[Federal Register Volume 62, Number 203 (Tuesday, October 21, 1997)]
[Notices]
[Pages 54659-54661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27761]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22856; 812-10632]


Smith Barney Muni Funds, et al.; Notice of Application

October 14, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application under section 17(b) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from section 17(a) 
of the Act.

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SUMMARY OF APPLICATION: Order requested to allow a series of a 
registered investment company to acquire substantially all of the 
assets and certain liabilities of another of its series. Because of 
certain affiliations, applicants may not rely on rule 17a-8 under the 
Act.

APPLICANTS: Smith Barney Muni Funds (the ``Trust''), Smith Barney 
Mutual Funds Management Inc. (``SBMFM''), and Smith Barney Inc. 
(``Smith Barney'')

FILING DATES: The application was filed on April 22, 1997, and amended 
on August 20, 1997.

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 November 10, 
1997, and should be accompanied by proof of service on applicants, in 
the from 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 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 388 Greenwich Street, 22nd Floor, New York, New York 
10013. Attention: Christina T. Sydor, Esq.

FOR FURTHER INFORMATION CONTACT: Kathleen L. Knisley, Staff Attorney, 
at (202) 942-0517, or Christine Y. Greenlees, Branch Chief, 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 at the 
SEC's Public Reference Branch, 450 Fifth

[[Page 54660]]

Street, N.W., Washington, D.C. 20549 (tel. 202-942-8090).

