[Federal Register Volume 62, Number 241 (Tuesday, December 16, 1997)]
[Notices]
[Pages 65827-65829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32749]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22933; 812-10670]
Financial Institutions Series Trust, et al.; Notice of
Application
December 10, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for order under section 11(a) of the
Investment Company Act of 1940 (the ``Act'').
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SUMMARY OF APPLICATION: Applicants request an order permitting certain
offers of exchange of shares (the ``Exchange Program'') between Summit
Cash Reserves Fund Portfolio (``MMF''), a money market fund sponsored
by Merrill Lynch, Pierce, Fenner & Smith Incorporated (``Merrill
Lynch'') and certain non-money market funds in other groups of
investment companies (the ``Participating Funds'') on a basis other
than their respective net asset values per share.
APPLICANTS: Financial Institutions Series Trust; Fund Asset Management,
L.P. (``FAM''); Merrill Lynch Asset Management, L.P. (``MLAM'');
Merrill Lynch Funds Distributor, Inc. (``MLFD''); and Merrill Lynch.
FILING DATES: The application was filed on May 15, 1997. Counsel for
applicants has agreed to file an amendment to the application 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
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Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should state the nature of the writer's
interest, the reason for the request and the issues contested. All
requests must be received by the SEC by 5:30 p.m. on January 2, 1998,
and should be accompanied by proof of service on applicants, in the
form of an affidavit or, for lawyers, a certicate of service. Persons
who wish to be notified of the date 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, c/o Merrill Lynch Asset Management, L.P. Attn:
Robert Harris, Esq., 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
FOR FURTHER INFORMATION CONTACT: H.R. Hallock, Jr., Senior Counsel, at
(202) 942-0568 (Division of Investment Management, Office of Disclosure
and Review), or Mercer E. Bullard, Special Counsel, at (202) 942-0659
(Division of Investment Management, Office of Chief Counsel).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee by
writing the SEC's Public Reference Branch at 450 Fifth Street, N.W.,
Washington, D.C., or by telephone at (202) 942-8090.
Applicants' Representations
1. MMF, a money market fund, is a series of Financial Institutions
Series Trust, an open-end management investment company registered
under the Act. FAM and MLAM are wholly-owned by Merrill Lynch & Co.
(``ML&Co.'') and are registered as investment advisers under the
Investment Advisers Act of 1940. FAM serves as MMF's investment
adviser.\1\ MLFD, a broker-dealer registered under the Securities
Exchange Act of 1934 (the ``1934 Act'') and a member of the National
Association of Securities Dealers, Inc. (the ``NASD''), serves as MMF's
distributor. Merrill Lynch, a wholly-owned subsidiary of ML&Co., is a
broker-dealer registered under the 1934 Act and a member of the NASD.
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\1\ In the future, MMF may be a feeder fund to another money
market fund in reliance on section 12(d)(1)(E) of the Act, in which
case the only investment securities it would hold would be shares of
the master fund. In that event, either FAM or MLAM will serve as the
investment adviser of the fund in which MMF invests.
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2. The Participating Funds will be non-money market open-end
management investment companies registered under the Act (a) that are
or will be sold to customers of Merrill Lynch under agreements whereby
Merrill Lynch serves as a selected dealer or agent; (b) whose
investment adviser is other than FAM or MLAM; (c) whose principal
underwriter is other than MLFD; and (d) that have agreed to participate
in the Exchange Program. Shares of Participating Funds may be sold with
a front-end sales load (``FESL''), subject to a contingent deferred
sales charge (``CDSC'') or subject to alternative sales charge
arrangements (e.g., a level load). Each of the principal underwriters
of the Participating Funds will be registered as a broker-dealer under
the 1934 Act and a member of the NASD.
3. Customers of Merrill Lynch who have acquired shares of
Participating Funds typically have such shares held in nominee name on
the books of Merrill Lynch. Merrill Lynch provides consolidated account
statements and year-end tax reports for its customers reflecting all
positions held on the books of Merrill Lynch, including shares of
Participating Funds. Merrill Lynch does not typically act as a selected
dealer for money market funds other than those in the Merrill Lynch
``group of investment companies'' (including MMF), as that term is
defined in rule 11a-3.\2\ Accordingly, Merrill Lynch does not typically
hold on its books shares of money market funds that currently have
exchange privileges with the Participating Funds.
