[Federal Register Volume 62, Number 199 (Wednesday, October 15, 1997)]
[Notices]
[Pages 53669-53672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27171]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22842; 812-10582]
Sierra Asset Management Portfolios, et al.; Notice of Application
October 7, 1997.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application under sections 6(c), 12(d)(1)(J), and
17(b) of the Investment Company Act of 1940 (the ``Act'') for an
exemption from sections 12(d)(1) (A) and (C) and 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would amend a
prior order \1\ (the ``Prior Order'') to permit a ``fund of funds''
that is an open-end investment company to invest in shares of an
affiliated closed-end investment company.
\1\ Sierra Asset Management Trust, et al., Investment Company
Act Release Nos. 22001 (June 3, 1996) (notice) and 22047 (June 28,
1996) (order).
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APPLICANTS: Sierra Asset Management Portfolios (the ``Trust''), Sierra
Prime Income Fund (``SPIF''), Sierra Investment Advisors Corporation
(``Sierra Advisors''), and Sierra Investment Services Corporation
(``Sierra Services''), including each applicant's successor in
interest.\2\
\2\ ``Successor in interest'' is limited to entities that result
from a reorganization into another jurisdiction or a change in the
type of business organization.
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FILING DATES: The application was filed on March 19, 1997 and amended
on July 21, 1997. Applicants have agreed to file an amendment, the
substance of which is incorporated in this notice, 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 October 29,
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. Applicants, 9301 Corbin Avenue, Suite 333, Northridge,
California 91324.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Senior Counsel, at
(202) 942-0572, or Christine Y. Greenlees, 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, 450 5th Street, N.W., Washington, D.C.
20549 (telephone (202) 942-8090).
Applicants' Representations
1. The Trust is registered under the Act as an open-end management
investment company and consists of five portfolios (the ``SAM
Portfolios'').\3\ Each SAM Portfolio operates as a ``fund of funds''
under the Prior Order and invests substantially all of its assets in
shares of various portfolios of Sierra Trust Funds. Sierra Trust Funds
is a registered open-end management investment company comprised of
sixteen portfolios (the ``Underlying Funds'') that is part of the
``same group of investment companies'' (as defined in section
12(d)(1)(G)(ii) of the Act) as the SAM Portfolios. Each SAM Portfolio
also invests in other securities. Each SAM Portfolio seeks to provide
diversification among major asset categories and stock and bond sub-
categories. Certain of the SAM Portfolios are designed to provide
exposure in varying degrees to the growth potential of the stock market
and/or the income potential of the bond market.
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\3\ The Trust was initially organized as the ``Sierra Asset
Management Trust,'' but changed its name on July 19, 1996, prior to
the Trust's registration statement becoming effective.
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2. Applicants seek to amend the Prior Order to permit the SAM
Portfolios to acquire up to 100% of SPIF's shares. Applicants request
that relief be extended to any registered open-end management
investment company, or
[[Page 53670]]
series thereof, for which Sierra Services or any entity controlling,
controlled by, or under common control with Sierra Services, now or in
the future acts as investment adviser or principal underwriter (the
``Funds'').\4\
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\4\ All investment companies that presently intend to rely on
the requested order are named as applicants.
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3. SPIF is registered under the Act as a non-diversified closed-end
fund. SPIF seeks to provide a high level of current income, consistent
with preservation of capital, through investments primarily in senior
collateralized loans made by banks or other financial institutions to
U.S. corporations, partnerships, and other entities. The loans
generally are expected to pay interest at rates that float or reset at
a margin above a generally recognized base lending rate and, in
addition, have a dollar-weighted average maturity of ninety days or
less. As a result, the net asset value (``NAV'') of SPIF's shares has
remained, and is expected to remain, relatively stable. Sierra Services
has determined that SPIF's investment objective and policies make it an
appropriate investment for four of the five SAM Portfolios. (It is not
presently intended that the other portfolio will invest in shares of
SPIF.)
4. Sierra Services is an investment adviser registered under the
Investment Advisers Act of 1940 (the ``Advisers Act'') and a broker-
dealer registered under the Securities Exchange Act of 1934. Sierra
Services serves as the principal underwriter/distributor of the SAM
Portfolios and SPIF. Sierra Services also serves as the SAM Portfolios'
investment adviser, for which it receives payment equal to 0.15% of
each SAM Portfolio's average net assets. Sierra Advisors is an
investment adviser registered under the Advisers Act and provides
overall investment management services to SPIF, for which it receives
payment equal to .95% of SPIF's assets. Sierra Advisors and Sierra
Services are wholly-owned subsidiaries of Sierra Capital Management
Corporation, which in turn is a wholly-owned subsidiary of Washington
Mutual, Inc. Van Kampen American Capital Management, Inc. (``VKM'') is
an investment adviser registered under the Advisers Act and manages
SPIF's investment portfolio on a day-to-day basis.