Applicants' Representations

    1. The Trust, a Massachusetts business trust, is an open-end 
management investment company registered under the Act.\1\ The Trust 
currently consists of nine series, including the Ohio Portfolio (the 
``Acquired Portfolio'') and the National Portfolio (the ``Acquiring 
Portfolio,'' and, collectively with the Acquired Portfolio, the 
``Portfolios'').
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    \1\ The Trust was organized on August 14, 1985, under the name 
Test Managed Municipal Bond Funds. On April 23, 1986, July 31, 1991, 
and July 20, 1993, the Trust's name was changed to The Muni Bond 
Funds, Smith Barney Muni Bond Funds, and Smith Barney Muni Funds, 
respectively.
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    2. SBMFM is the investment adviser to the Portfolios. Smith Barney 
is the Trust's distributor. As of February 28, 1997, Smith Barney owned 
11.2% of the outstanding shares of the Acquired Portfolio. SBMFM and 
Smith Barney are both wholly-owned subsidiaries of Smith Barney 
Holdings Inc. (``Holdings'').
    3. On September 4, 1996, the board of trustees of the Trust (the 
``Board''), including its disinterested trustees, unanimously approved 
the reorganization (the ``Reorganization'') described in a Plan of 
Reorganization (the ``Reorganization Plan''). Pursuant to the 
Reorganization Plan, the Acquiring Portfolio proposes to acquire all or 
substantially all of the assets and certain liabilities of the Acquired 
Portfolio in exchange for shares of the Acquiring Portfolio based on 
the Portfolios' relative net asset values. The number of full and 
fractional shares of the Acquiring Portfolio to be issued to 
shareholders of the Acquired Fund will be determined by dividing the 
value of the Acquired Portfolio's assets, less liabilities, 
attributable to each class of shares by the net asset value of one 
share of the same class of the Acquiring Portfolio, computed as of the 
close of regular trading on the New York Stock Exchange, Inc. on or 
about the date on which the closing presently is expected to occur, 
December 12, 1997 (the ``Closing Date'').
    4. Each Portfolio offers four classes of shares. Class A shares of 
both Portfolios are sold with a front-end sales charge. Class B and 
Class C shares of both Portfolios are sold without a front-end sales 
charge but are subject to a contingent deferred sales charge 
(``CDSC''). Classd Y shares of both Portfolios are sold without an 
initial sales charge or CDSC and are available only to investors 
investing a minimum of $5 million. There are no Class Y shareholders of 
the Acquired Portfolio.
    5. Class A, Class B, and Class C shares of both Portfolios are sold 
subject to distribution plans adopted pursuant to rule 12b-1 under the 
Act. Under their respective plans, the Portfolios pay Smith Barney a 
service fee at the annual rate of 0.15% of the value of each 
Portfolio's average daily net assets attributable to each Portfolio's 
Class A, Class B, and Class C shares. In addition, each Portfolio's 
Class B and Class C shares pay a distribution fee at an annual rate of 
0.50% and 0.55%, respectively, of the value of the Portfolio's average 
daily net assets attributable to those shares.
    6. Each Portfolio pays SBMFM a management fee at the annual rate of 
0.45% of the value of its average daily net assets. SBMFM currently is 
waiving this fee for the Acquired Portfolio.
    7. Both Portfolios seek a high level of income exempt from Federal 
income taxes, although the Acquired Portfolio also seeks to pay its 
shareholders a high level of income exempt from Ohio personal income 
taxes. The other investment policies and practices of the Portfolios 
are substantially similar. As of February 28, 1997, the net assets of 
the Acquired Portfolio were $7.8 million, and the net assets of the 
Acquiring Portfolio were $385.6 million.
    8. Prior to the Closing Date, the Acquired Portfolio will use its 
best efforts to discharge all of its known liabilities and obligations. 
On or before the Closing Date, the Acquired Portfolio will have 
declared a dividend and/or other distribution so that it will have 
distributed all of its investment company taxable income, exempt-
interest income, and realized net capital gain, if any, for the taxable 
year ending on or prior to the Closing Date.
    9. As soon as practicable after the Closing Date, the Acquired 
Portfolio will liquidate and distribute pro rata to its shareholders of 
record, determined as of the close of business on the Closing Date, the 
shares of the Acquiring Portfolio received by it pursuant to the 
Reorganization. The liquidation and distribution will be accomplished 
by establishing accounts in the names of the Acquired Portfolio 
shareholders, each account representing the respective pro rata number 
of shares of the Acquiring Portfolio due to the Acquired Portfolio 
shareholders. Class A, Class B, and Class C shareholders of the 
Acquired Portfolio will receive Class A, Class B, and Class C shares, 
respectively, of the Acquiring Portfolio. After the distribution and 
winding up of its affairs, the Acquired Portfolio will be liquidated.
    10. In considering the advisability of the Reorganization Plan, the 
Board, including its disinterested trustees, found that the 
Reorganization is in the best interests of each Portfolio and that the 
interests of existing shareholders of each Portfolio will not be 
diluted as a result of the Reorganization.
    11. The Board considered a number of factors in making its 
findings, including: (a) the terms and conditions of the 
Reorganization; (b) the tax-free nature of the Reorganization; (c) the 
costs of the Reorganization to the Portfolios; (d) the compatibility of 
the objectives, policies, and restrictions of the Portfolios; (e) the 
savings in expenses borne by shareholders expected to be realized by 
the Reorganization; and (f) the potential benefits to the Portfolios' 
affiliates, including SBMFM, Smith Barney, and Holdings.
    12. The Board also considered that combining the Portfolios should 
benefit the Acquired Portfolio's shareholders because the much greater 
size of the Acquiring Portfolio enables it to invest more effectively, 
to achieve certain economies of scale and, in turn, potentially to 
increase its operating efficiencies and facilitate portfolio 
management. During the Board's consideration of the Reorganization, it 
was noted that shareholders of the Acquired Portfolio would no longer 
have the benefit of a fund which seeks income exempt from Ohio personal 
income taxes. However, the Acquired Portfolio was not considered to 
have sufficient assets to justify maintaining it as a standing alone 
fund, and no potential for substantial future growth was foreseen.
    13. Smith Barney will be responsible for the expenses incurred in 
connection with the Reorganization, except that each Portfolio will be 
liable for any fees and expenses of its transfer agent incurred in 
connection with the Reorganization and the Acquired Portfolio will be 
liable for all fees and expenses incurred relating to its liquidation. 
The Reorganization expenses will include professional fees and the cost 
of soliciting proxies for the meeting of the Acquired Portfolio 
shareholders, consisting principally of printing and mailing expenses, 
together with the cost of any supplementary solicitation. The 
Reorganization Plan provides that it may be terminated by the Board at 
any time prior to the Closing Date if circumstances should develop 
that, in the opinion of the Board, make proceeding with the 
Reorganization Plan inadvisable. If the Board determines, prior to the 
Closing Date, that proceeding with the Reorganization would be 
inadvisable,

