[Federal Register Volume 61, Number 250 (Friday, December 27, 1996)]
[Notices]
[Pages 68317-68320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32957]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22411; 812-10242]


Harris Trust & Savings Bank, et al.; Notice of Application

December 19, 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: Harris Trust & Savings Bank (``Harris Bank''), Harris 
Bankcorp, Inc. (``Harris Bankcorp''), Bank of Montreal, Harris Insight 
Funds Trust (the ``Harris Funds''), HT Insight Funds, Inc. (the ``HT 
Funds'' and, collectively with the Harris Funds, the ``Funds''), and 
the Harris Trust & Savings Bank Trust for Collective Investment of 
Employee Benefit Accounts (the ``CIF'').

RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) of 
the Act exempting applicants from section 17(a) of the Act.

SUMMARY OF APPLICATION: The requested order would permit the CIF to 
transfer securities to certain portfolios of the Funds in exchange for 
portfolio shares.


[[Page 68318]]


FILING DATES: The application was filed on July 10, 1996 and amended on 
December 4, 1996 and December 17, 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 January 13, 1997 
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: Harris Trust & Savings Bank and Harris Bankcorp, 111 
West Monroe Street, Chicago, Illinois 60603; Bank of Montreal, First 
Canadian Place, 100 King Street West, First Bank Tower, Toronto, Canada 
MSX1A1; and Harris Insight Funds Trust and HT Insight Funds, Inc., One 
Exchange Place, Boston, Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Elizabeth G. 
Osterman, Assistant Director, 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. Harris Bank is an Illinois state-chartered bank and a member 
bank of the Federal Reserve System. Harris Bank is a wholly-owned 
subsidiary of Harris Bankcorp, a bank holding company. Harris Bankcorp 
is a wholly-owned subsidiary of Harris Bankcorp, a bank holding 
company. Harris Bankcorp is a wholly owned subsidiary of Bankmont 
Financial Corp., which is a wholly owned subsidiary of Bank of 
Montreal, a publicly traded Canadian banking institution. Harris Bank 
serves as trustee, investment manager, and/or custodian for numerous 
employee benefit plans qualified under section 401 of the Internal 
Revenue Code and certain governmental plans. The assets of some of 
these employee benefit plans are invested in the CIF, a collective 
investment fund sponsored by Harris Bank and for which Harris Bank acts 
as trustee.
    2. The CIF includes assets of retirement benefit plans for the 
benefit of employees of entities unaffiliated with Harris Bank (``Other 
Plans'') as well as assets of retirement plans for the benefit of 
employees of Harris Bank and its affiliates (``Affiliated Plans'') 
(Other Plans and Affiliated Plans collectively referred to as 
``Plans''). Plan assets in the CIF are invested in one or more 
investment funds (``CIF Portfolios'') with varying investment 
objectives.
    3. HT Funds is a Maryland corporation registered under the Act as 
an open-end management investment company. Harris Funds is a 
Massachusetts business trust registered under the Act as an open-end 
management investment company. Shares of the Funds are divided into 
portfolios (the ``Portfolios''). Harris Bank serves as the investment 
adviser to the Portfolios.
    4. Harris Bank has sold the portion of its investment management 
business that consists of managing the assets of defined benefit 
pension plans of large corporations. Because Harris Bank is leaving the 
large corporation pension business, certain of the CIF Portfolios will 
no longer be needed to manage large company pension plan assets. Harris 
Bank is terminating five of the CIF Portfolios and intends to transfer 
in-kind the assets of those five CIF Portfolios and Affiliated Plan 
assets of four additional CIF Portfolios to corresponding Portfolios 
with substantially similar investment objectives in exchange for shares 
of that Portfolio (the ``Proposed Transactions''). Harris Bank may 
decide at a later date to terminate additional CIF Portfolios.
    5. Affiliated Plan assets of the CIF will be transferred as 
follows: the Investment Reserve Fund into the Harris Insight Money 
Market Fund; the Marketable Bond Fund into the Harris Insight Bond 
Fund; the Government Agency Intermediate Fund into the Harris Insight 
Intermediate Government Bond Fund; the Convertible Fund into the Harris 
Insight Convertible Securities Fund; the Common Stock Fund into the 
Harris Insight Equity Fund; The Index Fund into the Harris Insight 
Index Fund; the International Equity Fund into the Harris insight 
International Fund; the Balanced Fund into the Harris Insight Balanced 
Fund; and the Special Capital Fund into the Harris Insight Value Equity 
Fund.
    6. The assets of the CIF representing Other Plans may be converted 
into Funds in accordance with a series of non-action letters in which 
the SEC staff has permitted similar conversions of collective trust 
funds into mutual funds.\1\ The Affiliated Plans are unable to rely on 
the no-action letters, however, because such relief has been 
conditioned on affiliated persons, or affiliated persons of affiliated 
persons, of the registered investment company into which assets will be 
transferred having no beneficial interest in the Proposed Transactions. 
Applicants are requesting exemptive relief for the transfer of CIF 
assets into the Funds only on behalf of the Affiliated Plans owning 
five percent or more of the assets of the CIF.\2\ Applicants also 
request relief for any registered open-end management investment 
company that may be advised by Harris Bank or any entity controlling, 
controlled by, or under common control with Harris Bank, and any other 
collective investment funds that may be sponsored by Harris Bank which 
Harris Bank in the future may decide to convert into registered, open-
end investment companies, and in which, at that time, Affiliated Plans 
have invested assets.
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    \1\ See, e.g., The DFA Investment Trust Company (pub. avail. 
Oct. 17, 1995); Federated Investors (pub. avail. Apr. 21, 1994); and 
Lincoln National Investment Management Company (pub. avail. Apr. 25, 
1976).
    \2\ See Letter to Stradley Ronon Stevens & Young (pub. avail. 
Mar. 21, 1996) (clarifying the staff's position that a less than 
five percent beneficial interest in a collective trust fund 
conversion by an affiliated person of a fund, or an affiliated 
person of such affiliated person, is not, in and of itself, a 
disqualifying affiliation for purposes of rule 17a-7).
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    7. Applicants will institute the following procedure to ensure the 
protection of Plan participants in the Proposed Transactions. Each 
Affiliated Plan will have an employee benefit review committee (the 
``Committee'') that serves as fiduciary for that Plan. The Proposed 
Transactions will be subject to the prior authorization of a fiduciary 
which will be independent of Harris Bank, Harris Bankcorp, Bank of 
Montreal, and their affiliates. The independent fiduciary will be 
subject, as will the Committee, to fiduciary responsibilities under the 
Employee Retirement Income Security Act of 1974 (``ERISA''). Such 
independent fiduciary will be retained solely for the purpose of 
determining the fairness to the Affiliated Plans of the Proposed 
Transactions. Under section 404(a) of ERISA, such fiduciaries must 
ensure that the investment of the Affiliated Plans' assets is prudent 
and operates exclusively for the benefit of participating employees of 
Harris Bank and its affiliates and of their beneficiaries.
    8. Before transferring the Affiliated Plans' CIF assets to the 
Portfolios, Harris