5. The SAM Portfolios currently offer two classes of shares, class
A shares and class B shares. Class A shares are subject to a maximum
front-end sales charge that ranges from 4.50% to 5.75%. Purchases of $1
million or more and certain other purchases are not subject to a front-
end sales charge but may be subject to a contingent deferred sales
charge (``CDSC'') of up to 1.00%. Class A shares also are subject to a
0.25% asset-based sales charge. Class B shares are subject to a maximum
CDSC of 5%, a 0.75% asset-based sales charge, and a 0.25% shareholder
servicing fee.
6. SPIF currently offers a single class of shares that carry a
maximum 4.5% front-end sales charge.\5\ SPIF has received an order of
the Commission permitting it to offer additional classes of shares
subject to differing sales charge structures (the ``Multi-Class
Order'').\6\ The sales charges would include front-end sales charges,
early withdrawal charges that are analogous to CDSCs and that comply in
substance with the terms of rule 6c-10 under the Act, and asset-based
distribution fees that comply with the terms of rule 12b-1 under the
Act. In addition, under the Multi-Class Order, SPIF has agreed to
comply with the terms of rule 18f-3 under the Act. SPIF also has agreed
to treat all sales-related compensation as sales charges subject to the
terms of rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (``NASD'').
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\5\ Shares of SPIF would be sold to the SAM Portfolios without
imposition of a sales charge.
\6\ Sierra Prime Income Fund, et al. Investment Company Act
Release Nos. 22512 (Feb. 14, 1997) (notice) and 22556 (March 12,
1997) (order).
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7. SPIF's shares are offered to the public on a continuous basis
pursuant to rule 415 under the Securities Act of 1933. Unlike most
closed-end funds, SPIF's shares are not listed on an exchange or traded
over-the-counter. No secondary market exists for SPIF's shares, and
none is expected to develop in the future. SPIF has made, and intends
to continue to make, pursuant to section 23(c)(2) of the Act, quarterly
tender offers to repurchase a specified percentage of its outstanding
shares for cash at NAV, subject to approval by SPIF's board of trustees
(the ``Tender Privilege'').
8. Under the Tender Privilege, absent an early withdrawal charge,
SPIF shareholders receive cash in an amount equal to the NAV of their
shares as determined by State Street Bank & Trust Company at the close
of business on the date that the Tender Privilege terminates. SPIF
shareholders who do not wish to receive cash under the Tender Privilege
may instead elect to exchange their shares (the ``Exchange Privilege'')
for shares of the Sierra Trust Funds or the SAM Portfolios. SPIF has
informed investors in its promotional materials that there can be no
assurance that the Tender and Exchange Privileges will be offered every
quarter, or if completed, that they will provide sufficient liquidity
for all shareholders who wish to dispose of their SPIF shares.
9. Sierra Services acknowledges that SPIF shares will be deemed
illiquid securities unless determined otherwise by the Trust's board of
trustees, and that any purchase of SPIF shares by a SAM Portfolio will
comply with the SEC rules, regulations, and staff positions concerning
the liquidity of an open-end fund's portfolio. The Trust acknowledges
that the periodic tender offers do not by themselves provide a basis
for determining that the SPIF shares are liquid.
Applicants' Legal Analysis
1. Section 12(d)(1)(A) provides that no registered investment
company may acquire securities of another investment company if the
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 the securities, together with the securities of any other acquired
investment companies, represent more than 10% of the acquiring
company's total assets. The purpose of section 12(d)(1)(A) was to
address the perceived adverse consequences of ``pyramiding'' of
investment companies in a fund of funds arrangement, including
duplicative costs, the exercise of undue influence or control over the
underlying fund, and the potential adverse impact of large-scale
redemptions.
2. Section 12(d)(1)(C) provides that no registered investment
company may acquire securities of a registered closed-end company if
the acquiring company, together with any other investment companies
advised by the investment adviser, own more than 10% of the closed-end
fund's outstanding voting securities. Applicants state that there were
no additional concerns underlying section 12(d)(1)(C); rather, section
12(d)(1)(C) was intended to relax the section 12(d)(1)(A) prohibitions
to accommodate fund industry difficulties associated with monitoring
the acquisition of closed-end fund shares.
3. Applicants request relief from the limitations of sections
12(d)(1) (A) and (C) to the extent necessary to permit each individual
SAM Portfolio to invest more than 5% of its assets in SPIF and acquire
more than 3% of SPIF's shares.
4. 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 the exemption is consistent with the public interest and the
protection of investors. For the reasons below, applicants assert that
the
[[Page 53671]]
proposal meets the requirements of section 12(d)(1)(J).
5. Section 12(d)(1)(G) of the Act provides that section 12(d)(1)
will not apply to the securities of an acquired company purchased by an
acquiring company if: (a) The acquiring company and the acquired
company are part of the same group of investment companies; (b) 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; (c) the aggregate sales loads and distribution-
related fees of the acquiring company and the acquired company are
limited; and (d) 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).
6. Applicants may not rely on section 12(d)(1)(G) because the SAM
Portfolios will, in addition to investing directly in portfolio
securities as permitted by the Prior Order, be investing in shares of
SPIF, a closed-end fund. However, applicants believe that exemptive
relief to permit investments by the SAM Portfolios in shares of SPIF is
appropriate because SPIF will operate in a manner substantially similar
to an open-end fund. Applicants state that operational similarities
between SPIF and an open-end fund include the following: (a) Share
offerings on a continuous basis at a price equal to their NAV, plus any
applicable sales charges; (b) daily pricing of shares that
substantially complies with rule 22c-1 under the Act; and (c)
procedures that permit investors to tender their shares for cash in an
amount equal to their NAV.
