[Federal Register Volume 61, Number 195 (Monday, October 7, 1996)]
[Notices]
[Pages 52477-52479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25624]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22255; 812-10292]
PaineWebber America Fund, et al.; Notice of Application
September 30, 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: PaineWebber America Fund; PaineWebber Cashfund, Inc.;
PaineWebber Investment Series; PaineWebber Managed Assets Trust;
PaineWebber Managed Investments Trust; PaineWebber Managed Municipal
Trust; PaineWebber Master Series, Inc.; PaineWebber Municipal Series;
PaineWebber Mutual Fund Trust; PaineWebber Olympus Fund; PaineWebber
Financial Services Growth Fund Inc.; PaineWebber RMA Money Fund, Inc.;
PaineWebber RMA Tax-Free Fund, Inc.; PaineWebber Securities Trust;
PaineWebber Municipal Money Market Series; PaineWebber Investment
Trust; PaineWebber Investment Trust II; PaineWebber Investment Trust
III; Liquid Institutional Reserves; PaineWebber Select Fund (together,
the ``Funds'') \1\; Mitchell Hutchins Asset Management Inc. (``Mitchell
Hutchins''); and PaineWebber Incorporated (``PaineWebber'').
\1\ The term ``Fund'' means, as the context requires, each of
the above-referenced investment companies acting on its own behalf,
or, if it is a series company, acting on behalf of one or more of
its series; the term may also mean, as the context requires, the
separate series of each Fund.
Existing Funds that intend to rely on the requested order,
including Underlying Funds (as hereinafter defined), have been named
as applicants. Other Funds do not presently intend to rely on the
requested order, but may do so in the future in accordance with the
terms of the application.
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RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
granting an exemption from section 12(d)(1) of the Act and under
sections 6(c) and 17(b) of the Act granting an exemption from section
17(a) of the Act.
SUMMARY OF APPLICATION: The order would permit certain PaineWebber
funds to operate as ``funds of funds'' by investing in affiliated open-
end investment companies in excess of the percentage limitations of
section 12(d)(1).
FILING DATES: The application was filed on August 13, 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 October 25,
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, c/o PaineWebber, 1285 Avenue of the Americas, New
York, NY 10019, Attention: Victoria E. Schonfeld, Esq.; and Wilmer,
Cutler & Pickering, 2445 M Street, NW., Washington, DC 20037,
Attention: Jeremy N. Rubenstein, Esq. & James E. Anderson, Esq.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, 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. Each Fund is organized either as a Maryland corporation or a
Massachusetts business trust and is registered under the Act as an
open-end management investment company. PaineWebber Select Fund is a
series company that initially will offer one or more series. The series
of the PaineWebber Select Fund, together with certain series of other
Funds and certain other Funds that do not offer their securities in
separate series, are hereinafter referred to as the ``Select Funds.''
Any Fund that is not a Select Fund is hereinafter referred to as an
``Underlying Fund.'' Applicants propose to invest substantially all of
the assets of the Select Funds in shares of the Underlying Funds.
2. PaineWebber is a publicly owned securities brokerage, investment
banking, and asset management firm offering a broad range of services
to corporations, institutions, and substantial private investors
worldwide. Mitchell Hutchins is a wholly-owned subsidiary of
PaineWebber. PainWebber and Mitchell Hutchins are each registered as a
broker-dealer under the Securities Exchange Act of 1934 and as an
investment adviser under the Investment Advisers Act of 1940.
PaineWebber or Mitchell Hutchins is the investment adviser for each of
the Funds. PaineWebber or Mitchell Hutchins is also the principal
underwriter for each of the Funds.
3. The Select Funds have been designed to satisfy the demand of
investors for a simple and cost-effective means of obtaining
professional investment allocation of their assets among a diversified
group of mutual funds. Pursuant to its investment objective and its
policies, each Select Fund will invest in shares of Underlying Funds,
and in no event will hold investment securities other than shares of
Underlying Funds and cash equivalents. A Select Fund will not invest in
an Underlying Fund unless the Underlying Fund may not acquire
securities of any other investment company in excess of the limits
contained in section 12(d)(1)(A), except for securities received as a
dividend or as a result of a plan of reorganization of any company.
Applicants currently expect that the Select Funds will not pay sales
loads or bear expenses under rule 12b-1 plans in connection with the
Select Funds' investments in Underlying Fund shares. If a Select Fund
in the future determines to invest in shares of Underlying Funds that
may incur sales charges, it will do so only in conformity with the NASD
restrictions on aggregate sales charges.
