[Federal Register Volume 62, Number 216 (Friday, November 7, 1997)]
[Notices]
[Pages 60293-60296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29471]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22871; File No. 812-10854]
Salomon, Inc.
November 3, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section
15(f)(1)(A) of the Act.
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SUMMARY OF APPLICATION: Applicant Salomon Inc (``Salomon'') requests an
order to permit Salomon and its investment advisory subsidiaries,
Salomon Brothers Asset Management (``SBAM'') and Salomon Brothers Asset
Management Limited (``SBAM Limited'') that act as investment adviser on
subadviser (collectively, ``Advisers'') to one or more registered
investment companies, to receive payment in connection with the sale of
applicant's advisory business. Without the requested exemption, an
investment company advised by an Adviser would have to reconstitute its
board of directors (``Board'') to meet the 75 percent non-interested
director requirement of section 15(f)(1)(A).
FILING DATE: The application was filed on November 3, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be
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issued unless the SEC orders a hearing. Interested persons may request
a hearing by writing to the SEC's Secretary and serving applicant 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 24, 1997 and should be
accompanied by proof of service on applicant, 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. Applicant, 7 World Trade Center, New York, NY 10048
FOR FURTHER INFORMATION CONTACT: J. Amanda Machen, Senior Counsel, at
(202) 942-7120, 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 Street, N.W., Washington, D.C.
20549 (tel. 202-942-8090).
Applicant's Representations
1. Salomon is a global investment banking and securities and
commodities trading company. Salomon Brothers Inc and its subsidiaries
(``Salomon Brothers'') conduct Salomon's investment banking and
securities trading activities. Salomon's asset management business is
conducted primarily through SBAM and SBAM Limited, both indirect,
wholly-owned subsidiaries of Salomon and investment advisers registered
under the Investment Advisers Act of 1940.
2. The relief requested relates to the following registered
investment companies for which SBAM or SBAM Limited acts as investment
adviser, investment manager, or subadviser: The Emerging Markets Income
Fund Inc., The Emerging Markets Income Fund II Inc., The Emerging
Markets Floating Rate Fund Inc., Global Partners Income Fund Inc.,
Municipal Partners Fund Inc., Municipal Partners Fund II Inc., New
England Zenith Fund (``New England''), JNL Series Trust, North American
Funds, WNL Series Trust, SEI International Trust, Nationwide Separate
Account Trust (``Nationwide''), The Americas Income Trust, Inc.,
Heritage Income Trust, Latin America Investment Fund, and Irish
Investment Fund, Inc. (``Irish Investment'') (collectively, the
``Companies''). \1\
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\1\ In each of the foregoing cases, whether acting as investment
adviser, investment manager or subadviser, SBAM or SBAM Limited (as
applicable) is acting as an investment adviser within the meaning of
section 2(a)(20) of the Act, and serves as investment adviser,
investment manager or subadviser under a contract subject to section
15 of the Act.
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3. Travelers Group Inc. (``Travelers'') is a diversified,
integrated financial services company engaged in investment services,
consumer finance, and life and property-casualty insurance services.
4. On September 24, 1997, Travelers and Salomon entered into a
merger agreement, under which a wholly-owned subsidiary of Travelers
will be merged into Salomon, with Salomon continuing as the surviving
entity, becoming a wholly-owned subsidiary of Travelers, and changing
its name to Salomon Smith Barney Holdings, Inc. (``Salomon Smith
Barney''). Then, Smith Barney Holdings, Inc., a wholly-owned subsidiary
of Travelers, will merge with Salomon Smith Barney. After the two
mergers (collectively, the ``Transaction''), the combined company will
hold the investment banking, proprietary trading, retail brokerage and
asset management operations of both Salomon and Smith Barney Holdings,
Inc. Upon consummation of the Transaction, SBAM and SBAM Limited will
remain wholly-owned subsidiaries of Salomon Smith Barney and will
continue to operate in the same fashion. Applicant anticipates that the
Transaction will be consummated in late November 1997.
5. In connection with the Transaction, the parties to the
Transaction have determined to seek to comply with the safe harbor
provisions of section 15(f) of the Act. The Board and the shareholders
of each Company are being asked to consider and approve new contracts
with SBAM and, in certain cases, SBAM Limited in connection with the
Transaction.\2\
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\2\ In certain instances, Companies have obtained or, in the
case of Nationwide, have applied for exemptive relief permitting the
investment adviser to the Company to hire and fire subadvisers
without shareholder approval. See NASL Financial Services, Inc., et
al., Investment Company Act Release Nos. 22382 (December 9, 1996)
(notice) and 22429 (December 31, 1996) (order); SEI Institutional
Managed Trust, et al., Investment Company Act Release Nos. 21863
(April 1, 1996) (notice) and 21921 (April 29, 1996) (order). To the
extent permitted by their respective orders, these Companies will
not seek shareholder approval of new contracts with SBAM and SBAM
Limited.