[[Page 54661]]

the Reorganization Plan provides that each Portfolio will bear any 
expenses it has incurred incidental to the preparation and carrying out 
of the Reorganization Plan.
    14. A registration statement on Form N-14 containing a combined 
prospectus/proxy statement has been filed with the SEC. Applicants 
expect to send the prospectus/proxy statement to shareholders of the 
Acquired Portfolio in October 1997 for their approval at a meeting of 
shareholders scheduled to be held on or about November 21, 1997.
    15. The consummation of the Reorganization is subject to the 
following conditions set forth in the Reorganization Plan: (a) the 
shareholders of the Acquired Portfolio will have approved the 
Reorganization Plan; and (b) the parties will have received exemptive 
relief from the SEC with respect to the issues that are the subject of 
the application. Applicants agree not to make any material changes to 
the Reorganization Plan that affect the application without prior SEC 
approval.

Applicants' Legal Analysis

    1. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or any affiliated person of 
such a person, acting as principal, from selling any security to, or 
purchasing any security from the company. Section 2(a)(3) of the Act 
defines an ``affiliated person'' of another person to include any 
person that owns 5% or more of the outstanding voting securities of 
such other person and any person directly or indirectly controlling, 
controlled by, or under common control with such other person; or, if 
the other person is an investment company, any investment adviser of 
the investment company.
    2. Rule 17a-8 under the Act exempts from the prohibitions of 
section 17(a) mergers, consolidations, or purchasers or sales of 
substantially all of the assets of registered investment companies that 
are affiliated persons solely by reason of having a common investment 
adviser, common directors/trustees, and/or common officers, provided 
that certain conditions are satisfied.
    3. Applicants believe that they may not rely upon rule 17a-8 
because the Portfolios may be affiliated for reasons other than those 
set forth in the rule. Smith Barney owns 5% or more of the outstanding 
voting securities of the Acquired Portfolio. Because of this ownership, 
the Acquiring Portfolio may be deemed an affiliated person of an 
affiliated person of the Acquired Portfolio, and vice versa, for 
reasons not based solely on their common adviser. Consequently, 
applicants are requesting an order pursuant to section 17(b) of the Act 
exempting them from section 17(a) to the extent necessary to consummate 
the Reorganization.
    4. Section 17(b) of the Act provides that the SEC may exempt a 
transaction from the provisions of section 17(a) if the terms of the 
proposed transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned; the proposed transaction is 
consistent with the policy of each registered investment company 
concerned; and the proposed transaction is consistent with the general 
purposes of the Act.
    5. Applicants submit that the terms of the Reorganization satisfy 
the standards set forth in section 17(b), in that the terms are fair 
and reasonable and do not involve overreaching on the part of any 
person concerned. Applicants note that the Board, including the 
disinterested trustees, has reviewed the terms of the Reorganization as 
set forth in the Reorganization Plan, including the consideration to be 
paid or received, and has found that participation in the 
Reorganization is the best interests of each Portfolio and that the 
interests of the existing shareholders of each Portfolio will not be 
diluted as a result of the Reorganization. Applicants also note that 
the exchange of the Acquired Portfolio's assets and certain liabilities 
for the Acquiring Portfolio shares will be based on the Portfolio's 
relative net asset values.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27761 Filed 10-20-97; 8:45 am]
BILLING CODE 8010-01-M