4. PaineWebber and Mitchell Hutchins are considering charging an
advisory fee, presently expected to be up to a maximum of 50 basis
points (.50%) (which may be waived initially), for allocating assets
for the different Select Funds, monitoring general economic conditions,
and providing other advisory services. Although PineWebber and Mitchell
Hutchins would also earn advisory fees arising by virtue of their
investment advisory contracts with the Underlying Funds, these fees
will not be duplicative of any fee charged directly to the Select
Funds.
[[Page 52478]]
Any advisory fee charged at the level of the Select Funds will
compensate PaineWebber and Mitchell Hutchins for services that are
unique to the Select Funds and are not provided at the Underlying Fund
level.
5. Applicants request that any relief granted pursuant to the
application also apply to 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 (i) for which PaineWebber
or any entity controlling, controlled by, or under common control with
PaineWebber now or in the future acts as principal underwriter; or (ii)
for which PaineWebber or any entity controlling, controlled by, or
under common control with PaineWebber now or in the future acts as
investment adviser.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) 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 would cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
would cause more than 10% of the acquired company's voting stock to be
owned by investment companies.
2. Section 6(c) provides that the SEC may exempt persons or
transactions 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) to permit the Select Funds to
invest in the Underlying Funds in excess of the percentage limitations
of section 12(d)(1).
3. Applicants state that section 12(d)(1), as originally adopted
and as amended in 1970, is intended to mitigate or eliminate actual or
potential abuses that might arise when an investment company acquires
shares of another investment company. These abuses include the layering
of sales charges and advisory fees and the acquiring fund imposing
undue influence over the management of the acquired funds through the
threat of large-scale redemptions.
4. Applicants state that the proposed fund of funds structure
contains no layering of sales charges or advisory fees. Layering of
sales charges will be avoided because applicants currently expect that
the Select Funds will not pay sales loads or bear experiences under
rule 12b-1 plans in connection with the Select Funds' investments and
holdings in Underlying Fund shares. The fact that applicants have
reserved the right to have different sales load structures in the
future, which may include the payment of sales charges or service fees
at both the Select Fund and Underlying Fund level, does not permit any
excessive or duplicative sales related charges due to the substantial
protections provided by the application. If a Select Fund in the future
determines to invest in shares of an Underlying Fund that also bears
sales charges or service fees, it will do so only in conformity with
the NASD's restrictions on aggregate sales charges and service fees. In
addition, a Select Fund will pay no sales charge on its investments in
Underlying Funds unless such charges have been reviewed and approved by
the Select Fund's directors or trustees who are not ``interested
persons,'' as defined in section 2(a)(19) of the Act (``Independent
Trustees'').
5. As stated above, PaineWebber and Mitchell Hutchins are
considering charging an advisory fee, presently expected to be up to a
maximum of 50 basis points (.50%) (which may be waived initially).
Applicants state that the advisory fees charged to the Select Funds and
the Underlying Funds in which they invest will not be duplicative. If
PaineWebber and Mitchell Hutchins determine to charge an advisory fee
for the allocation services, or to increase any advisory fee borne by a
Select Fund, the fees will conform to the Independent Trustee approval
requirements of condition 4 below. The approval process is designed to
ensure that any advisory fee that may be borne by any Select Fund will
be for services that augment, rather than duplicate, the services
provided to the Underlying Funds.
6. Applicants state that there is no basis for the concern that the
Select Funds would exercise influence over the management of the
Underlying Funds by the threat of redemptions. Applicants contend that
excessive control from the threat of redemption and the accompanying
loss of advisory fees is not present in the context of a fund of funds
involving only funds from the same group of investment companies.
Because the Select Funds will acquire only shares of Underlying Funds,
a redemption from one Underlying Fund will simply lead to the placing
of the proceeds into another Underlying Fund.
7. Condition 2 below prohibits a Select Fund from investing in any
Underlying Fund unless the Underlying Fund may not acquire securities
of any other investment company in excess of the limits contained in
section 12(d)(1)(A) of the Act, except for securities received as a
dividend or as a result of a plan of reorganization of any company. The
exception for securities received as a dividend or as a result of a
plan of reorganization is based on section 12(d)(1)(D) of the Act,
which permits an investment company to exceed the limits contained in
section 12(d)(1)(A) if it acquires investment company shares as a
dividend, as a result of an offer of exchange, or pursuant to a plan of
reorganization (other than a plan devised for the purpose of evading
section 12(d)(1)(A)). Applicants state that no Underlying Fund would
participate in any plan of reorganization devised for the purpose of
evading the provisions of section 12(d)(1)(A). Applicants assert that
the legislative history of section 12(d)(1)(D) indicates that the
enumerated exceptions are warranted because they do not involve any new
commitment on the part of the acquiring investment company, and
consequently do not present the abuses section 12(d)(1)(A) was intended
to address.
