[Federal Register Volume 61, Number 216 (Wednesday, November 6, 1996)]
[Notices]
[Pages 57500-57502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28515]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22308/812-10146]


Strong Advantage Fund, Inc., et al.; Notice of Application

October 31, 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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APPLICANTS: Strong Advantage Fund, Inc., Strong Asia Pacific Fund, 
Strong Asset Allocation Fund, Inc., Strong Common Stock Fund, Inc., 
Strong Conservative Equity Funds, Inc., Strong Corporate Bond Fund, 
Inc., Strong Discovery Fund, Inc., Strong Equity Funds, Inc., Strong 
Government Securities Fund, Inc., Strong Heritage Reserve Series, Inc., 
Strong High-Yield Municipal Bond Fund, Inc., Strong Income Funds, Inc., 
Strong Institutional Funds, Inc., Strong Insured Municipal Bond Fund, 
Inc., Strong International Bond Fund, Inc, Strong International Stock 
fund, Inc., Strong Money Market Fund, Inc., Strong Municipal Funds, 
Inc., Strong Municipal Bond Fund, Inc., Strong Opportunity Fund, Inc., 
Strong Short-Term Bond Fund, Inc., Strong Short-Term Global Bond Fund, 
Inc., Strong Short-Term Municipal Bond Fund, Inc., Strong Special Fund 
II, Inc., Strong Total Return Fund, Inc., Strong Variable Insurance 
Funds, Inc. (collectively, the ``Funds''), Strong Capital Management, 
Inc. (``SCM''), and Strong Funds Distributors, Inc. (the 
``Distributor'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from section 12(d)(1), under sections 6(c) and 17(b) 
for an exemption from section 17(a), and under section 178(d) and rule 
17d-1.

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) for 
cash management purposes.

FILING DATE: The application was filed on May 14, 1996 and amended on 
August 14, 1996. Applicants have agreed to file an amendment, the 
substance of which is incorporated herein, during the notice period.

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 November 25, 
1996, and should be accompanied by proof of service on applicant, 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 notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, One Hundred Heritage Reserve, Menomonee Falls, 
Wisconsin 53051.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Staff Attorney, at 
(202) 942-0574, 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 at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. The Funds are open-end investment companies incorporated under 
the laws of Wisconsin and registered under the Act, and the shares of 
the Funds are registered under the Securities Act of 1933. The Funds 
are organized as series companies. Certain of the 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 Funds are non-money market funds (together with any 
future non-money market funds, the ``Non-Money Market Funds''). The 
Funds include taxable and tax-exempt money market funds, growth funds, 
growth and income funds, taxable and tax-exempt bond funds, global 
funds, and international funds.
    2. Strong Capital Management, Inc., an investment adviser 
registered under the Investment Advisers Act of 1940, acts as the 
investment manager for the majority of the Funds, provides each Fund 
with various administrative services, and acts as transfer and dividend 
paying agent for the Funds. Schafer Capital Management, Inc. 
(``Schafer'') acts as investment adviser for Strong Schafer Value Fund. 
SCM and Schafer are collectively referred to herein as the ``Adviser.'' 
Strong Funds Distributors, Inc., a subsidiary of Strong Capital 
Management, Inc., is registered as a broker-dealer under the Securities 
Exchange Act of 1934 and acts as each Fund's principal underwriter. 
Applicants request relief on behalf of the investment companies and 
series thereof that are currently or in the future part of the same 
``group of investment companies,'' as defined under rule 11a-3 of the 
Act.
    3. Each Non-Money Market Fund has, or may be expected to have, 
uninvested cash (``Uninvested Cash'') held by its custodian bank. Such 
Uninvested Cash may result from a variety of sources, including 
dividends or interest received from portfolio securities, unsettled 
securities transactions, reserves held for investment strategy 
purposes, scheduled maturity of investments, liquidation of investment 
securities to meet anticipated redemptions and dividend payments, and 
new monies received from investors. Applicants request an order to 
permit the Non-Money Market Funds to use their Uninvested Cash to 
purchase shares of one or more of the Money Market Funds (these 
transactions are collectively referred to hereinafter as the ``Proposed 
Transactions'').

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 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.

