of Funds pays relating to Underlying Portfolio or 
Underlying Distributor Fund shares. The aggregate sales charges at both 
levels, therefore, will not exceed the limit that otherwise lawfully 
could be charged at any single level. Applicants expect that, overall, 
administrative and other expenses will be reduced at both levels under 
the proposed arrangement and, therefore, an investment in a Portfolio 
or Distributor Fund of Funds should not be significantly more expensive 
than a direct investment in an Underlying Portfolio or Underlying 
Distributor Fund. Applicants believe that all of the One Group Funds 
and Underlying Distributor Funds are likely to benefit from the 
existence of the Portfolios and Distributor Funds of Funds since 
increased distribution and the resulting increase of assets under 
management will produce additional cost savings.
    6. Applicants also believe that the concern that the acquiring fund 
might be able to control the management decisions of the underlying 
fund through the threat of large redemptions is not relevant to the 
proposed arrangements. There is little risk that the Adviser will 
exercise inappropriate control over the Underlying Portfolios. The 
Portfolios only will acquire shares of Underlying Portfolios that are 
One Group Funds. Because the Adviser is the investment adviser to the 
Underlying Portfolios as well as to the Portfolios, a redemption from 
one Underlying Portfolio will simply lead to the investment of the 
proceeds in another Underlying Portfolio. Applicants believe that the 
same will be true in the case of the Distributor Funds of Funds since 
they will invest in Underlying Distributor Funds that are part of the 
same ``group of investment companies.''
    7. Applicants believe that the proposed arrangement will be 
structured to minimize large scale redemption concerns. The Portfolios 
and Distributor Funds of Funds will be designed for intermediate and 
long term investment purposes. This will reduce the possibility of the 
Portfolios and Distributor Funds of Funds from being used as short-term 
investment vehicles and further protect the Portfoios and the 
Distributor Funds of Funds and their respective Underlying Portfolios 
and the Underlying Distributor Funds from unexpected large redemptions. 
Applicants believe that the proposed arrangement will not be 
unnecessarily complex. No Underlying Portfolio or Underlying 
Distributor Fund will acquire securities of any other investment 
company in excess of the limits contained in section 12(d)(1)(A) of the 
Act.
    8. Section 17(a) generally makes it unlawful for an affiliated 
person of a registered investment company to sell securities to, or 
purchase securities from, the company. The Portfolios and the 
Underlying Portfolios may be considered affiliated persons because they 
share a common adviser and to the extent a Portfolio owns 5% of an 
Underlying Portfolio's shares. Similar arguments may be made in the 
case of the Distributor Funds of Funds and the Underlying Distributor 
Funds. An Underlying Portfolio's issuance of its shares to the 
Portfolio, and the sale by the Underlying Distributor Funds of their 
shares to the Distributor Funds of Funds, could be deemed principal 
transactions subject to section 17(a).
    9. 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 
allow the above transactions.\4\
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    \4\ 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 is used to grant relief from section 
17(a) to permit an ongoing series of future transactions.
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    10. Applicants believe that the proposed transactions meet the 
standards of sections 6(c) and 17(b). The consideration paid for the 
sale and redemption of shares of Underlying Portfolios and Underlying 
Distributor Funds will be based on the net asset value of the 
Underlying Portfolios and Underlying Distributor Funds, respectively, 
subject to applicable sales charges. The proposed arrangements also 
will be consistent with the policies as set forth in the registration 
statement of each Portfolio and Distributor Fund of Funds. Applicants 
also believe that the proposed transactions are consistent with the 
general purposes of the Act.

Applicant's Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each Portfolio and each Underlying Portfolio will be part of the 
``same group of investment companies,'' as defined in rule 11a-3 under 
the Act. In addition, each Distributor Fund of Funds and each 
Underlying Distributor Fund will be part of the same ``group of 
investment companies.''
    2. No Underlying Portfolio or Underlying Distributor Fund will 
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 Trust and a majority of the 
trustees or directors of each Distributor Fund of Funds, will not be 
``interested persons,'' as defined in section 2(a)(19) of the Act.
    4. Any sales charges or service fees charged relating to the shares 
of a Portfolio or Distributor Fund of Funds, when aggregated with any 
sales charges or service fees paid by the Portfolio or Distributor Fund 
of Funds relating to the securities of the respective Underlying 
Portfolio or Underlying Distributor Fund, will not exceed the limits 
set forth in Article III, section 26, of the NASD's Rules of Fair 
Practice.
    5. Before approving any advisory contract under section 15 of the 
Act, the board of trustees of the Trust and the board of trustees or 
directors of the Distributor Fund of Funds, including a majority of the 
trustees or directors who are not ``interested persons,'' as defined in 
section 2(a)(19), will find that

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advisory fees charged under the contract are based on services provided 
that are in addition to, rather than duplicative of, services provided 
under any Underlying Portfolio or Underlying Distributor Fund advisory 
contract. The finding, and the basis upon which the finding was made, 
will be recorded fully in the minute books of the Portfolio or 
Distributor Fund of Funds.
    6. Applicants agree to provide the following information, in an 
electronic format, to the Chief Financial Analyst of the SEC's Division 
of Investment Management: monthly average total assets of each 
Portfolio and Distributor Fund of Funds, and each respective Underlying 
Portfolio and Underlying Distributor Fund; monthly purchases and 
redemptions (other than by exchange) for each Portfolio and Distributor 
Fund of Funds and each respective Underlying Portfolio and Underlying 
Distributor Fund; monthly exchanges into and out of each Portfolio and 
Distributor Fund of Funds and each respective Underlying Portfolio and 
Underlying Distributor Fund; month-end allocations of each Portfolio's 
assets among the Underlying Portfolios and of the assets of each 
Distributor Fund of Funds among its Underlying Distributor Funds; 
annual expense ratios for each Portfolio and each Distributor Fund of 
Funds and each respective Underlying Portfolio and any Underlying 
Distributor Fund; and a description of any vote taken by the 
shareholders of any Underlying Portfolio and Underlying Distributor 
Fund, including a statement of the percentage of votes cast for and 
against the proposal by the Portfolio and the Distributor Fund of Funds 
and by the other shareholders of the Underlying Portfolio and 
Underlying Distributor Fund. The information will be provided as soon 
as reasonably practicable following each fiscal year-end of the 
Portfolio and each Distributor Fund of Funds (unless the Chief 
Financial Analyst notifies applicants in writing that the 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. 96-21754 Filed 8-26-96; 8:45 am]
BILLING CODE 8010-01-M