[Federal Register Volume 62, Number 25 (Thursday, February 6, 1997)]
[Notices]
[Pages 5659-5661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2905]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22486; 812-10164]
SBSF Funds, Inc. d/b/a Key Mutual Funds, et al.; Notice of
Application
January 30, 1997.
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: SBSF Funds, Inc. d/b/a Key Mutual Funds (``KMF''), The
Victory Portfolios (``VP''), KeyCorp Mutual Fund Advisers, Inc.
(``KMFAI''), and Spears, Benzak, Salomon & Farrell, Inc. (``SBS&F'').
RELEVANT ACT SECTIONS: Order requested under section 12(d)(1)(J) of the
Act for an exemption from sections 12(d)(1)(A) and (B) of the Act, and
under sections 6(c) and 17(b) of the Act for an exemption from section
17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
them to implement a ``fund of funds'' arrangement. In addition to the
fund of funds investing in other funds in the same group of investment
companies, such fund of funds also may invest a portion of its assets
in funds that are not part of the same group of investment companies in
reliance on Section 12(d)(1)(F) of the Act.
FILING DATES: The application was filed on May 20, 1996, and amended on
January 22, 1997. 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 February 24,
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 who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. KMF and VP, 3435 Stelzer Road, Columbus, OH 43219; KMFAI, 127
Public Square, Cleveland, OH 44114; SBS&F, 45 Rockefeller Plaza, New
York, NY 10111.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard,
Branch Chief, at (202) 942-0564 (Office of Investment Company
Regulation, Division of Investment Management).
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. KMF is a Maryland corporation registered under the Act as an
open-end management investment company currently consisting of eight
operating portfolios and one inactive portfolio. VP is a Delaware
business trust registered under the Act as an open-end management
investment company currently consisting of 24 operating and four
inactive portfolios.
2. Applicants request relief to permit the series of KMF, VP, and
any other investment company created in the future that is part of the
same ``group of investment companies'' as KMF or VP, as defined in
section 12(d)(1)(G)(ii) of the Act (the ``Direct Funds''), to purchase
shares of investment companies or series thereof, existing or created
in the future, that are part of the same ``group of investment
companies'' (the ``Underlying Portfolios'') as the Direct Funds, and to
permit the Underlying Portfolios to sell such shares to, and redeem
such shares from, the Direct Funds. Some of the Underlying Portfolios
may rely upon a ``manager of managers'' exemptive order granted by the
SEC that permits the Underlying Portfolios to select a sub-adviser
without the approval of their shareholders, subject to certain
conditions.\1\
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\1\ The Victory Portfolios, Investment Company Act Release Nos.
22366 (Dec. 3, 1996) (notice) and 22432 (Dec. 31, 1996) (order).
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3. The investment policies of the Direct Funds also permit each
Fund to invest a portion of its assets in government securities,
certain short-term obligations, and, subject to receipt of the request
exemptive relief, shares of other investment companies that are not
part of the same ``group of investment companies'' as KMF and VP
(``Other Portfolios''). Investments in Other Portfolios will conform to
the requirements of section 12(d)(1)(F) of the Act.\2\
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\2\ On January 1, 1997, in reliance only on section 12(d)(1)(G)
of the Act, KeyChoice Growth Fund, KeyChoice Moderate Growth Fund,
and KeyChoice Income and Growth Fund, the initial Direct Funds,
commenced operations with investments limited to Underlying
Portfolios.
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4. SBS&F currently serves as investment adviser to four of the
operating funds of KMF. SBS&F is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. (``KAMHI''), which is a wholly-owned
subsidiary of KeyBank National Association, a national banking
association, which, in turn, is a wholly-owned subsidiary of KeyCorp, a
bank holding company. KMFAI currently serves as investment adviser to
VP and to four funds of KMF, including the Direct Funds. In addition,
KMFAI has been retained to act as investment adviser to a fund of KMF
that has yet to commence operations. KMFAI is a wholly-owned subsidiary
of KAMHI.
5. The Underlying Portfolios will pay investment advisory fees to
KMFAI and/or SBS&F. In addition, the Underlying Portfolios will pay
fees to their various service providers for all other services relating
to their operations. The Direct Funds pay investment advisory fees to
their investment adviser(s), as well as fees to the Direct Funds'
various service providers. By investing in other investment companies,
shareholders of the Direct Funds indirectly will pay their
proportionate share of any Underlying Portfolio fees and expenses.
Similarly, the Direct Funds' shareholders indirectly pay their
proportionate share of any Other Portfolio fees and expenses.
6. The Direct Funds will pay no front-end sales loads or contingent
deferred sales charges in connection with the purchase or redemption of
shares of either Underlying Portfolios or Other Portfolios. In
addition, sales charges, distribution-related fees, and service
[[Page 5660]]
fees charged in connection with shares of the Direct Funds will not
exceed the limits set forth on Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the ``NASD'') when
aggregated with any sales charges, distribution-related fees, and
service fees that the Direct Funds pay relating to Underlying Portfolio
and Other Portfolio shares.