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\2\ Rule 11a-3 defines ``group of investment companies'' to mean
two or more open-end investment companies that hold themselves out
as being related and that have a common adviser or principal
underwriter (or advisers and underwriters that are affiliated
persons of one another within the meaning of section 2(a)(3) of the
Act).
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4. The Participating Funds generally offer exchange privileges that
permit an investor to exchange shares of one Participating Fund for
shares of another Participating Fund in the same group of investment
companies without paying a CDSC on the redemption of the shares
exchanged or a FESL on the shares purchased, depending on the sales
loads charged by each Fund. Currently, a Merrill Lynch customer who is
a shareholder of a Participating Fund may exchange into a money market
fund with which the Participating Fund has an exchange privilege. In
that event, because the customer's interest in that money market fund
will not be carried on Merrill Lynch's books, Merrill Lynch is unable
to provide a consolidated report of the customer's entire position.
Alternatively, the customer could acquire a money market fund in the
Merrill Lynch group of investment companies, the shares of which can be
recorded on the books of Merrill Lynch. In that case, however, the
customer would have to redeem shares of the Participating Fund and pay
any applicable CDSC or, if Participating Fund shares subject to an FESL
are redeemed, the customer may have to pay the FESL upon any subsequent
repurchase of those shares.
5. The Exchange Program would enable Merrill Lynch customers who
hold Participating Fund shares to maintain all of their holdings at
Merrill Lynch, while also being able to avail themselves of the
exchange privileges offered by the Participating Fund in which they
have invested. These shareholders would be able to make exchanges into
MMF, or exchanges back into shares of the same Participating Fund
involved in the original exchange, without incurring a sales load.
These shareholders also would be able to exchange their MMF shares at a
reduced or no sales load into shares of certain other Participating
Funds in the same group of investment companies as the Participating
Fund involved in the original exchange.
6. Any exchange under the Exchange Program will be made in
accordance with the exchange privileges offered by the Participating
Fund group in which the Merrill Lynch customer has invested. Thus,
shareholders of a Participating Fund who exchange their shares for
shares of MMF may not exchange the MMF shares for shares of another
fund that is not in the same group of investment companies as the
Participating Fund. The Exchange Program also will not enable
Participating Fund shareholders to exchange their shares directly for
shares of another Participating Fund except in accordance with the
exchange privileges offered by the particular Participating Fund group.
7. All shares involved in the Exchange Program will be held in
Merrill Lynch's omnibus account on each Fund's books.\3\ Merrill Lynch,
as selected dealer for both MMF and the Participating Fund involved in
the exchange, will process the sale and related purchase of shares at
the price calculated in accordance with each Fund's prospectus. Merill
Lynch will accept and record the payment of sales loads, administrative
fees and redemption fees. In particular, upon receipt of a share
exchange request, Merrill Lynch will process the share exchange on its
mutual fund shareholder software system in accordance with the
directions of the prospectuses for MMF and for the Participating Fund
involved
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in the exchange. Merrill Lynch also will prepare and mail appropriate
confirmations or statements related to the share exchange transactions.
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\3\ Shares held in certificated form will not be eligible for
the Exchange Program.
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8. The exchange arrangements for MMF and each Participating Fund
will be described in general terms in MMF's prospectus, including the
existence of any administrative or redemption fees charged (without
necessarily identifying the specific Funds available for exchange).
Each Participating Fund's prospectus will be required to disclose the
amount of any administrative or redemption fees that will be imposed in
connection with an exchange to or from MMF.
Applicants' Legal Analysis
1. Section 11(a) of the Act prohibits any offer by a registered
open-end management investment company or its principal underwriter
involving the exchange of the company's shares on any basis other than
the relative net asset value of the securities to be exchanged, unless
the terms of the offer have been approved in advance by the SEC or meet
the requirements of any rules adopted to regulate exchange offers.
