[Federal Register Volume 62, Number 35 (Friday, February 21, 1997)]
[Notices]
[Pages 8063-8065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4244]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22512; 812-10132]


Sierra Prime Income Fund, et al.; Notice of Application

February 14, 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: Sierra Prime Income Fund (the ``Trust''), Sierra Investment 
Advisors Corporation (the ``Adviser''), and Sierra Investment Services 
Corporation (the ``Distributor'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from sections 18(c) and 18(i) of the Act, and under 
section 17(d) of the Act and rule 17d-1 thereunder permitting certain 
joint transactions.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain closed-end investment companies to issue multiple classes of 
shares in the same portfolio of securities and impose distribution fees 
on one or more classes of shares.

FILING DATES: The application was filed on May 7, 1996 and amended on 
August 14, 1996, and on November 26, 1996. Applicants have agreed to 
file an amendment during the notice period, the substance of which is 
incorporated herein.

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 March 11, 1997 
and should be accompanied by proof of service on the 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 5th Street, N.W., Washington, D.C. 
20549. Applicants, 9301 Corbin Avenue, Suite 333, Northridge, 
California 91324.

FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, 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. The Trust is a registered closed-end management investment 
company organized as a Massachusetts business trust. The Trust has 
entered into an investment advisory agreement with the Adviser, a 
wholly-owned subsidiary of Sierra Capital Management Corporation. The 
Adviser has delegated the management of the Trust's investment 
portfolio to Van Kampen American Capital Management Inc. The Trust has 
entered into a distribution agreement with the Distribution pursuant to 
which the Distributor acts as principal underwriter or distributor for 
the Trust. Applicants request that relief extend to all future series 
of the Trust and all other registered closed-end investment companies 
with substantially the same investment policies and manner of operation 
as the Trust for which the Adviser, the Distributor, or any entity 
controlling, controlled by, or under common control with the Adviser or 
Distributor acts as adviser or distributor now or in the future.
    2. The Trust's investment objective is to provide as high a level 
of income as is consistent with the preservation of capital primarily 
through investment in senior collateralized corporate loans (``Senior 
Loans'') in the form of participation interests in Senior Loans made by 
banks or other financial institutions. The Trust and funds with similar 
investment policies and manners of operation are commonly known as 
``prime rate'' funds. While the Trust's investment policies require it 
to be organized as a closed-end investment company, the Trust has 
characteristics largely associated with an open-end investment company. 
Similar to open-end funds, shares of the Trust are not listed on an 
exchange and are not traded over-the-counter on the National 
Association of Securities Dealers, Inc.'s (``NASD's'') Automated 
Quotation National Market System. Also similar to open-end funds, the 
Trust engages in a continuous offering of its shares, and updates its 
registration statement annually. The Trust currently offers one class 
of shares to investors with a front-end sales load, as described below.
    3. Because the Trust does not currently anticipate that a secondary 
market will develop for its shares, the Trust considers the shares to 
be illiquid. Therefore, consistent with section 23(c)(2) of the Act, 
the Trust intends to consider making tender offers each quarter to 
purchase its shares from shareholders at the then current net asset 
value (``NAV'') per share. Section 23(c)(2) provides that a registered 
closed-end investment company may

[[Page 8064]]