Applicants' Legal Analysis
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 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 12(d)(1)(F) of the Act provides that section 12(d)(1)
shall not apply to an acquiring company if the company and its
affiliates own no more than 3% of an acquired company's securities,
provided that the acquiring company does not impose a sales load of
more than 1.5% on its shares. In addition, the section provides that no
acquired company is obligated to honor any acquiring company redemption
request in excess of 1% of the acquired company's securities during any
period of less than 30 days, and the acquiring company must vote its
acquired company shares either in accordance with instructions from its
shareholders or in the same proportion as all other shareholders of the
acquired company. Applicants state that no exemptive relief is sought
with respect to investments by the Direct Funds in shares of Other
Portfolios.
3. Section 12(d)(1)(G) of the Act provides that section 12(d)(1)
shall not apply to the securities of an acquired company purchased by
an acquiring company if: (i) the acquiring company and the acquired
company are part of the same group of investment companies; (ii) the
acquiring company holds only securities of acquired companies that are
part of the same group of investment companies, government securities,
and short-term paper; (iii) the aggregate sales loads and distribution-
related fees of the acquiring company and the acquired company are
limited; and (iv) the acquired company has a policy that prohibits it
from acquiring securities of registered open-end investment companies
or registered unit investment trusts in reliance on section 12(d)(1)
(F) or (G). Section 12(d)(1)(G)(ii) defines the term ``group of
investment companies'' to mean any two or more registered investment
companies that hold themselves out to investors as related companies
for purposes of investment and investor services. Because the Direct
Funds will invest in shares of Other Portfolios, they cannot rely on
the exemption from section 12(d)(1) (A) and (B) afforded by section
12(d)(1)(G).
4. Applicants request relief from the limitations of section
12(d)(1) (A) and (B) to the extent necessary to permit (i) the Direct
Funds to purchase an unlimited amount of the outstanding voting shares
of each Underlying Portfolio; (ii) the securities of each Underlying
Portfolio to have an aggregate value of as much as 100% of the total
assets of the Direct Funds: (iii) the Direct funds to invest up to 100%
of their assets in the securities of the Underlying Portfolios; and
(iv) each of the Underlying Portfolios to sell more than 10% of its
total outstanding voting stock to the Direct Funds.
5. Applicants believe that the purpose of section 12(d)(1) was to
limit and address the perceived adverse consequences of ``pyramiding''
of investment companies in a fund of funds arrangement, including the
duplicative costs involved in such a structure, the exercise of undue
influence or control over the underlying series, and the potential
adverse impact of large-scale redemptions.
6. Applicants assert that the structure of applicants' fund of
funds will include safeguards designed to address multiple layering of
advisory fees. Applicants state that, before approving any advisory
contract under section 15 of the Act, the directors of the Direct
Funds, including a majority of the directors/trustees who are not
``interested persons,'' as defined in section 2(a)(19), will find that
any advisory fees charges under the contract are based on services
provided that are in addition to, rather than merely duplicative of,
services provided under any Underlying Portfolio advisory contract.
Applicants state further that this finding, documented in the minute
books of the Direct Funds. Applicants state that the directors of the
Direct Funds will make a similar finding with respect to the Other
Portfolios, as well, which will be fully documented.
7. Applicants state that, to address the issue of multiple layers
of sales loads, the Direct Funds will pay no front-end or contingent
deferred sales charge in connection with the purchase or redemption of
shares of the Underlying Portfolios, Applicants state further that, as
a condition to the requested exemptive relief, any sales charges,
distribution-related fees, or service fees relating to the shares of
the Direct funds will not exceed the limits set forth in rule 2830 of
the Conduct Rules of the NASD when aggregated with any sales charges,
distribution-related fees, or service fees that the Direct Funds may
pay relating to the acquisition, holding, or disposition of Underlying
Portfolio or Other Portfolio shares. Applicants assert that the
aggregate sales charges, therefore, will not exceed the amount that
otherwise lawfully could be charged at either fund level.
8. Applicants state administrative and similar fees will be charged
at the Direct Fund and Underlying Portfolio/Other Portfolio levels.
However, applicants believe that the redundancy of administrative fees
and expenses between the Direct Funds and the Underlying Portfolios
will be minimal, because distinct services are being provided at each
level. Likewise, applicants believe that distinct services will be
provided at each level of the Direct Funds' investment in Other
Portfolios, thus minimizing any concerns of redundancy of
administrative fees and expenses. In any event, applicants believe that
administrative and other expenses may be reduced at both levels under
the proposed Direct Funds' structure. Thus, applicants believe that an
investment in the Direct Funds should not be significantly more
expensive than a direct investment in an Underlying Portfolio or Other
Portfolio.
9. Applicants believe that the concern of undue influence and
control is addressed by the proposed structure of the Direct Funds.