2. Rule 11a-3 allows an investment company or its principal
underwriter to make exchange offers to its shareholders or to
shareholders in another company in the same group of investment
companies, and to charge a sales load, redemption fee, administrative
fee or any combination thereof in connection with the exchange, subject
to compliance with certain requirements. Among other requirements,
paragraph (b)(6)(i) of the rule requires that the prospectus of the
offering company disclose the amount of any administrative or
redemption fee charged in connection with an exchange.
3. Applicants request an order under section 11(a) to permit the
exchange of shares of MMF for shares of Participating Funds, and shares
of Participating Funds for shares of MMF, at other than their
respective net asset values at the time of exchange. Applicants state
that these exchanges would include, for example, (i) exchanges of MMF
shares for shares of a Participating Fund sold with an FESL or a CDSC
(``CDSC Shares''), (ii) exchanges of CDSC Shares of a Participating
Fund for MMF shares, and (iii) the imposition of an ``administrative''
and/or ``redemption'' fee (as defined in rule 11a-3) in connection with
the exchanges.
4. Applicants state that each exchange will comply with all the
requirements of rule 11a-3, except (a) the requirement that the
Participating Funds and MMF be part of the same ``group of investment
companies,'' as that term is defined in paragraph (a)(5) of the rule,
and (b) the requirement of paragraph (b)(6)(i) that MMF's prospectus
disclose the amount of any administrative or redemption fee imposed on
an exchange transaction for its securities, provided that MMF's
prospectus will disclose the existence of these fees.
5. Applicants submit that the Exchange Program would not create any
opportunity for improper gain by the underwriters of the Participating
Funds, by MLFD, or by Merrill Lynch, and would not raise the
possibility of inducing exchanges for the purpose of exacting
additional sales charges, the abuse against which section 11(a) was
directed. Furthermore, if the exchanges were always made at relative
net asset values, applicants believe that the distribution systems of
the Participating Funds could be disrupted because an investor could
easily avoid applicable FESLs by acquiring shares of MMF and
immediately exchanging those shares for Participating Fund shares, or
avoid applicable CDSCs by exchanging CDSC Shares for MMF shares and
then redeeming such shares without payment of any otherwise applicable
CDSC. Applicants contend that the Exchange Program would avoid these
problems.
6. Applicants also contend that the Exchange Program would benefit
exchanging shareholders by crediting them for FESLs already paid, or,
in the case of CDSC Shares, for the time the MMF shares are held or for
distribution fees paid with respect to MMF shares under rule 12b-1
under the Act, consistent with the requirements of rule 11a-3. Finally,
applicants contend Merrill Lynch is logically positioned to implement
the Exchange Program even though members of different ``groups of
investment companies'' are involved because it is the single entity
with the information needed to execute both the redemption and purchase
orders involved in a share exchange.
7. Applicants believe there will be such a wide variety of
potential exchange arrangements offered by different families of
Participating Funds that it would be impractical for MMF's prospectus
to state the amounts of administrative or redemption fees imposed on an
exchange transaction. Applicants also submit that shareholders will be
fully informed of the fees and charges applicable to any exchange,
because each Participating Fund's prospectus will include the
information required by rule 11a-3.
Finally, applicants note that MMF's prospectus will include general
information about the Exchange Program and refer shareholders to their
financial consultants for more detailed information.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Merrill Lynch will be responsible for tracking the payment of
sales loads, administrative fees and redemption fees by shareholders of
investment companies or portfolios covered by the application, and
otherwise will conduct share exchanges in accordance with the
applicants' representations.
2. Offers of exchange pursuant to the applicants' Exchange Program
will be conducted in accordance with rule 11a-3 under the Act, except
that:
(a) An offering company will not be limited to making an exchange
offer only to the holder of a security of the offering company, or of
another open-end investment company within the same group of investment
companies as the offering company;
(b) MMF's prospectus will describe the existence (but not the
amount) of any administrative or redemption fees imposed on an exchange
pursuant to the Exchange Program.
3. Merrill Lynch will maintain and enforce internal control
procedures that are designed to assure the Exchange Program's
compliance with all applicable provisions of rule 11a-3 under the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32749 Filed 12-15-97; 8:45 am]
BILLING CODE 8010-01-M