[[Page 57501]]

    3. Applicants' request would permit Non-Money Market Funds to use 
Uninvested Cash to acquire shares of Money Market Funds in excess of 
the percentage limitations set out in section 12(d)(1)(A). Applicants 
propose that each Non-Money Fund be permitted to invest in shares of a 
Money Market Fund so long as each Non-Money Market Fund's aggregate 
investment in such Money Market Fund does not exceed 25% of the Non-
Money Market Fund's total net assets. Applicants' request also would 
permit Money Market Funds to sell their securities to Non-Money Market 
Funds in excess of the percentage limitations set out in section 
12(d)(1)(B).
    4. Applicants state that while the Non-Money Market Funds typically 
are fully invested, cash positions fluctuate with shareholder and 
investment activity and cash positions in excess of 20% of total assets 
may occasionally occur. The Uninvested Cash available for investment at 
any particular time (including instances of unusual equity and debt 
market conditions and unusual cash flow activity in any Money Market 
Fund) may, in fact, total 25% or more of a Non-Money Market Fund's 
total net assets. Therefore, in order to allow the Non-Money Market 
Funds maximum flexibility to invest Uninvested Cash and to maximize the 
returns on such investments, the Non-Money Market Funds seek the 
ability to invest up to the full amount of their available Uninvested 
Cash in each investment option. Applicants believe that permitting a 
Non-Money Market Fund to invest up to 25% of its total net assets in a 
Money Market Fund would generally accommodate cash investment 
requirements.
    5. Applicants state that section 12(d)(1) is intended to protect an 
investment company's shareholders against (a) undue influence over 
portfolio management through the threat of large scale redemptions; (b) 
the acquisition of voting control of the company; (c) the layering of 
fees; and (d) a complex structure that makes it difficult for a 
shareholder to ascertain the true value of the subject security. 
Applicants believe that none of these perceived abuses are created by 
the Proposed Transactions.
    6. Applicants state that the Adviser will serve as investment 
adviser to both the Non-Money Market Funds and the Money Market Funds, 
and will not receive double advisory fees or other compensation 
relating to transactions in the shares of the Money Market Funds 
purchased or sold by the Non-Money Market Funds. Thus, the Adviser is 
not susceptible to undue influence regarding its management of the 
Money Market Funds due to threatened redemptions or loss of fees.
    7. Applicants represent that the Proposed Transactions would 
involve no improper layering of fees. The shareholders of the Non-Money 
Market Funds would not be subject to the imposition of double 
investment advisory fees. Before approving any advisory contract under 
section 15, the Board of Directors of the Non-Money Market Fund, 
including a majority of the Directors 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 Non-Money Market 
Fund by the Adviser should be reduced to account for the fee indirectly 
paid by the Non-Money Market Fund because of the advisory fee paid by 
the Money Market Fund to the Adviser. Further, no front-end sales 
charge, contingent deferred sales charge, rule 12b-1 fee, or other 
underwriting and distribution fee will be charged in connection with 
the purchase and sale of shares of the Money Market Funds. If a Money 
Market Fund offers more than one class of shares, each Non-Money Market 
Fund will invest only in the class with the lowest expense ratio at the 
time of the investment.
    8. Applicants state that the net asset value of each of the Money 
Market Funds is, and has been since its inception, maintained at a 
constant $1.00 per share. Therefore, applicants believe that the value 
of the investments held by a Non-Money Market Fund will be easily 
determinable and will not create any difficulty in assessing the true 
value of the Non-Money Market Fund's holdings.

B. Section 17(a)

    1. Section 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 
the Adviser is an affiliated person of each Fund, as defined in Section 
2(a)(3) of the Act, and because the Funds share a common investment 
adviser and a common Board of Directors, each of the Funds may be 
deemed to be under common control with all the other Funds, and, 
therefore, an affiliated person of those Funds. Accordingly, the sale 
of shares of the Money Market Funds to the Non-Money Market Funds, and 
the redemption of such shares from the Non-Money Market Funds, would be 
prohibited under section 17(a).
    2. 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 
section 6(c) and 17(b) to permit Non-Money Market Funds to purchase 
shares of Money Market Funds, and the Money Market Funds to redeem such 
shares.\1\
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    \1\ 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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    3. Section 17(a) is intended to prohibit affiliated persons in a 
position of influence or control over an investment company from 
furthering their own interests by selling property they own to an 
investment company at an inflated price, or by purchasing property from 
an investment company at less than its fair value. Applicants state 
that, under the Proposed Transactions, the Non-Money Market Funds will 
retain their ability to invest their Uninvested Cash directly in money 
market instruments and other short-term obligations, as permitted by 
each Non-Money Market Fund's investment objectives and policies, if 
they believe they can achieve a higher return or for any other reason. 
By adding shares of the Money Market Funds as another investment 
option, the Applicants believe that the Non-Money Market Funds may 
reduce the risk of counterparty default on repurchase agreements and 
the risks associated with direct purchases of short-term obligations, 
while providing high current money market rates of return, ready 
liquidity, and increased diversity of holdings. In addition, Applicants 
assert the Proposed Transactions would benefit the Money Market Funds 
by increasing their asset base and would provide an additional, stable 
market for their shares. Further, each of the Money Market Funds 
reserves the right to discontinue selling shares to any of the Non-
Money Market Funds if the Board of Directors determines that such sales 
would adversely effect its portfolio management and operations. 
Therefore, Applicants believe that the Proposed Transactions satisfy 
the standards of sections 6(c) and 17(b).