Applicants assert that there is little risk that the Direct Funds'
adviser will exercise inappropriate control over the Underlying
Portfolios, which are part of the same ``group of investment
companies.'' Applicants also contend that the Other Portfolios cannot
be controlled in any meaningful way by the Direct Funds because section
12(d)(1)(F) limits them, together with their affiliates, the acquiring
no more than 3% of the total outstanding stock of any Other Portfolio.
In addition, applicants note that section 12(D)(1)(F) permits the Other
Portfolios to reject redemption requests by a Direct Fund that exceed
1% of the Other Portfolio's total outstanding securities during any
[[Page 5661]]
period of less than 30 days. Applicants state that, to protect further
the Underlying Portfolios and Other Portfolios from unexpected large
redemptions, the Direct Funds generally will be designed for
intermediate and long-term investors.
10. Applicants state that an additional concern underlying section
12(d)(1) is that the popularity of fund of funds could lead to the
creation of more complex vehicles that would not serve any meaningful
purpose. Applicants submit that these concerns are addressed by the
fact that no Underlying Portfolio or Other Portfolio can acquire
securities of any other investment company in excess of the limits
contained in section 12(d)(1)(A), except to the extent that such
Underlying Portfolio or Other Portfolio (a) receives securities of
another investment company as a dividend or as a result of a plan of
reorganization of a company (other than a plan devised for the purpose
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed
to have acquired) securities of another investment company pursuant to
exemptive relief from the SEC permitting such Underlying Portfolio or
Other Portfolio to (i) acquire securities of one or more affiliated
investment companies for short-term cash management purposes; or (II)
engage in interfund borrowing and lending transactions.
11. Section 12(d)(1)(J) provides that the SEC may exempt persons or
transactions from any provision of section 12(d)(1) if and to the
extent such exemption is consistent with the public interest and the
protection of investors. Applicants assert that the Direct Funds will
provide a simple answer to investor demand for a diversified,
professionally managed fund and funds, and that the structure of the
Direct Funds is consistent with the public interest and the protection
of investors.
12. Section 17(a) generally prohibits an affiliated person of a
registered investment company from selling securities to, or purchasing
securities from, the company. Applicants submit that the Direct Funds
and Underlying Portfolios may be deemed to be affiliated persons of one
another by virtue of being under common control of their adviser, or
because Direct Funds own 5% or more of the shares of an Underlying
Portfolio. Applicants state that sales by the Underlying Portfolios of
their shares to the Direct Funds could be deemed to be principal
transactions between affiliated persons under section 17(a)
13. 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 believe that relief under
section 6(c) is appropriate for the reasons discussed above.
14. 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, including the consideration to be
paid or received, 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 purposes of the
Act. Applicants request an exemption under sections 6(c) and 17(b) to
allow the transactions described above.
15. Applicants believe that the terms of the proposed arrangement
are reasonable and fair and do not involve overreaching because the
consideration paid for the sale and redemption of shares of Underlying
Portfolios will be based on the net asset values of the Underlying
Portfolios. Applicants note the investment of assets of the Direct
Funds in shares of the Underlying Portfolios and the issuance of shares
of the Underlying Portfolios to the Direct Funds will be effected in
accordance with the investment restrictions of the Direct Funds and
will be consistent with the policies as set forth in the registration
statement of the Direct Funds. Applicants also believe that the
proposed arrangement is consistent with the general purposes of the
Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. All Underlying Portfolios will be part of the same ``group of
investment companies,'' as defined in section 12(d)(1)(G)(ii) of the
Act, as the Direct Funds.
2. No Underlying Portfolio or Other Portfolio will acquire
securities of any other investment company in excess of the limits
contained in section 12(d)(1)(A) of the Act, except to the extent that
such Underlying Portfolio or Other Portfolio (a) receives securities of
another investment company as a dividend or as a result of a plan of
reorganization of a company (other than a plan devised for the purpose
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed
to have acquired securities of another investment company pursuant to
exemptive relief from the SEC permitting such Underlying Portfolio or
Other Portfolio to (i) acquire securities of one or more affiliated
investment companies for short-term cash management purposes; or (ii)
engage in interfund borrowing and lending transactions.
3. Any sales charges, distribution-related fees, and service fees
relating to the shares of the Direct Funds, when aggregated with any
sales charges, distribution-related fees, and service fees paid by the
Direct Funds relating to its acquisition, holding, or disposition of
shares of the Underlying Portfolios (and Other Portfolios), will not
exceed the limits set forth in rule 2830 of the NASD Conduct Rules.
4. Before approving any advisory contract under section 15 of the
Act, the boards of directors/trustees of the Direct Funds, including a
majority of the directors/trustees who are not ``interested persons,''
as defined in section 2(a)(19), 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 Other Portfolio advisory contract. This
finding, and the basis upon which the finding was made, will be
recorded fully in the minute books of the Direct Funds.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2905 Filed 2-5-97; 8:45 am]
BILLING CODE 8010-01-M