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6. Applicant states that, absent exemptive relief, following
consummation of the Transaction, more than 25% of the Board of a
Company would be ``interested persons'' for purposes of section
15(f)(1)(A) of the Act. The Companies have informed applicant that
reconstituting each Company's Board is not in the best interests of the
Companies or their shareholders.
Applicant's Legal Analysis
1. Section 15(f) of the Act is a safe harbor that permits an
investment adviser to a registered investment company (or an affiliated
person of the investment adviser) to realize a profit on the sale of
its business if certain conditions are met. One of these conditions is
set forth in section 15(f)(1)(A). This condition provides that, for a
period of three years after such a sale, at least 75 percent of the
board of directors of an investment company may not be ``interested
persons'' with respect to either the predecessor or successor adviser
of the investment company. Section 2(a)(19)(B)(v) defines an interested
person of an investment adviser to include any broker or dealer
registered under the Securities Exchange Act of 1934 or any affiliated
person of such broker or dealer. Rule 2a19-1 provides an exemption from
the definition of interested person for directors who are registered as
brokers or dealers, or who are affiliated persons of registered brokers
or dealers, provided certain conditions are met.\3\
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\3\ The rule generally provides that the exemption is available
only if: (a) The broker or dealer does not execute any portfolio
transactions for, engage in principal transactions with, or
distribute shares for, the fund complex, (b) the fund's board
determines that the fund will not be adversely affected if the
broker or dealer does not effect the portfolio or principal
transactions or distribute shares of the fund, and (c) no more than
a minority of the fund's directors are registered brokers or dealers
or affiliated persons thereof.
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2. Upon consummation of the Transaction, the Board of each Company
will consist of a majority of directors who are not interested persons
of any Adviser within the meaning of section 2(a)(19)(B). However, each
Board also will consist of one or more directors who may be considered
interested persons of one of the Advisers (``Interested Directors''),
for a total of thirty-two Interested Directors in the sixteen fund
complexes involved.\4\
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Twenty-two of the Interested Directors may be considered interested
persons of one of the Advisers within the meaning of section
2(a)(19)(B)(v) by virtue of their relationship to a registered broker-
dealer. The exemption provided by rule 2a19-1 will not be available
with respect to these Interested Directors because the broker-dealers
with which they are affiliated act as distributors for the Companies in
question or engage in transactions with other members of each Company's
complex.\5\
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\4\ Applicants believe that the 75% disinterested board
requirement set forth in section 15(f)(1)(A) of the Act should not
apply to investment company directors who are interested persons of
an investment adviser to a registered investment company within the
meaning of section 2(a)(19)(B) of the Act, unless that investment
adviser is involved in the relevant change of control. Accordingly,
applicants assert that a director who is an interested person of an
investment adviser to a Company counts against the 75% disinterested
board requirement only if that director also is an interested person
of one of the Advisers, either before or following consummation of
the Transaction.
\5\ The exemption provided by rule 2a19-1 of the Act may not be
available with respect to the director of Irish Investment because
the Board has not made the determinations required by the rule.
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3. Three of the directors are the beneficial owners of Travelers
stock and, therefore, will be interested persons within the meaning of
section 2(a)(19)(B)(iii).\6\ While applicant is not aware of any other
director owning Travelers stock, it is possible that other Company
directors may be beneficial owners of up to 1,000 shares of Travelers
stock in similar situations where the amount of the advisory fees paid
by the Company to SBAM or SBAM Limited in relationship to the total
revenues of Travelers is such that the income derived by the director
from his or her holdings of Travelers stock will not be affected by
advisory fees paid by the Company.\7\
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\6\ Two of these directors serve on the Board of New England,
and each is the beneficial owner of one thousand shares and four
hundred shares, respectively, of Travelers stock, which constitutes
.00016% and .00006% of Travelers 641,114,000 shares outstanding as
of July 31, 1997. The third director serves on the Board of Irish
Investment, and beneficially owns 8,300 shares of Travelers stock,
which constitutes .00129% of Travelers shares outstanding as of July
31, 1997.
\7\ In any of these instances, (i) the director would have been
on the Board of the respective Company on the date the Transaction
was consummated, (ii) the director would have owned the Travelers
stock on the date the Transaction was consummated and would not have
acquired additional Travelers stock after the date the Transaction
was consummated, (iii) no more than two directors per Company would
be beneficial owners of Travelers stock, and (iv) the Travelers
stock owned by any of the directors will not represent a material
portion of the director's assets.
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4. The remaining seven director positions will be filled by one
individual who is an officer and director of SBAM and Salomon Brothers,
affiliates of one of the parties to the Transaction. As such, this
director will be an interested person of one of the Advisers. With the
exception of this director, none of the members of the Companies'
Boards will be affiliated persons (within the meaning of section
2(a)(3) of the Act) of any party to the Transaction.