7. Applicants assert that permitting the SAM Portfolios to invest
in SPIF would not raise the concerns underlying sections 12(d)(1)(A)
and (C). Applicants believe that the proposal will not raise the
concern that investors will be subject to two layers of advisory fees.
Applicants state that, before approving any advisory contract under
section 15 of the Act, the trustees of the Trust, including a majority
of the trustees who are not ``interested persons,'' as defined in
section 2(a)(19) of the Act, will find that any advisory fees charged
under the contract are based on services provided that are in addition
to, rather than duplicative of, services provided under any advisory
contract with an Underlying Fund or SPIF. Applicants also note that the
advisory fees charged to the Trust are, in essence, for asset
allocation, while the Underlying Funds' and SPIF's advisory fees relate
to the selection and disposition of specific securities.
8. Applicants assert that the proposal will not involve layering of
sales charges. Applicants state that, as a condition to the requested
relief, any sales charges or distribution or service fees relating to
the shares of a SAM Portfolio will not exceed the limits set forth in
rule 2830 of the Conduct Rules of the NASD when aggregated with any
sales charges or distribution or service fees that the SAM Portfolio
may pay relating to the acquisition, holding, or disposition of shares
of the Underlying Funds or SPIF.
9. Applicants state that administrative and similar fees may be
charged at the Trust and Underlying Fund and SPIF levels. However,
applicants believe that overall administrative and other expenses may
be reduced at each individual level under the proposed arrangement.
10. Applicants contend that the threat of large scale redemptions
is minimized in the proposed structure. Applicants assert that the SAM
Portfolios are designed for long-term investors, which reduces the
possibility that the SAM Portfolios will be used as short-term trading
vehicles and further protects the SAM Portfolios, the Underlying Funds,
and SPIF from unexpected large redemptions.
11. Applicants state that an additional concern underlying section
12(d)(1) is the creation of overly complex investment vehicles.
Applicants state that these concerns are addresses by the fact that no
Underlying Fund or SPIF will acquire securities of any other investment
company in excess of the limits contained in section 12(d)(1)(A) of the
Act.
12. Section 17(a) generally prohibits an affiliated person of a
registered investment company from selling securities to, or purchasing
securities from, the company. The Trust and SPIF may be considered
affiliated persons by virtue of being under common control of Sierra
Capital Management Corporation. They also many be deemed to be
affiliated persons to the extent that a SAM Portfolio may own 5% or
more of SPIF's shares. Accordingly, applicants request relief to permit
SPIF to sell its shares to and repurchase its shares from the SAM
Portfolios.
13. 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.
14. Section 17(b) provides that the SEC will 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)
and state that relief is appropriate for the reasons discussed below.
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 repurchase of shares of SPIF will
be based on the NAV of SPIF. Applicants represent that VKM, an entity
that is not an affiliated person of Sierra Services, will provide
pricing recommendations to Sierra Advisors concerning SPIF's portfolio
securities. Sierra Advisors will then provide pricing information,
based on the recommendations received from VKM, to State Street Bank &
Trust Company to determine the NAV of SPIF's shares, subject to
procedures that SPIF's board of trustees have established and monitor
on a periodic basis. Sales and repurchases from all investors will be
based on the NAV so determined.
16. Applicants state that the proposed arrangement will be
consistent with the policies of each Fund and SPIF. The investment of
assets of the Funds in shares of SPIF and the issuance of shares of
SPIF to the Funds will be effected in accordance with the investment
restrictions of each Fund and SPIF and will be consistent with the
policies as set forth in the registration statement of each Fund and
SPIF. 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, which supersede the conditions
to the Prior Order:
1. A Fund may purchase shares of SPIF so long as shares of SPIF are
continuously offered to the Funds at NAV, and SPIF continues to offer
the Tender Privilege.
2. Neither the Underlying Funds nor SPIF (collectively, the ``New
Underlying Funds'') will acquire securities of any other investment
company in excess of
[[Page 53672]]
the limits contained in section 12(d)(1)(A) of the Act.
3. Before approving any advisory contract under section 15 of the
Act, the board of trustees of a Fund, including a majority of the
trustees who are not ``interested persons'' of the Fund as defined in
section 2(a)(19) of the Act, 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 New
Underlying Fund advisory contract. This finding, and the basis upon
which the finding was made, will be recorded fully in the minute books
of the Fund.
4. Any sales charges or distribution or service-related fees
charged with respect to shares of a Fund, when aggregated with any
sales charges or distribution or service-related fees paid by the Fund
with respect to the shares of any New Underlying Fund, will not exceed
the limits set forth in rule 2830 of the NASD Conduct Rules.
5. Each Fund and each New Underlying Fund will be part of the same
``group of investment companies,'' as defined in section
12(d)(1)(G)(ii) of the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27171 Filed 10-14-97; 8:45 am]
BILLING CODE 8010-01-M