C. Section 17(d)

    1. Section 17(d) and rule 17d-1 prohibit an affiliated person of an 
investment company, acting as principal, from participating in or

[[Page 57502]]

effecting any transaction in connection with any joint enterprise or 
joint arrangement in which the investment company participates. 
Applicants assert that the Funds, by participating in the Proposed 
Transactions, and the Adviser, by managing the assets of both the Non-
Money Market Funds and the Money Market Funds, could be deemed to be 
``joint participants * * * in a transaction'' within the meaning of 
section 17(d) of the Act, and the Proposed Transactions could be deemed 
to be ``joint enterprise[s]'' within the meaning of rule 17d-1 under 
the Act.
    2. 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 assert that 
the Non-Money Market Funds and the Money Market Funds will not 
participate in this arrangement on a basis that is different from or 
less advantageous than the participants that are not investment 
companies. Thus, Applicants believe that the Proposed Transactions 
satisfy the standards of rule 17d-1.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. The shares of the Money Market Funds sold to and redeemed from 
the Non-Money Market Funds will not be subject to a sales load, 
redemption fee, distribution fee under a plan adopted in accordance 
with rule 12b-1, or service fee (as defined in rule 2830(b)(9) of the 
NASD Rules of Conduct).\2\
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    \2\ The staff notes that, until recently, rule 2830(b)(9) of the 
NASD Rules of Conduct was section 26(b)(9) of Article III of the 
NASD Rules of Fair Practice.
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    2. If the Adviser collects a fee from a Money Market Fund for 
acting as its investment adviser with respect to assets invested by a 
Non-Money Market Fund, before the next meeting of the Board of 
Directors of a Non-Money Market Fund that invests in the Money Market 
Funds is held for the purpose of voting on an advisory contract under 
section 15 of the Act, the Adviser to the Non-Money Market Fund will 
provide the Board of Directors with specific information regarding the 
approximate cost to the Adviser for, or portion of the advisory fee 
under the existing advisory fee attributable to, managing the assets of 
the Non-Money Market Fund that can be expected to be invested in such 
Money Market Funds. Before approving any advisory contract under 
section 15, the Board of Directors of such Non-Money Market Fund, 
including a majority of the Directors 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 Non-Money Market 
Fund by the Adviser should be reduced to account for the fee indirectly 
paid by the Non-Money Market Fund because of the advisory fee paid by 
the Money Market Fund to the Adviser. The minute books of the Non-Money 
Market Fund will record fully the Directors' consideration in approving 
the advisory contract, including the considerations relating to fees 
referred to above.
    3. Each of the Non-Money Market Funds will invest Uninvested Cash 
in, and hold shares of, the Money Market Funds only to the extent that 
the Non-Money Market Fund's aggregate investment in the Money Market 
Funds does not exceed 25% of the Non-Money Market Fund's total net 
assets. For purposes of this limitation, each Non-Money Market Fund or 
series thereof will be treated as a separate investment company.
    4. Investment in shares of the Money Market Funds will be in 
accordance with each Non-Money Market Fund's respective investment 
restrictions, if any, and will be consistent with each Non-Money Market 
Fund's policies as set forth in its prospectuses and statements of 
additional information.
    5. Each Non-Money Market Fund, the Money Market Funds, and any 
future fund that may rely on the order shall be part of the same 
``group of investment companies,'' as defined in rule 11a-3(a)(5) under 
the Act.
    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 each Non-Money Market 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, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28515 Filed 11-15-96; 8:45 am]
BILLING CODE 8010-01-M