[Federal Register Volume 63, Number 67 (Wednesday, April 8, 1998)]
[Notices]
[Pages 17244-17246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9124]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23098; 812-11052]


CoreFunds, Inc. and CoreStates Investment Advisers, Inc.; Notice 
of Application

April 2, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from section 15(a) 
of the Act.

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SUMMARY OF APPLICATION: Applicants seek an order to permit the 
implementation, without prior shareholder approval, of an interim 
investment advisory agreement and sub-advisory agreements (collectively 
the ``Interim Agreements'') between CoreFunds, Inc. (``Fund'') and 
CoreStates Investment Advisers, Inc. (``Adviser'') and sub-advisers, in 
connection with the merger of CoreStates Financial Corp. 
(``CoreStates'') with and into First Union Corporation (``First 
Union''). The order would cover a period of up to 150 days following 
the date of the consummation of the merger (but in no event later than 
September 30, 1998) (``Interim Period''). The order also would permit 
the Adviser and sub-advisers to receive all fees earned under the 
Interim Agreements during the Interim period, following shareholder 
approval.

APPLICANTS: The Funds, or behalf of its separate investment portfolios, 
Equity Index Funds, Core Equity Fund, Growth Equity Fund, Special 
Equity Fund, International Growth Fund, Balanced Fund, Short-Term 
Income Fund, Short-Intermediate Bond Fund, Government Income Fund, Bond 
Fund, Global Bond Fund, Intermediate Municipal Bond Fund, Pennsylvania 
Municipal Bond Fund, New Jersey Municipal Bond Fund, Treasury Reserve 
Fund, Cash Reserve Fund, Tax-Free Reserve Fund, Elite Cash Reserve 
Fund, Elite Treasury Reserve Fund, Elite Tax-Free Reserve Fund 
(collectively the ``Portfolios'') and the Adviser.

FILING DATES: The application was filed on March 6, 1998. Applicants 
have agreed to file an amendment to the application during the notice 
period, the substance of which is included in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on April 27, 1998, 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. CoreFunds, Inc., c/o John A. 
Dudley, Esq., 1025 Connecticut Avenue, N.W., Washington, D.C. 20036 and 
James W. Jennings, Esq., 2000 One Logan Square, Philadelphia, PA 19103-
6993, CoreStates Investment Advisers, Inc., c/o Mark E. Stalnecker, 
1500 Market Street, (FC-1-3-86-11), Philadelphia, Pennsylvania 19102.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at 
(202) 942-0714, or George J. Zornada, 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 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549 (tel. 202-942-8090).

Applicant's Representations

    1. The Fund is a Maryland corporation registered under the Act as 
an open-end management investment company and is organized as a series 
company offering the Portfolios. The Adviser is an investment adviser 
registered under the Investment Advisers Act of 1940 (``Advisers Act'') 
and is a wholly-owned subsidiary of CoreStates. The Adviser serves as 
investment adviser to each of the Portfolios. The Fund and the Adviser 
also have sub-advisory agreements for certain Portfolios with advisers 
registered under the Advisers Act.\1\
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    \1\ The following firms serve as sub-advisers to the respective 
Portfolios under sub-advisory agreements with the Adviser: Martin 
Currie, Inc. (for the International Growth Fund); Aberdeen Fund 
Managers, Inc. (for the International Growth Fund); and Analytic TSA 
International, Inc. (for the Global Bond Fund).
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    2. CoreStates, which is a bank holding company, has agreed to merge 
with and into First Union or a designated subsidiary of First Union 
(the ``Transaction''). Applicants currently expect the Transaction to 
close on April 30, 1998. As a result of the Transaction, the Adviser 
will come under the control of First Union.
    3. Applicants believe that the Transaction will result in an 
assignment and thus automatic termination of the existing investment 
advisory and sub-advisory agreements between the Fund and the Adviser 
and the sub-advisers (collectively, ``Existing Agreements''). 
Applicants request an exemption: (i) to

[[Page 17245]]

