[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56274-56276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28166]


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

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23488; 812-11312]


The Victory Portfolios and Key Asset Management, Inc.; Notice of 
Application

October 15, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 12(d)(1)(J) of the 
Investment Company Act of 19940 (the ``Act'') for an exemption from 
section 12(d)(1) of the Act, and under sections 6(c) and 17(b) of the 
Act for an exemption from section 17(a) of the Act.

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

SUMMARY OF APPLICATION: Applicants request an order that would 
supersede a prior order and permit applicants to implement a ``fund of 
funds'' arrangement. In addition to the fund and funds investing in 
other funds in the same group of investment companies, the order would 
permit the fund of funds to invest a portion of its assets in funds 
that are not part of the same group of investment companies in reliance 
on section 12(d)(1)(F) of the Act. The order would also allow the funds 
of funds to offer its shares to the public with a sales load that 
exceeds the 1.5% limit of section 12(d)(1)(F)(ii).

APPLICANTS: The Victory Portfolios (``VP'') and Key Asset Management, 
Inc. (``KAM'').

FLING DATE: The application was filed on September 18, 1998.

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 applicant with a copy of the request, personally or by 
mail, Hearing requests should be received by the Commission by 5:30 
p.m. on November 9, 1998 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

[[Page 56275]]

contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 5th Street N.W., Washington, DC 
20549. Applicant, 3435 Stelzer Road, Columbus, Ohio 43219.

FOR FURTHER INFORMATION CONTACT: Lawrence W. Pisto, Senior Counsel, at 
(202) 942-0527, or Nadya B. Roytblat, Assistant Director 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 5th Street N.W., Washington, 
D.C. 20549 (tel 202-942-8090).

Applicants' Representations

    1. VP is a Delaware business trust registered under the Act as an 
open-end management investment company currently consisting of 30 
portfolios. KAM, registered under the Investment Advisers Act of 1940, 
serves as investment adviser to VP.
    2. Applicants request relief to permit certain series of VP (the 
``Direct Funds'') to invest in certain other series of VP that are in 
the same group of investment companies as the Direct Funds (the 
``Underlying Portfolios'').\1\ The Direct Funds also would invest in 
other registered open-end management investment companies that are not 
part of the same group of investment companies as VP (the ``Other 
Portfolios'') in reliance on section 12(d)(1)(F) of the Act discussed 
below. With respect to a Direct Fund's investment in Other Portfolios, 
applicants also seek an exemption from the sales load limitation in 
section 12(d)(1)(F) of the Act. Applicants believe that the proposed 
structure of the Direct Funds will provide a consolidated and efficient 
means through which investors can have access to a comprehensive 
investment vehicle.\2\
---------------------------------------------------------------------------

    \1\ The requested order would supersede a prior order, Key 
Mutual Funds, et al., Investment Company Act Rel. 22486 (January 30, 
1997 (notice) and 22526 (February 25, 1997) (order).
    \2\ Applicants also request relief for each registered open-end 
management investment company that currently, or in the future, is 
part of the same ``group of investment companies'' as the Direct 
Funds as defined in section 12(d)(1)(G)(ii) of the Act. All 
registered open-end management investment companies which currently 
intend to rely on the order are named as applicants. Any registered 
open-end management investment company that relies on the order in 
the future will do so only in accordance with the terms and 
conditions of the application.
---------------------------------------------------------------------------

Applicants' Legal Analysis

Section 12(d)(1) of the Act

    1. Section 12(d)(1)(D) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or if such securities, together with the securities of any 
other acquired investment companies, represent more than 10% of the 
acquiring company's total assets. Section 12(d)(1)(B) of the Act 
provides that no registered open-end investment company may sell its 
securities to another investment company if the sale will cause the 
acquiring company to own more than 3% of the acquired company's voting 
stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies.
    2. Section 12(d)(1)(G) of the Act provides that section 12(d)(1) 
shall not apply to the securities of an acquired company purchased by 
an acquiring company if: (i) The acquiring company and the acquired 
company are part of the same group of investment companies; (ii) the 
acquiring company holds only securities of acquired companies that are 
part of the same group of investment companies, government securities, 
and short-term paper; (iii) the aggregate sales loads and distribution-
related fees of the acquiring company and the acquired company are not 
excessive under rules adopted pursuant to section 22(b) or section 
22(c) by a securities association registered under section 15A of the 
Securities Exchange Act of 1934, or the Commission; and (iv) the 
acquired company has a policy that prohibits it from acquiring 
securities of registered open-end investment companies or registered 
unit investment trust in reliance on section 12(d)(1)(F) or (G). 
Section 12(d)(1)(G)(ii) defines the term ``group of investment 
companies'' to mean any two or more registered investment companies 
that hold themselves out to investors as related companies for purposes 
of investment and investor services. Because the Direct Funds will 
invest in shares of the Other Portfolios, they cannot rely on the 
exemption from sections 12(d)(1)(A) and (B) afforded by section 
12(d)(1)(G).
    3. Section 12(d)(1)(F) of the Act provides that section 12(d)(1) 
shall not apply to an acquiring company if the company and its 
affiliates own no more than 3% of an acquired company's securities, 
provided that the acquiring company does not impose a sales load of 
more than 1.5% of its shares. In addition, the section provides that no 
acquired company is obligated to honor any acquiring company redemption 
request in excess of 1% of the acquired company's securities during any 
period of less than 30 days, and the acquiring company must vote its 
acquired company shares either in accordance with instructions from its 
shareholders or in the same proportion as all other shareholders of the 
acquired company. The Direct Funds will invest in Other Portfolios in 
reliance on section 12(d)(1)(F). If the requested relief is granted, 
shares of the Direct Funds will be sold with a sales load that exceeds 
1.5%.
    4. Section 12(d)(1)(J) provides that the Commission may exempt 
persons or transactions from any provision of section 12(d)(1) if and 
to the extent such exemption is consistent with the public interest and 
the protection of investors.
    5. Applicants request relief under section 12(d)(1)(J) of the Act 
from the limitations of sections 12(d)(1) (A) and (B) to permit the 
Direct Funds to invest in the Underlying Portfolios and from section 
12(d)(1)(F) to permit the Direct Funds to sell shares to the public 
with a sales load that exceeds 1.5%.
    6. Applicants state that the Direct Funds' investments in the 
Underlying Portfolios do not raise the concerns about undue influence 
that sections 12(d)(1) (A) and (B) were designed to address. Applicants 
further state that the proposed conditions would appropriately address 
any concerns about the layering of sales charges or other fees.
    7. The Direct Funds will invest in Other Portfolios only within the 
limits of section 12(d)(1)(F). Applicants believe that an exemption 
from the sales load limitation in that section is consistent with the 
protection of investors because applicants' proposed sales load limit 
would cap the aggregate sales charges of the Direct Fund and the Other 
Portfolio in which it invests. Applicants have agreed, as a condition 
to the relief, that any sales charges, asset-based distribution and 
service fees relating to the Direct Fund's shares, when aggregated with 
any sales charges, asset-based distribution and service fees paid by 
the Direct Fund relating to its acquisition, holding, or disposition of 
shares of the Underlying Portfolios and Other Portfolios, will not 
exceed the limits set forth in Rule 2830 of the Conduct Rules of the 
National Association of Securities Dealers (``NASD Conduct Rules'').

