[Federal Register Volume 63, Number 118 (Friday, June 19, 1998)]
[Notices]
[Pages 33738-33740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16346]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23251; 812-11118]


Fountain Square Funds, et al.; Notice of Application

June 12, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order 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: Applicants request an order to permit certain 
series of the Fountain Square Funds (``FSF'') to acquire all of the 
assets and certain stated liabilities of certain series of The Cardinal 
Group (``Cardinal'').

APPLICANTS: FSF, Cardinal, Cardinal Management Corp. (``CMC''), and 
Fifth Third Bank (the ``Bank'').

FILING DATES: The application was filed on May 1, 1998. Applicants have 
agreed to file an amendment during the notice period, the substance of 
which is reflected 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 July 7, 1998, and should be accomplished 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. Fountain Square Funds and Fifth 
Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263. The 
Cardinal Group and Cardinal Management Corp., 155 East Broad Street, 
Columbus, Ohio 43215.

FOR FURTHER INFORMATION CONTACT: Kathleen L. Knisely, Staff Attorney, 
at (202) 942-0517, or George J. Zornada, 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 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549 (tel. 202-942-8090).

Applicants' Representations

    1. FSF is a Massachusetts business trust registered under the Act 
as an open-end management investment company. FSF currently has sixteen 
separate series, five of which are the acquiring funds (``Acquiring 
Funds''). The Bank, an Ohio state-chartered bank, serves as the 
investment adviser to FSF. The Bank is not required to register under 
the Investment Advisers Act of 1940 (``Advisers Act''). The Bank is a 
subsidiary of Fifth Third Bancorp (``Fifth Third''), a bank holding 
company.
    2. Cardinal is an Ohio business trust registered under the Act as 
an open-end management investment company.

[[Page 33739]]

Cardinal currently has six separate series, five of which are termed 
the ``Acquired Funds'' for purposes of this application (the Acquired 
Funds together with the Acquiring Funds, the ``Funds'').\1\ CMC serves 
as the investment adviser to Cardinal and is registered under the 
Advisers Act. CMC is a subsidiary of The Ohio Company. The Ohio 
Company, as a fiduciary for its customers, owns more than 5% of each of 
the Acquired Funds.
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    \1\ The sixth series also is an acquired fund but no relief is 
being sought for this series because it may rely on rule 17a-8.
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    3. On or about July 12, 1998, The Ohio Company will merge with a 
subsidiary of Fifth Third (``The Ohio Company Merger''). As a result of 
the Ohio Company Merger, CMC will become an indirect subsidiary of 
Fifth Third.
    4. On March 12, 1998, the board of trustees of Cardinal, including 
a majority of its trustees who are not ``interested persons'' under 
section 2(a)(19) of the Act, approved and authorized an Agreement and 
Plan of Reorganization and Liquidation (the ``Reorganization 
Agreement'') pursuant to which the Acquiring Funds will acquire a 
corresponding series of the Acquired Funds having similar investment 
objectives. Pursuant to the Reorganization Agreement, as soon as 
practicable after July 13, 1998 or such later date as the parties may 
mutually agree (``Closing Date''), each Acquiring Fund will acquire all 
of the assets and certain stated liabilities of the corresponding 
Acquired Fund in exchange for shares of the Acquiring Fund equal in 
value to the Acquired Fund's aggregate net asset value, computed as of 
the close of business on the last day preceding the Closing Date (the 
``Reorganizations'').\2\ As soon as practicable after the Closing Date, 
each Acquired Fund will liquidate and distribute pro rata to the 
Acquired Fund's shareholders of record, determined as of the close of 
business on the Closing Date, the Acquiring Fund's shares received by 
the Acquired Fund.
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    \2\ The Acquired Funds and the corresponding Acquiring Funds 
are: (i) The Cardinal Fund and Fountain Square Cardinal Fund; (ii) 
Cardinal Aggressive Growth Fund and Fountain Square Mid Cap Fund; 
(iii) Cardinal Balanced Fund and Fountain Square Balanced Fund; (iv) 
Cardinal Government Securities Money Market Fund and Fountain Square 
Government Cash Reserves Fund; (v) Cardinal Tax Exempt Money Market 
Fund and Fountain Square Tax Exempt Money Market Fund.
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    5. The Acquired Funds, except for the Cardinal money market funds, 
offer two classes of shares, Investor Y (``Institutional'') Shares and 
Investor A (``Investor'') Shares. The Acquiring Fund currently offer 
two classes of shares, Investment A Shares and Investment C Shares, but 
will begin offering Institutional Shares in connection with the 
Reorganizations.
    6. In the Reorganizations, holders of Institutional Shares of an 
Acquired Fund will receive Institutional Shares of the corresponding 
Acquiring Fund and holders of Investor Shares of an Acquired Fund will 
receive Investment A Shares of the corresponding Acquiring Fund. 
Holders of the Cardinal money market funds who are eligible to purchase 
Institutional Shares will receive Institutional Shares of the 
corresponding Acquiring Fund. Holders of the Cardinal money market 
funds who are not eligible to purchase Institutional Shares will 
receive Investment A Shares of the corresponding Acquiring Fund. No 
sales charges will be imposed in connection with the Reorganizations.
    7. Institutional Shares of the Acquired and the Acquiring Funds are 
not subject to any asset-based distribution fees. Institutional Shares 
of the Acquired Funds are subject to an administrative service fee of 
.15% of average net assets. Institutional Shares of the Acquiring Funds 
are not subject to administrative service fees. Investor Shares and 
Investment A Shares are both subject to a 4.5% front-end sales charge. 
Investor Shares and Investment A shares also are subject to asset-based 
distribution fees of up to .25% of the average net assets. After the 
Reorganizations the Acquiring Funds will begin paying asset-based 
distribution fees, with the exception of the Fountain Square Tax Exempt 
Money Market Fund for which these fees will be waived. None of the 
classes of the Acquiring and the Acquired Funds are subject to any 
redemption fees.
    8. The investment objectives of each Acquired Fund and its 
corresponding Acquiring Fund are substantially similar. The investment 
policies and restrictions of each Acquired Fund and its corresponding 
Acquiring Fund also are substantially similar, but in some cases 
involve differences that reflect the differences in the general 
investment strategies used by the Acquiring Funds.
    9. The board of directors of the Acquiring and the Acquired Funds 
(collectively, ``Boards'') approved the Reorganizations as in the best 
interests of the existing shareholders and determined that the 
interests of the existing shareholders will not be diluted as a result 
of the Reorganizations. The Boards, including a majority of the 
disinterested trustees (the ``Independent Trustees''), considered 
various factors in approving the Reorganizations, including that: (i) 
the investment objectives and policies of the Acquiring and the 
Acquired Funds are substantially similar; (ii) no sales charges will be 
imposed in connection with the Reorganizations; (iii) the 
Reorganizations will be free from federal income taxes; (iv) the 
conditions and policies of rule of 17a-8 under the Act will be 
followed: (v) the Reorganizations will be based on net asset values 
calculated by the Bank, as custodian of the Acquiring Funds, in 
accordance with the stated policies and procedures of both the 
Acquiring and Acquired Funds; (vi) the Reorganizations will be 
submitted to shareholders of the Acquired Funds in a combined proxy 
statement/prospectus; and (vii) no overreaching of any person is 
occurring. Expenses incurred in connection with the Reorganizations 
will be borne by the Bank.
    10. The Reorganization Agreement may be terminated at any time 
prior to the Closing Date (a) by mutual written consent of the 
Acquiring and Acquired Funds or (b) by either an Acquiring or an 
Acquired Fund by written notice to the other, without liability on the 
part of either party, if circumstances develop that, in the opinion of 
the Board of either Fund, make proceeding with the Reorganizations not 
in the best interests of the Fund's shareholders.
    11. A registration statement on Form N-14 was filed with the 
Commission on April 6, 1998 and became effective on May 27, 1998. 
Applicants mailed a prospectus/proxy statement to shareholders of the 
Acquired Funds on or about June 1, 1998. A special meeting of the 
Acquired Funds' shareholders will be held on July 10, 1998 to vote on 
the Reorganizations.
    12. The consummation of the Reorganizations is subject to the 
following conditions, as set forth in the Reorganization Agreement: (i) 
the N-14 Registration Statement will have become effective; (ii) the 
Acquired Funds' shareholders will have approved the Reorganization 
Agreement; (iii) applicants will have received exemptive relief from 
the Commission with respect to the issues in the application; (iv) the 
Acquiring and the Acquired Funds will have received an opinion of 
counsel concerning the federal income tax aspects of the 
Reorganizations; and (v) each Acquired Fund will have declared a 
dividend or dividends to distribute substantially all of its investment 
company taxable income and net gain, if any, to its shareholders. 
Applicants agree not to make any material changes to the Reorganization 
Agreement that affect the application without prior Commission 
approval.