5. Without the requested exemption, a Company would have to
reconstitute its Board to meet the 75 percent non-interested director
requirement of section 15(f)(1)(A). Under the relief requested, during
the three years following consummation of the Transaction, directors
who are ``interested persons'' of an Adviser solely by reason of being
(i) affiliated persons of brokers or dealers who are affiliated persons
of another investment adviser to a Company, or (ii) on the Board of a
Company on the date the Transaction is consummated beneficially owning
Travelers stock as described in the application, will not be considered
``interested persons'' of SBAM or SBAM Limited for purposes of
calculating the 75 percent requirement in section 15(f)(1)(A) of the
Act.
6. Section 6(c) of the Act permits the SEC to exempt any person or
transaction from any provision of the Act, or any rule or regulation
under 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.
7. Applicant believes that the requested exemption is necessary and
appropriate in the public interest. Applicant states that compliance
with section 15(f)(1)(A) would require a Company to reconstitute its
Board. In applicant's view, this reconstitution would serve no public
interest and would be contrary to the interests of the shareholders of
the Companies. Applicant submits that the addition of directors to
achieve the 75% disinterested director ratio required by section
15(f)(1)(A) could make the Boards unduly large and unwieldy, make
decisional and operational matters cumbersome, unnecessarily increase
the expenses of the Transaction, and would cause the Companies to incur
additional expenses in connection with the selection and election of
the additional directors. In addition, applicant submits that shrinking
the Boards by eliminating previously existing Interested Director
positions would deny the Companies the valued services and insights
these insiders bring to their respective Boards.
8. Although directors who are affiliated persons of broker-dealers
may be viewed as interested persons of the Advisers, these directors
and the broker-dealers with which they are affiliated are not
affiliated persons of any party to the Transaction. In addition,
applicant argues that a director's affiliation with a Company's
distributor should not preclude the requested exemption, despite the
unavailability of the rule 2a19-1 exemption, because a Company's
distributor is retained directly by the Company. As a result, retention
of a distributor depends upon approval from the Company's Board and not
upon the identity of or transactions involving the Company's Adviser.
Further, applicant submits that each distributor's compensation is
based on asset levels and/or the receipt of sales loads, and each
distributor therefore has a direct economic interest in the financial
success of the Company that retains it, an interest that is consistent
with the interests of the Company's shareholders.
9. Applicant asserts, with respect to the directors who are
shareholders of Travelers, that the immaterial number of shares owned
by these directors should have no affect on fulfilling their
responsibilities to their respective Companies. Applicant asserts that
the income derived by each director from ownership of Travelers stock
will not be affected in any noticeable degree by the advisory fees paid
by the applicable Companies. Applicant maintains, therefore, that the
beneficial ownership of Travelers stock should not prevent these
directors from carrying out their fiduciary duties.
10. Applicant believes that the requested exemption is consistent
with the protection of investors. Applicant states that the parties to
the Transaction will comply with section 15(f)(1)(B) of the Act for at
least two years following consummation of the Transaction. Accordingly,
applicant argues that no unfair burdens will be placed on the Companies
as a result of the Transaction. The Board and shareholders of each
Company are being asked to consider and approve new contracts with SBAM
and, in certain cases, SBAM Limited in connection with the Transaction.
The adviser arrangements will continue only if the Board has determined
that they continue to be in the best interests of the Company's
shareholders, and then only in the event that the Company's
shareholders also approve the continuation of the arrangements.
Applicant also states that the Companies will continue to treat the
Interested Directors as interested persons of the Companies and the
Advisers for all purposes other than section 15(f)(1)(A) of the Act for
so long as the directors are ``interested persons'' as defined in
section 2(a)(19) of the Act and are not exempted from that definition
by any applicable rules or orders of the SEC.
11. Applicant also submits that the requested exemption is
consistent with the purposes fairly intended by the policies and
provisions of the Act.
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Applicant asserts that the legislative history of section 15(f)
indicates that Congress intended the SEC to deal flexibly with
situations where the imposition of the 75 percent requirement might
pose an unnecessary obstacle or burden on a fund. Applicant also states
that section 15(f)(1)(A) was designed primarily to address the types of
biases and conflicts of interest that might exists where the board of
an investment company is influenced by a substantial number of
interested directors to approve a transaction because the directors
have an economic interest in the adviser. Because these circumstances
do not exist in the present case, applicant believes that the SEC
should be willing to exercise flexibility.
Applicant's Condition
Applicant agrees that any order of the SEC granting the requested
relief with respect to a particular Company will be subject to the
following condition:
If, within three years of the completion of the Transaction, it
becomes necessary to replace any director of the Company, that
director will be replaced by a director who is not an ``interested
person'' of SBAM or SBAM Limited within the meaning of section
2(a)(19)(B) of the Act, unless at least 75% of the directors at that
time, after giving effect to the order granted pursuant to the
application, are not interested persons of SBAM or SBAM Limited,
provided that this condition will not preclude replacements with or
additions of directors who are interested persons of SBAM or SBAM
Limited solely by reason of being affiliated persons of brokers or
dealers who are affiliated persons of another investment adviser to
a Company, provided that the brokers or dealers are not affiliated
persons of SBAM or SBAM Limited.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-29471 Filed 11-6-97; 8:45 am]
BILLING CODE 8010-01-M