[[Page 68319]]

Bank will seek and obtain the approval of the Committee and each 
Affiliated Plan's independent fiduciary. Harris Bank will provide the 
Committee and the independent fiduciaries with a current prospectus for 
the relevant Portfolios and a written statement giving full disclosure 
of the fees to be received by Harris Bank and/or its affiliates and the 
terms of the Proposed Transactions. The disclosure will explain why 
Harris Bank believes that the investment of assets of the Affiliated 
Plans in the Portfolios is appropriate.
    9. On the basis of such information, the Committee and the 
Independent fiduciary will decide whether to authorize Harris Bank to 
invest the relevant Affiliated Plan's CIF assets in the Fund and to 
receive fees from the Fund. Harris Bank does not charge Plan level fees 
to Affiliated Plans; it does charge Plan level fees to Other Plans. 
Harris Bank will rebate to each Other Plan its proportionate share of 
all advisory fees payable to Harris Bank by the Funds and it may do so 
as well for the Affiliated Plans.
    10. Plans that are invested in the terminating CIFs and whose 
independent fiduciaries do not consent to the conversion will be 
redeemed out of the CIF in accordance with the terms of the CIF prior 
to the conversion. All of the assets of the CIFs representing the 
interests of the consenting Plans will be converted in a single 
transaction on the same day.
    11. As of the date of the Transfer, Harris Bank, on behalf of the 
terminating CIF Portfolios, will deliver to the corresponding Portfolio 
securities equal in value to the aggregate interest of each 
participating Plan in exchange for Fund shares with a total net asset 
value equal to the market value of the transferred assets as of the 
date of the transfer. The Fund shares received by the CIF then will be 
distributed, pro rata, to all Plans whose interests were converted as 
of the date. If any assets of a CIF Portfolio are not appropriate for 
its corresponding Fund Portfolio, Harris Bank intends to sell such 
assets in the open market through an unaffiliated brokerage firm prior 
to the transfer.