permit the implementation, prior to shareholder approval, of the 
Interim Agreements; and (ii) to permit the Adviser and sub-advisers, 
upon shareholder approval, to receive any and all fees earned under the 
Interim Agreements during the Interim Period. Applicants state that the 
Interim Agreements will be identical in substance to the Existing 
Agreements, except for their effective and termination dates. The Fund 
and the Adviser also will have an escrow arrangement as described 
below.
    4. On February 6, 1998, the Fund's board of directors (``Board'') 
met in-person and considered the Interim Agreements. At the meeting, a 
majority of the Board, including a majority of the directors who are 
not ``interested persons'' as defined in section 2(a)(19) of the Act 
(``Independent Directors''), voted in accordance with section 15(c) of 
the Act and (i) approved the Interim Agreements after evaluating 
whether the terms were in the best interests of the Portfolios and 
their shareholders, and (ii) agreed to recommend approval of the 
Interim Agreements to shareholders of the Portfolios. A vote of the 
shareholders of the Portfolios is scheduled for July 17, 1998.
    5. Applicants propose to enter into an escrow arrangement with an 
unaffiliated bank (``Escrow Agency''). The fees payable to the Adviser 
and sub-advisers under the Interim Agreements during the Interim Period 
will be paid into an interest-bearing escrow account maintained by the 
Escrow Agent. The amounts in the escrow account (including interest 
earned on such paid fees) will be paid to the Adviser and, if 
applicable, sub-advisers only if Portfolio shareholders approve the 
Interim Agreements. If the Interim Period has ended and shareholders of 
any Portfolio have failed to approve the Interim Agreements, the Escrow 
Agent will pay to the Portfolio the escrow amounts (including any 
interest earned). Before the release of any such escrow amounts, the 
Fund's Independent Directors will be notified.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in pertinent part, that it 
shall be unlawful for any person to serve or act as an investment 
adviser of a registered investment company, except pursuant to a 
written contract that has been approved by the vote of a majority of 
the outstanding voting securities of such registered investment 
company. Section 15(a)(4) of the Act further requires that such written 
contract provide for automatic termination in the event of its 
``assignment.'' Section 2(a)(4) of the Act defines ``assignment'' to 
include any direct or indirect transfer of a contract by the assignor, 
or of a controlling block of the assignor's outstanding voting 
securities by a security holder of the assignor.
    2. Applicants state that, upon completion of the Transaction, 
indirect control of the Adviser will transfer to First Union. 
Accordingly, the Transaction will result in an assignment of the 
Existing Agreements and the Existing Agreements will terminate by their 
terms upon consummation of the Transaction.
    3. Rule 15a-4 provides, in pertinent part, that if an investment 
advisory contract with a registered investment company is terminated by 
an assignment in which the adviser does not directly or indirectly 
receive a benefit, the adviser may continue to act as such for the 
company for 120 days under a written contract that has been approved by 
the company's shareholders, provided that: (a) the new contract is 
approved by that company's board of directors (including a majority of 
the non-interested directors); (b) the compensation to be paid under 
the new contract does not exceed the compensation that would have been 
paid under the contract most recently approved by the company's 
shareholders; and (c) neither the adviser nor any controlling person of 
the adviser ``directly or indirectly receives money or other benefit'' 
in connection with the assignment. Applicants state that they cannot 
rely on rule 15a-4 because of the benefits CoreStates, the Adviser's 
parent, will receive from the Transaction.
    4. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction from any provision of the Act, if 
and to the extent that such 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. 
Applicants assert that the requested relief meets this standard.
    5. Applicants submit that the terms and timing of the Transaction 
arose primarily out of business considerations unrelated to the Fund 
and the Adviser. Applicants state that the requested relief would 
permit the continuity of investment management for the Fund, without 
interruption, during the period following the Transaction. Applicants 
also state that there is not sufficient time to make an adequate 
solicitation of fund shareholders prior to the closing of the 
Transaction.
    6. Applicants submit that the scope and quality of investment 
advisory services provided for the Fund during the Interim Period will 
not be diminished. During the Interim Period, the Adviser and sub-
advisers will operate under the Interim Agreements, which the Board has 
approved and which will be substantively the same as the Existing 
Agreements, except for their effective and termination dates. In 
addition, there will be an escrow agreement as discussed above. 
Applicants are not aware of any material changes in the personnel that 
will provide investment management services during the Interim Period. 
Accordingly, the Fund should receive, during the Interim Period, the 
same investment advisory services, at the same fee levels, provided in 
the same manner as the Fund received before the Transaction. Applicants 
state that, in the event that a material change in the personnel of the 
Adviser or sub-adviser occurs during the Interim Period, the Adviser or 
sub-adviser will apprise and consult the Board, including the 
Independent Directors, to assure that the Board and the Independent 
Directors are satisfied that the services provided by the Adviser or 
sub-adviser will not be diminished in scope and quality.
    7. Applicants assert that to deprive the Adviser or sub-advisers of 
fees during the Interim Period would be unduly harsh and an 
unreasonable penalty to attach to the Transaction. Applicants submit 
that adequate safeguards exist in that the fees payable to the Adviser 
and sub-advisers under the Interim Agreements during the Interim Period 
will be maintained in an interest-bearing escrow account by the Escrow 
Agent and that such fees will not be released by the Escrow Agent 
without notice to the Independent Directors and appropriate 
certification that the Interim Agreements have been approved by the 
shareholders of the Portfolios.

Applicants' Conditions

    Applicants agree as conditions to the issuance of the exemptive 
order requested by the application that:
    1. The Interim Agreements will be identical in substance to the 
Existing Agreements with the exception of the effective and termination 
dates.
    2. Fees earned by the Adviser and sub-advisers during the Interim 
Period in accordance with the Interim Agreements will be maintained in 
an interest-bearing escrow account with an unaffiliated bank, and 
amounts in the account (including interest earned on such paid fees) 
will be paid to the Adviser, and if applicable, sub-adviser, only upon 
approval of the related Portfolio shareholders, or, in the

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absence of such approval, to the related Portfolio.
    3. The Fund will hold meetings of shareholders to vote on approval 
of the Interim Agreements on or before the 150th day following the 
termination of the Existing Agreements (but in no event later than 
September 30, 1998).
    4. First Union will bear the costs of preparing and filing the 
application and the costs relating to the solicitation of shareholder 
approval of the Portfolios necessitated by the Transaction.
    5. The Adviser and sub-advisers will take all appropriate steps so 
that the scope and quality of advisory and other services provided to 
the Portfolios during the Interim Period will be at least equivalent, 
in the judgment of the Board, including a majority of the Independent 
Directors, to the scope and quality of services previously provided. If 
personnel providing material services during the Interim Period change 
materially, the Adviser or any sub-adviser will apprise and consult 
with the Board to assure that the Directors, including a majority of 
the Independent Directors of the Fund, are satisfied that the services 
provided will not be diminished in scope or quality.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9124 Filed 4-7-98; 8:45 am]
BILLING CODE 8010-01-M