purchase securities of which it is the issuer pursuant to tenders, 
after reasonable opportunity to submit tenders given to all holders of 
securities of the class to be purchased.\1\
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    \1\ Each tender offer will be made in accordance with section 
13(e) of the Securities Exchange Act of 1934 (the ``Exchange Act'') 
and rule 13e-4 thereunder. Applicants received an exemption from 
rule 10b-6 under the Exchange Act from the SEC's Division of Market 
Regulation to permit the Trust to make tender offers for its shares 
while simultaneously engaging in a continuous offering of its 
shares. Applicants also received an exemption from rule 13e-
4(f)(8)(ii) under the Exchange Act to permit the Trust to allow 
shareholders to exchange shares of the Trust for either cash or the 
cash-equivalent amount of the same class of shares of certain open-
end investment companies advised by the Adviser. See Sierra Prime 
Income Fund (pub. avail. June 5, 1996).
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    4. Applicants propose to continue to operate as a ``prime rate'' 
fund, with the addition of a multiclass pricing system (the 
``System''). On April 24, 1996, the board of trustees of the Trust 
approved the establishment of the System, subject to the receipt of the 
order requested in the application. Under the System, the Trust could 
provide investors with the option of purchasing shares: (a) Subject to 
a conventional front-end sales load and, under certain circumstances, 
an Early Withdrawal Charge (``EWC'') (``Class A Shares''); (b) subject 
to an EWC, an asset-based distribution fee (``Distribution Fee''), and 
a service fee (``Service Fee'') (``Class B Shares''); and (c) subject 
to an EWC, a Distribution Fee, and a Service Fee offered in connection 
with the Sierra Asset Management Program (``SAM Program'') (``Class S 
Shares''). All fees charged by applicants under the System will comply 
with Rule 2830 of the NASD Conduct Rules, although such rule does not 
technically apply to the Trust. If applicants receive the relief 
requested, sales loads, Distribution Fees, EWCs, and exchange 
procedures for the Trust will be structurally similar to those in open-
end investment companies. In addition, the only differences between the 
Trust's current and future operations would be the offering of multiple 
classes of shares, and the imposition of Distribution Fees and Service 
Fees, as described below.
    5. Currently, Class A Shares of the Trust are offered to investors 
at NAV plus a front-end sales load (``Class A Sales Load''). The Class 
A Sales Load is graduated from 4.5% of the offering price per share for 
purchases of less than $50,000 to 0% for purchases of $1,000,000 or 
more. Applicants will waive the Class A Sales Load for certain 
purchases described in the application. The Trust may impose an EWC on 
certain Class A Shares redeemed within one or two years of purchase. 
The Class A Shares subject to an EWC include those purchased at NAV 
without a sales charge, acquired through certain exchanges of shares, 
and purchased through certain employee benefit plans. The EWC for Class 
A Shares is waived for certain repurchases or tenders outlined in the 
application. The EWC for Class A Shares is calculated based on the 
lower of the shares' cost or current NAV. In determining whether the 
EWC is payable, the Trust will first redeem shares not subject to an 
EWC. Class A Shares are not subject to a Distribution Fee.
    6. Applicants propose to offer Class B Shares of the Trust at NAV 
without the imposition of a sales load at the time of purchase. 
Applicants would impose a Distribution Fee on Class B Shares of up to 
.75% of the value of Class B's average daily net assets. The 
Distribution Fee, similar to a fee charged under a rule 12b-1 plan for 
open-end investment companies, would compensate the Distributor for its 
services and expenses in distributing Class B Shares, including 
payments made to broker-dealers and certain financial institutions as 
commissions. Class B Shares also may be subject to a Service Fee (as 
defined in NASD Conduct Rule 2830) of up to .25% of Class B's average 
daily net assets. The Service Fee would compensate certain broker-
dealers, financial institutions, and others that provide personal 
services or maintain shareholder accounts.
    7. An investor's proceeds from a redemption of Class B Shares made 
within a certain period after the purchase of the shares may be subject 
to an EWC that is paid to the Distributor. The amount of the EWC would 
be calculated by multiplying the applicable percentage charge by the 
lesser of: (a) The NAV of the shares at the time of purchase; or (b) 
the NAV of the shares at the time of redemption. Applicants currently 
expect that the EWC would be graduated from 4% to 0% over five years.
    8. Class S Shares would be sold in connection with the SAM 
Program.\2\ Class S Shares have the same characteristics as Class B 
Shares except for the SAM requirement and a modification to the EWC. 
The EWC for Class S Shares graduates from 5% to 0% over seven years. 
Shares purchased through the reinvestment of dividends and other 
distributions paid in Class S Shares will be Class S Shares, but will 
not be subject to an EWC. A shareholder's termination of participation 
in the SAM Program will not affect the shareholder's continued ability 
to hold Class S Shares, but the shareholder would be precluded from 
purchasing additional Class S Shares.
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    \2\ The SAM Program is an asset allocation program that provides 
two levels of professional management and diversification to 
clients. The Distributor determines an asset allocation strategy and 
investment policy for each SAM Program strategy.
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    9. All expenses incurred by the Trust will be allocated to each 
class of shares based upon the net assets of the Trust attributable to 
each class. Distribution Fees, Service Fees, and other incremental 
expenses that may be attributable to a particular class of shares will 
be charged directly to the net assets of the particular class. 
Incremental expenses include transfer agent fees, printing and postage 
expenses, state and federal registration fees, and other incremental 
expenses that should be allocated to a particular class of shares. 
Because of the higher fees or expenses paid by the holders of certain 
classes, the net income attributable to and the dividends payable on 
shares of one class may differ from the net income attributable to and 
the dividends payable on shares of other classes in the Trust. As a 
result, the NAV per share of the classes will differ at times. Expenses 
of the Trust allocated to a particular class of shares will be borne on 
a pro rata basis by each outstanding share of that class.
    10. The Trust may create additional classes of shares or series 
that may differ from Class A, Class B, or Class S Shares in the 
following respects: (a) The amount of Distribution Fees; (b) voting 
rights with respect to each class' expenses; (c) the designation of 
each class; (d) the impact of any class expenses directly attributable 
to a particular class of shares; (e) the dividends and NAV resulting 
from differences in fees under a plan of distribution or class 
expenses; (f) the EWC structure; (g) the sales load structure; and (h) 
exchange privileges or conversion features.
    Currently, Class A Shares of the Trust may be exchanged during a 
tender offer period for Class A shares of equal value of any portfolio 
of any open-end investment company advised by Sierra Advisors (``Sierra 
Funds''). In addition, Class A shares of Sierra Funds may be exchanged 
for Class A Shares of the Trust. Under the proposal, the Trust will 
permit shareholders at the time of a tender offer to exchange Trust 
shares for the same class of shares of the Sierra Funds (except for The 
Sierra Variable Trust) equal in value to the tendered Trust shares in 
lieu of cash. All exchanges of Trust shares will comply with rule 13e-4 
under the Exchange