Applicants' Legal Analysis

    1. Section 17(a) of the Act, in relevant part, prohibits an 
affiliated person of a registered investment company, or an affiliated 
person of such person, acting as principal, from selling to or 
purchasing from such investment company any security of other property. 
Section 2(a)(3) of the Act, in relevant part, defines ``affiliated 
person'' to include: (a) Any person directly or indirectly owning, 
controlling, or holding with the power to vote, five percent or more of 
the outstanding voting securities of such other person; (b) any person 
directly or indirectly controlling, controlled by, or under common 
control with, such other person; and (c) if such other person is an 
investment company, any investment adviser thereof.
    2. Section 6(c) provides that the SEC may exempt any person or 
transaction from any provision of the Act or any rule thereunder 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.
    3. 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 transactions 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.
    4. Because the CIF may be viewed as acting as principal in the 
Proposed Transactions and because the CIF and the Funds may be viewed 
as being under the common control of Harris Bank within the meaning of 
section 2(a)(3)(C) of the Act, the Proposed Transactions may be subject 
to the prohibitions contained in section 17(a).
    5. Applicants request an order under sections 6(c) and 17(b) 
granting an exemption from section 17(a), to the extent necessary to 
effect the Proposed Transactions.\3\ Applicants submit that the terms 
of the Proposed Transactions satisfy the standards for an exemption set 
forth in sections 6(c) and 17(b).
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    \3\ 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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    6. Applicants believe that the terms of the transfers of CIF assets 
to the Funds are reasonable and fair to the Affiliated Plans, to the 
Other Plans invested in the CIF, and to existing and prospective 
shareholders of the Funds, and do not involve overreaching on the part 
of any applicant. The Proposed Transactions will comply with rule 17a-7 
and conditions under the Act, and also will comply with the policy 
behind the conditions of rule 17a-8 under the Act. Applicants assert 
that the fact that the Proposed Transactions are designed as in-kind 
transfers does not negatively affect their fairness. Indeed, if the 
Proposed Transactions were effected in cash, the Plans would have to 
sell their securities, thereby incurring brokerage commissions or the 
adverse effects of mark-downs. Moreover, the Fund would purchase 
similar securities in the market, causing a second round of brokerage 
commissions and the adverse effects or mark-ups. In addition, because 
time could elapse between the sale of Plan securities and the 
repurchase of similar securities, no assurance could be given that the 
Funds would be able to purchase those securities at the price for which 
Plan securities had been sold. In contrast, applicants believe that the 
Proposed Transactions would not expose the Plans' assets to transaction 
costs or timing risk.
    7. Applicants contend that the requested exemptive relief also 
would be consistent with the purposes intended by the policies and 
provisions of the Act. Applicants believe that the Proposed 
Transactions do not give rise to the abuses that section 17(a) was 
designed to prevent. A primary purpose underlying section 17(a) is a 
prevent a person with a pecuniary interest in a transaction from using 
his or her position with a registered investment company to benefit 
himself or herself to the detriment of the company's shareholders. 
After the Proposed Transactions, each Affiliated Plan will be a 
shareholder in a Portfolio with substantially similar investment 
objectives to the CIF Portfolio from which their assets were 
transferred. In this sense, applicants believe that the Proposed 
Transactions can be viewed as a change in the form in which assets are 
held, rather than as a disposition giving rise to section 17(a) 
concerns. Moreover, any transfer will be subject to extensive review 
and evaluation by independent fiduciaries whose actions are governed by 
ERISA and by the disinterested members of the board of directors 
(trustees) of the Funds.
    8. Applicants submit that the Proposed Transactions meet the 
section 6(c) standards for relief as necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policies and provisions of the Act. 
Harris Bank believes that the Funds may offer the Plans advantages over 
the CIFs as pooled investment vehicles. Sponsors of and participants in 
the Plans will be able to monitor more easily the performance of their 
investments on a daily basis, since information concerning the 
investment performance of the Portfolios will be available in daily 
newspapers of general circulation. Additionally, the mutual

[[Page 68320]]

fund vehicle will afford Harris Bank a better opportunity to market its 
investment management services and, assuming those marketing efforts 
result in greater assets under management, will allow for economies of 
scale, greater diversification and risk spreading. Also, Plan 
participants will have the benefit of the heightened disclosure 
applicable to mutual funds under the federal securities laws and the 
Plans, as shareholders, of a Fund, will have the opportunity to 
exercise voting and other shareholder rights. Further, shares of the 
Funds issued as part of the Proposed Transactions will be issued at 
prices equal to their net asset values. In addition, the assets of the 
Affiliated Plans will be valued pursuant to objective standards and are 
the type that the Portfolios otherwise would purchase through market 
transactions. Moreover, the Proposed Transactions are subject to 
independent fiduciary approval. Applicants contend, therefore, that the 
transfers will afford no opportunity for affiliated persons of the 
Funds to effect a transaction detrimental to the other shareholders of 
the Funds.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The Proposed Transactions will comply with the terms of rule 
17a-7(b)-(f).
    2. The Proposed Transactions will not occur unless and until: (a) 
the boards of directors (trustees) of the Funds (including a majority 
of their disinterested members) and the Committee and the Affiliated 
Plans' independent fiduciaries find that the Proposed Transactions are 
in the best interests of the Funds and the Affiliated Plans, 
respectively; and (b) the boards of directors (trustees) of the Funds 
(including a majority of their disinterested members) find that the 
interests of the existing shareholders of the Funds will not be diluted 
as a result of the Proposed Transactions. These determinations and the 
basis upon which they are made will be recorded fully in the records of 
the Funds and the Plans, respectively.
    3. In order to comply with the policies underlying rule 17a-8, any 
conversion will have to be approved by the Funds' board of directors 
(trustees) and any Affiliated Plan's independent fiduciaries who would 
be required to find that the interests of beneficial owners would not 
be diluted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-32957 Filed 12-26-96; 8:45 am]
BILLING CODE 8010-01-M