[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