[[Page 56276]]

Section 17(a) of the Act

    8. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company from selling securities to, 
or purchasing securities 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. Applicants submit that the Direct 
Funds and Underlying Portfolios may be deemed to be affiliated persons 
of one another by virtue of being under common control of KAM, or 
because the Direct Funds own 5% or more of the shares of an Underlying 
Portfolio. Applicants state that purchases and redemptions of shares of 
the Underlying Portfolios by the Direct Funds could be deemed to be 
principal transactions between affiliated persons under section 17(a).
    9. Section 17(b) provides that the Commission shall exempt a 
proposed transaction from section 17(a) if evidence establishes that 
(a) the terms of the proposed transaction, including the consideration 
to be paid or received, are reasonable and fair and do not involve 
overreaching; (b) the proposed transaction is consistent with the 
policies of the registered investment company involved; and (c) the 
proposed transaction is consistent with the general purposes of the 
Act.
    10. Section 6(c) of the Act provides that the Commission may exempt 
persons or transactions from any provision of the Act if 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 request an exemption under 
sections 6(c) and 17(b) to permit the Direct Funds to purchase and 
redeem shares to the Underlying Portfolios.
    11. Applicants state that the terms of the proposed transactions 
will be reasonable and fair and will not involve overreaching because 
shares of Underlying Portfolios will be sold and redeemed at their net 
asset values. Applicants also state that the investment by the Direct 
Funds in the Underlying Portfolios will be effected in accordance with 
the investment restrictions of the Direct Funds and will be consistent 
with the policies as set forth in the registration statement of the 
Direct Funds.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. All Underlying Portfolios will be part of the same ``group of 
investment companies,'' as defined in section 12(d)(1)(G)(ii) of the 
Act, as the Direct Funds.
    2. No Underlying Portfolio or Other Portfolio will acquire 
securities of any other investment company in excess of the limits 
contained in section 12(d)(1)(A) of the Act, except to the extent that 
such Underlying Portfolio or Other Portfolio (a) receives securities of 
another investment company as a dividend or as a result of a plan of 
reorganization of a company (other than a plan devised for the purpose 
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed 
to have acquired) securities of another investment company pursuant to 
exemptive relief from the Commission permitting such Underlying 
Portfolio or Other Portfolio to (i) acquire securities of one or more 
affiliated investment companies for short-term cash management 
purposes; or (ii) engaged in interfund borrowing and lending 
transactions.
    3. Any sales charges, distribution-related fees, and service fees 
relating to the shares of the Direct Funds, when aggregated with any 
sales charges, distribution-related fees, and service fees paid by the 
Direct Funds relating to their acquisition, holding, or disposition of 
shares of the Underlying Portfolios and Other Portfolios, will not 
exceed the limits set forth in rule 2830 of the NASD Conduct Rules.
    4. Before approving any advisory contract under section 15 of the 
Act, the boards of directors/trustees of the Direct Funds, including a 
majority of the directors/trustees who are not ``interested persons,'' 
as defined in section (2)(a)(19), will find that the advisory fees 
charged under the contract are based on services provided that are in 
addition to, rather than duplicative of, services provided under any 
Underlying Portfolio or Other Portfolio advisory contract. This 
finding, and the basis upon which the finding was made, will be 
recorded fully in the minute books of the Direct Funds.
    5. Each Direct Fund will comply with section 12(d)(1)(F) in all 
respects except for the sales load limitation of section 
12(d)(1)(F)(ii).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28166 Filed 10-20 -98; 8:45 am]
BILLING CODE 8010-01-M