B. Section 17(a)
1. Section 17(a) makes it unlawful for an affiliated person of a
registered investment company, or an affiliated person of such person,
acting as principal, to sell securities to, or purchase securities
from, the company. Because the Select Funs and the Underlying Funds are
each advised by PaineWebber and/or Mitchell Hutchins, the Select Funds
and the Underlying Funds could be deemed to be affiliates of one
another. Purchases by the Select Funds of the shares of the Underlying
Funds and the sale by the Underlying Funds of their shares to the
Select Funds thus could be deemed to be principal transactions between
affiliated persons prohibited by 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
[[Page 52479]]
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) for
an exemption from section 17(a).\2\
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\2\ 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 in conjunction with section 17(b) to grant relief
from section 17(a) to permit an ongoing series of future
transactions.
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3. Applicants assert that the proposed transactions meet the
standards of sections 6(c) and 17(b). As discussed previously,
protections against duplicative or excessive advisory fees and sales
loads ensure that the consideration to be paid in the proposed
transactions will be reasonable and fair. A Select Fund's investment in
an Underlying Fund will be in accordance with the Select Fund's
investment restrictions and will be consistent with its policies as
recited in its registration statement. Moreover, applicants represent
that because the proposal provides greater diversification, lower
costs, and increased administrative efficiency without diminishing the
protections afforded to investors, it is consistent with the purposes
of the Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Select Funds and each Underlying Fund will be part of the
same ``group of investment companies'' as defined in paragraph (a)(5)
of rule 11a-3 under the Act.
2. The Select Funds will not invest in an Underlying Fund unless
that Fund may not acquire securities of any other investment company in
excess of the limits contained in section 12(d)(1)(A) of the Act,
except for securities received as a dividend or as a result of a plan
of reorganization of any company.
3. At least a majority of each Select Fund's trustees will be
Independent Trustees.
4. Prior to approving any advisory contract under section 15 of the
Act or promptly upon the termination of a fee waiver, the trustees of
each Select Fund, including a majority of the Independent Trustees,
will find that the advisory fees charged under such contract, if any,
are based on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract of
any Underlying Fund in which a Select Fund may invest; provided that no
such findings will be necessary if the investment adviser to an
Underlying Fund waives all advisory fees that may be imposed for
serving as investment adviser to the Underlying Fund, or, if only a
portion of those advisory fees are waived, the investment adviser or
another party reimburses the Underlying Fund for any advisory fee or
portion thereof that is not waived. These findings and their basis will
be recorded fully in the minute books of the Select Fund.
5. Any sales charges or service fees, as such terms are defined
under rule 2830(b) of the NASD Conduct Rules, as may be charged with
respect to securities of a Select Fund, when aggregated with any sales
charges and/or service fees borne by the Select Fund with respect to
shares of an Underlying Fund, will not exceed the limits set forth in
rule 2830(d) of the NASD Conduct Rules.
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 Select Fund, unless the Chief Financial Analyst
notifies applicants that the information need no longer be submitted:
(a) Monthly average total assets of each Select Fund and each
Underlying Fund in which a Select Fund invests; (b) monthly purchases
and redemptions (other than by exchange) for each Select Fund and each
Underlying Fund in which a Select Fund invests; (c) monthly exchanges
into and out of each Select Fund and each Underlying Fund in which a
Select Fund invests; (d) month-end allocations of each Select Fund's
assets among the Underlying Funds in which it invests; (e) annual
expense ratios for each Select Fund and each Underlying Fund in which a
Select Fund invests; and (f) a description of any vote taken by the
shareholders of any Underlying Fund in which a Select Fund invests,
including a statement of the percentage of votes cast for and against
the proposal by the Select Fund and by the other shareholders of that
Underlying Fund.
7. Substantially all of the assets of each Select Fund will be
invested in shares of Underlying Funds. Each Select Fund will not hold
any investment securities other than shares of Underlying Funds and
cash equivalents.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-25624 Filed 10-4-96; 8:45 am]
BILLING CODE 8010-01-M