[Federal Register Volume 63, Number 186 (Friday, September 25, 1998)]
[Notices]
[Pages 51381-51383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25726]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23442; 812-11314]


Gradison-McDonald Cash Reserve Trust, et al.; Notice of 
Application

September 22, 1998.
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(a) 
of the Act.

-----------------------------------------------------------------------

SUMMARY: The requested order would permit the implementation, without 
prior shareholder approval, of new investment advisory and subadvisory 
agreements (the ``New Agreements'') for a period of up to 150 days 
following the later of the date on which a merger between McDonald & 
Company Investments, Inc. (``McDonald'') and KeyCorp is consummated 
(the ``Merger Date'') or the date on which the requested order is 
issued and continuing until the date the New Agreements are approved or 
disapproved by the shareholders (but in no event later than April 1, 
1999) (``Interim Period''). The order also would permit McDonald & 
Company Securities, Inc. (the ``Adviser''), and Blairlogie Capital 
Management (the ``Subadviser'') to receive all fees earned under the 
New Agreements during the Interim Period following shareholder 
approval.

APPLICANTS: Gradison-McDonald Cash Reserves Trust (``Cash Reserves 
Trust''), Gradison Custodian Trust (``Custodian Trust''), Gradison-
McDonald Municipal Custodian Trust (``Municipal Trust''); Gradison 
Growth Trust (``Growth Trust'') (collectively, the ``Trusts''), each on 
behalf of its separate portfolios (the ``Funds''), the Adviser, and the 
Subadviser.

FILING DATES: The application was filed on September 21, 1998.

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 October 13, 
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 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549; 
Trusts and Adviser, 580 Walnut Street, Cincinnati, Ohio 45202; and 
Subadviser, 125 Princes Street, Edinburgh, Scotland EH2, 4AD.

FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Attorney Adviser, at (202) 942-0574, or Edward P. 
Macdonald, 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 
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. Each Trust is registered under the Act as an open-end management 
investment company, and each Trust, except the Cash Reserves Trust 
which is a Massachusetts business trust, is an Ohio business trust. The 
Cash Reserves Trust, the Custodian Trust, and the Municipal Trust each 
offer one Fund, and the Growth Trust offers four Funds.
    2. The Adviser, a wholly-owned subsidiary of McDonald, is 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act'') and serves as investment adviser to the Funds. The Subadviser, 
organized as a Scottish limited partnership, is registered under the 
Advisers Act. The Subadviser acts as subadviser to the International 
Fund series of the Growth Trust under a subadvisory agreement with the 
Adviser.
    3. On June 15, 1998, McDonald and Key Corp, a bank holding and 
financial services company, entered into an Agreement and Plan of 
Merger under which Key Corp will acquire McDonald and its direct and 
indirect subsidiaries including the Adviser (the ``Merger''). Upon 
consummation of the Merger, McDonald will merge into KeyCorp with 
KeyCorp as the surviving entity.

[[Page 51382]]

McDonald and KeyCorp currently intend to combine the businesses of the 
Adviser and Key Capital Markets, Inc., a wholly-owned subsidiary of 
KeyCorp, into one wholly-owned subsidiary of KeyCorp with the Adviser 
continuing as the surviving entity.
    4. Applicants state that the Merger will result in an assignment, 
and thus automatic termination, of the Adviser's existing investment 
advisory agreements with the Trusts and the Subadviser's existing 
investment subadvisory agreement with the Adviser (the ``Existing 
Agreements''). Applicants anticipate that the Merger will occur on or 
about October 12, 1998.
    5. Applicants request an exemption to permit the implementation, 
during the Interim Period and prior to obtaining shareholder approval, 
of the New Agreements. The requested exemption would cover an Interim 
Period of not more than 150 days, beginning on the later of the Merger 
Date or the date the requested order is issued and continuing until the 
date the New Agreements are approved or disapproved by each Fund's 
shareholders (but in no event later than April 1, 1999).\1\ The 
requested order also would permit the Adviser and Subadviser to receive 
all fees earned under the New Agreements during the Interim Period if, 
and to the extent, the New Agreements are approved by the Fund's 
shareholders. Applicants state that the terms and conditions of the New 
Agreements will substantially identical to those of the Existing 
Agreements, except for the effective and termination dates and the 
inclusion of escrow arrangements described below.
---------------------------------------------------------------------------

    \1\ Applicants state that if the Merger Date precedes the 
issuance of the requested order, the Adviser and, if applicable, the 
Subadviser will serve after the Merger Date and prior to the 
issuance of the order in a manner consistent with their fiduciary 
duty to provide investment advisory services to the Funds even 
though approval of the New Agreements has not been secured from the 
Funds' respective shareholders. Applicants submit that in such an 
event, the Adviser and, if applicable, the Subadviser will be 
entitled to receive from the Funds, with respect to the period from 
the Merger Date until the issuance of the order, no more than the 
actual out-of-pocket cost to the Adviser and, if applicable, the 
Subadviser for providing investment advisory services to the Funds.
---------------------------------------------------------------------------