[[Page 8065]]

Act.\3\ In addition, shareholders of any portfolio of Sierra Funds 
could exchange their shares for shares of the Trust of equal value in 
lieu of cash. The exchanges of shares from the Sierra Funds into shares 
of the Trust will comply with rule 11a-3 under the Act, except to the 
extent that the Trust operates as a closed-end fund. Although 
applicants currently do not intend to do so, the Trust may in the 
future offer a class of shares that will convert into shares of another 
class of the Trust. Except to the extent that the Trust operates as a 
closed-end fund, it would comply with rule 18f-3 under the Act with 
respect to such conversions.
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    \3\ See, supra, note 1.
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Applicant's Legal Analysis

    1. Applicants request an exemption under section 6(c) of the Act 
from sections 18(c) and 18(i) of the Act to the extent that the 
proposed issuance and sale of multiple classes of shares might be 
deemed to result in the issuance of a ``senior security'' within the 
meaning of section 18(g) of the Act and thus be prohibited by section 
18(c), and violate the equal voting provisions of section 18(i) of the 
Act.
    2. Section 18(c) provides, in relevant part, that a closed-end 
investment company may not issue or sell any senior security that is 
stock if, immediately thereafter, the company has more than one class 
of senior security that is a stock. An exception to this prohibition is 
that any such class of stock may be issued in one or more series 
provided no series has a preference or priority over any other series 
upon the distribution of the company's assets or in respect of payment 
of interest or dividends. The creation of multiple classes of shares 
may result in shares of a class having priority over another class as 
to the payment of dividends because shareholders of different classes 
would pay different Distribution Fees, Service Fees, and other 
incremental expenses that should be allocated to a particular class of 
shares.
    3. Section 18(i) provides that each share of stock issued by a 
registered management company shall be a voting stock and have equal 
voting rights with every other outstanding voting stock. The System may 
violate section 18(i) because each class would be entitled to exclusive 
voting rights with respect to matters solely related to such class.
    4. 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.
    5. Applicants believe that the proposed allocation of expenses and 
voting rights in the manner described above is equitable and would not 
discriminate against any group of shareholders. According to 
applicants, the proposed arrangements would permit the Trust to 
facilitate the distribution of its securities and provide investors 
with a broader choice of shareholder services without the Trust 
assuming excessive costs or unnecessary investment risks.
    6. Applicants represent that if the Trust was required to organize 
separate investment portfolios for each class of shares, it could face 
liquidity and diversification problems that could prevent the Trust 
from producing a favorable return. Under the proposal, investors would 
be able to benefit, according to applicants, by investing in an 
established, sizable fund. In addition, shareholders may be relieved of 
a portion of the fixed costs of the Trust because such costs, 
potentially, would be spread over a greater number of shares than they 
would be otherwise.
    7. Applicants believe that their proposal does not raise the 
concerns that section 18 was designed to ameliorate to any greater 
degree than open-end investment companies' multiple class systems. 
Under rule 18f-3, open-end investment companies may offer multiple 
classes of shares without seeking individual exemptive orders from the 
SEC. Applicants further believe that their arrangement does not involve 
borrowings and it would not adversely affect the assets of the Trust.
    8. Section 17(d) and rule 17d-1 prohibit an affiliated person of an 
investment company, acting as principal, from participating in or 
effecting any transaction in connection with any joint enterprise or 
joint arrangement in which the investment company participates. 
Applicants request an order pursuant to section 17(d) and rule 17d-1 to 
permit the Trust to impose Distribution Fees in a manner similar to 
rule 12b-1 fees imposed by open-end investment companies. While rule 
12b-1 does not apply to closed-end investment companies, there is some 
question as to whether section 17(d) and rule 17d-1 apply to such fees.
    9. In passing upon applications submitted pursuant to section 17(d) 
and rule 17d-1, the SEC considers 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.
    10. Applicants have agreed to comply with rule 12b-1 as if the 
Trust is an open-end investment company. Applicants believe that any 
section 17(d) concerns in connection with the Trust financing the 
distribution of its shares should be resolved by this undertaking. By 
complying with rule 12b-1, applicants believe that the Trust would 
participate in substantially the same way and under substantially the 
same conditions as would be the case with an open-end investment 
company imposing distribution fees under rule 12b-1.

Applicants' Condition

    Applicants expressly consent, in connection with this request for 
exemptive relief, to be subject to conditions applicable to open-end 
investment companies as set forth in rules 18f-3, 6c-10, and 12b-1 
under the Investment Company Act, as amended from time to time, as if 
the rules applied to them.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4244 Filed 2-20-97; 8:45 am]
BILLING CODE 8010-01-M