[[Page 33740]]

Applicants' Legal Analysis

    1. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
that 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 (a) any 
person that directly or indirectly owns, controls, or holds with power 
to vote 5% or more of the outstanding voting securities of the other 
person; (b) any person 5% or more of whose outstanding voting 
securities are directly or indirectly owned, controlled, or held with 
power to vote by the other person; (c) any person directly or 
indirectly controlling, controlled by, or under common control with the 
other person; and (d) if the other person is an investment company, any 
investment adviser of that company.
    2. Rule 17a-8 under the Act exempts from the prohibitions of 
section 17(a) mergers, consolidations, or purchases 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 set forth in the rule are satisfied.
    3. Applicants believe that they may not rely on rule 17a-8 under 
the Act because the Funds may be affiliated for reasons other than 
those set forth in the rule. Because the Ohio Company owns 5% or more 
of each of the Acquired Funds, each Acquired Fund may be deemed an 
``affilaited person of an affiliated person'' of each Acquiring Fund.
    4. Section 17(b) of the Act provides that the Commission may exempt 
a transaction from the provisions of section 17(a) if the evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid, are reasonable and fair and do not involve 
overreaching on the part of any person concerned, and that the proposed 
transaction is consistent with the policy of each registered investment 
company concerned and with the general purposes of the Act.
    5. Applicants request an order under section 17(b) of the Act 
exempting them from section 17(a) of the Act to the extent necessary to 
consummate the Reorganizations. Applicants submit that the terms of the 
Reorganizations satisfy the standards set forth in section 17(b) of the 
Act. Applicants also note that the Boards of the Acquiring and the 
Acquired Funds, including the Independent Trustees, have determined 
that the Reorganizations are in the best interests of their 
shareholders and that the interests of the existing shareholders of the 
Funds will not be diluted as a result of the Reorganizations. In 
addition, applicants state that the exchange of the Acquired Funds' 
shares for shares of the Acquiring Funds will be based on the Funds' 
relative net asset values.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-16346 Filed 6-18-98; 8:45 am]
BILLING CODE 8010-01-M