    6. Each Trust's board of trustees (the ``Boards''), including a 
majority of each Board's trustees who are not interested persons of the 
Funds, within the meaning of section 2(a)(19) of the Act (``Independent 
Trustees'') met on July 31, 1998 and September 14, 1998 and received 
information deemed reasonably necessary to evaluate whether the terms 
of the New Agreements are in the best interest of the Funds and their 
respective shareholders. Each Board, including the Independent 
Trustees, approved the respective New Agreement in accordance with 
section 15(c) of the Act and voted to recommend that shareholders of 
the respective Fund approve the New Agreement during the Interim 
Period.
    7. Proxy materials for the approval of the New Agreements are 
expected to be mailed to the Funds' shareholders on or about January 
15, 1999. Applicants state that although no decisions have been made 
with respect to the Funds, KeyCorp will likely recommend that the Funds 
be merged or reorganized into funds of the KeyCorp family of mutual 
funds during or by the close of the Interim Period. Applicants state 
that commencing the proxy solicitations on or about January 15, 1999, 
will allow the Funds to undertake a single proxy solicitation for 
obtaining shareholder approval of the New Agreements and any proposed 
mergers or reorganizations, rather than conducting multiple proxy 
solicitations within a relatively short period of time, and thus, 
should reduce costs and minimize any potential shareholder confusion 
that may arise in the circumstances.
    8. Fees earned by the Adviser or the Subadviser under the New 
Agreements during the Interim Period will be maintained in an interest-
bearing escrow account with an unaffiliated bank. An escrow agent will 
make payment of fees (including any interest earned) to the Adviser 
only if each Fund's shareholders approve the respective New Agreement. 
The amounts in the escrow account (including interest earned on such 
paid fees) will be paid (i) to the Adviser or Subadviser only upon 
approval of the New Agreements by the shareholders of the respective 
Fund; or (ii) to the respective Fund, in the absence of shareholder 
approval. The escrow agent will notify the relevant Boards when fees 
are paid from the escrow account.

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) 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. Applicants state that 
the Merger will result in an assignment, and thus automatic 
termination, of the Existing Agreements.
    2. Rule 15a-4 under the Act provides, in pertinent part, that if an 
investment advisory contract with an 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 not 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 the Adviser may be deemed to receive 
a benefit in connection with the Merger.
    3. Section 6(c) provides that the SEC 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.
    4. Applicants submit that the requested relief meets this standard. 
Applicants state that the terms and timing of the Merger were 
determined by McDonald and KeyCorp in response to a number of factors 
beyond the scope of the Act and substantially unrelated to the Funds. 
Applicants also state that there is not a sufficient opportunity to 
secure shareholder approval of the New Agreements before the Merger 
Date. Applicants assert that the requested relief would permit the 
continuity of investment management of the Funds, without interruption, 
during the period following the consummation of the Merger.
    5. Applicants submit that the scope and quality of the investment 
advisory and subadvisory services provided to the Funds during the 
Interim Period will be equivalent to the scope and quality of the 
services currently provided to the Funds. Applicants state that the 
Existing Agreements were approved by the Boards and the

[[Page 51383]]

shareholders of the Funds. Applicants represent that the New Agreements 
will have substantially the same terms and conditions as the Existing 
Agreements, except for the dates of commencement and termination and 
the inclusion of the escrow arrangements. Accordingly, applicants 
assert that each Fund will receive, during the Interim Period, 
substantially identical investment advisory and/or subadvisory 
services, provided in the same manner, as it received prior to the 
Effective Date. Applicants state that, in the event of any material 
change in the personnel of the Adviser or the Subadviser providing 
services during the Interim Period, the Adviser or Subadviser will 
apprise and consult the Boards to assure that the Boards, including a 
majority of the Independent Directors, are satisfied that the services 
provided by the Adviser and Subadviser will not be diminished in scope 
or quality.
    6. Applicants contend that to deprive the Adviser and the 
Subadviser of their customary fees during the Interim Period would be 
an unduly harsh and unreasonable penalty. Applicants note that the fees 
payable to the Adviser and the Subadviser under the New Agreements will 
be the same as the fees paid under the Existing Agreements. Applicants 
also note that the fees will not be released by the escrow agent to the 
Adviser or the Subadviser without the approval of the Funds' 
shareholders.

Applicants' Conditions

    Applicants agree as conditions to the issuance of the exemptive 
order requested by the application that:
    1. Each New Agreement will have the same terms and conditions as 
the respective Existing Agreement, except for their effective and 
termination dates and the inclusion of escrow arrangements.
    2. Fees earned by the Adviser or the Subadviser in accordance with 
a New Agreement during the Interim Period 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: (a) to the Adviser and, if applicable, the Subadviser, upon 
approval of the New Agreements by the respective Fund's shareholders; 
or (b) to the respective Fund, in the absence of shareholder approval.
    3. Each Fund will promptly schedule a meeting of shareholders to 
vote on approval of the respective New Agreement to be held within 150 
days following the commencement of the Interim Period (but in no event 
later than April 1, 1999).
    4. McDonald, KeyCorp and/or one or more of their subsidiaries, but 
not the Funds, will pay the costs of preparing and filing the 
application and the costs relating to the solicitation of shareholder 
approval of the New Agreements.
    5. The Adviser and Subadviser will take all appropriate actions to 
ensure that the scope and quality of advisory and other services 
provided to the Fund during the Interim Period will be at least 
equivalent, in the judgment of the respective Board, including a 
majority of the Independent Trustees, to the scope and quality of 
services provided under the Existing Agreement. In the event of any 
material change in personnel providing services under the New 
Agreements, the Adviser or Subadviser will apprise and consult the 
Boards to assure that the Boards, including a majority of the 
Independent Trustees, 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-25726 Filed 9-24-98; 8:45 am]
BILLING CODE 8010-01-M