[Federal Register Volume 64, Number 15 (Monday, January 25, 1999)]
[Notices]
[Pages 3725-3727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1531]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23654; 812-11390]
Principal Management Corporation, et al.; Notice of Application
January 15, 1999.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of application for an order under section 17(b) of the
Investment Company Act of 1940 (the
[[Page 3726]]
``Act'') for an exemption from section 17(a) of the Act.
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APPLICANTS: Principal Management Corporation (the ``Adviser''),
Principal Tax-Exempt Cash Management Fund, Inc. (the ``Tax-Exempt
Fund''), and Principal Cash Management Fund, Inc. (the ``Cash
Management Fund'' and together with the Tax-Exempt Fund, the
``Funds'').
SUMMARY OF APPLICATION: Applicants request an order to permit the Cash
Management Fund to acquire the assets and the liabilities of the Tax-
Exempt Fund.
FILING DATES: The application was filed on October 30, 1998, and
amended on January 12, 1999.
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 February 9,
1999, and should be accompanied by proof of service on the 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.
Applicants, The Principal Financial Group, Des Moines, Iowa 50392-0200.
FOR FURTHER INFORMATION CONTACT: Mary Kay Frech, 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 from
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549 (tel. (202) 942-0526).
Applicants' Representations
1. Each of the Funds is a Maryland corporation registered under the
Act as an open-end management investment company. Each of the Funds
operates as a money market fund and seeks to maintain a stable net
asset value (``NAV'') per share of $1.00. The Cash Management Fund has
three classes of shares outstanding: Classes A, B, and R. The Tax-
Exempt Fund has only one class, Class A, shares outstanding. Class A
shares of the Funds are not subject to a sales load, redemption fee,
exchange fee, contingent deferred sales charge, or a distribution fee
under rule 12b-1 under the Act (``rule 12b-1 fee'').
2. The Adviser, an investment adviser registered under the
Investment Advisers Act of 1940, serves as investment adviser for each
of the funds. The Adviser is an indirect wholly-owned subsidiary of the
Principal Life Insurance Company, an Iowa insurance company
(``Principal Life''). At October 31, 1998, Principal Life and it
subsidiaries owned approximately 9.5% of all the outstanding shares of
the Cash Management Fund.
3. On September 14, 1998, the boards of directors of the Funds
(``Boards''), including a majority of the directors who are not
``interested persons'' of the Funds as defined in section 2(a)(19) of
the Act, approved the terms of an Agreement and Plan of Acquisition
pursuant to which the Cash Management Fund will acquire all the assets
and assume all the liabilities of the Tax-Exempt Fund in exchange for
shares of the Cash Management Fund equal in value to the NAV of the
Tax-Exempt Fund (the ``Acquisition''). The Acquisition is expected to
close on April 1, 1999 (the ``Closing Date''). Each shareholder of the
Tax-Exempt Fund will receive shares of the Cash Management Fund having
an aggregate NAV equal to the aggregate NAV of the Tax-Exempt Fund's
shares held by that shareholder calculated as of 4:00 p.m. on the
Closing Date.
4. The investment objectives of the Funds are substantially
similar. The principal investment objective of the Cash Management Fund
is to seek as high a level of current income as is consistent with the
preservation of principal and maintenance of liquidity by investing in
money-market instruments. Similarly, the principal investment objective
of the Tax-Exempt Fund is to seek as high a level of current interest
income exempt from federal income tax as is consistent with stability
of principal and maintenance of liquidity by investing in high quality,
short-term municipal obligations.\1\
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\1\ In order to permit the shareholders of the Tax-Exempt Fund
who wish to maintain an investment in a tax-exempt fund to do so,
the Principal Tax-Exempt Bond Fund (the ``Bond Fund'') intends to
offer to exchange its Class A shares at no load for shares of the
Tax-Exempt Fund or the shares of the Cash Management Fund issued in
exchange for shares of the Tax-Exempt Fund (the ``Exchange Offer'').
The Exchange Offer is expected to commence the day after the
Acquisition is approved by shareholders of the Tax-Exempt Fund and
to continue for at least 30 days following the Closing Date. The
Bond Fund, a Maryland corporation, is an open-end management
investment company registered under the Act. The Adviser serves as
the investment adviser to the Bond Fund.
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5. The Boards found that participation in the Acquisition was in
the best interests of each Fund and their shareholders and that the
interests of the existing shareholders of each Fund would not be
diluted as a result of the Acquisition. The Boards considered a number
of factors in authorizing the Acquisition including: (i) possible
alternatives to the Acquisition, (ii) the terms and conditions of the
Acquisition and whether the Acquisition would result in dilution of
shareholder interests, (iii) the advantage to the Tax-Exempt Fund
shareholders of investing in a larger asset pool with greater
diversification, (iv) any direct or indirect costs incurred by the
Funds as a result of the Acquisition, (v) expense ratios and available
information regarding fees and expenses of the Funds, (vi) the tax
consequences of the Acquisition, (vii) the compatibility of the
investment objectives of the Funds, and (viii) the likelihood that the
shareholders of the Tax-Exempt Fund would prefer the option of
selecting between the Cash Management Fund and the Bond Funds to
maintaining their interests in the Tax-Exempt Fund. The Adviser will
pay all expenses incurred in connection with the Acquisition.
6. The Tax-Exempt Fund intends to hold a shareholders meeting on
March 31, 1999 to consider and vote on the Acquisition. Completion of
the Acquisition is subject to a number of conditions precedent, in
addition to the approval of the Acquisition by the Boards and the
shareholders of the Tax-Exempt Fund. The Acquisition will not be
considered a tax-free ``reorganization,'' under applicable provision of
the Internal Revenue Code. Although the Acquisition will not be
considered a tax-free ``reorganization,'' in the opinion of tax counsel
to the Funds, no gain or loss will be recognized by either Fund or
shareholders, in connection with the Acquisition, and the tax cost
basis of the Cash Management Fund shares received by Tax-Exempt Fund
shareholders will equal the tax cost basis of their shares in the Tax-
Exempt Fund, although their holding period will begin anew with the
Acquisition. Applicants agree that no material changes will be made to
the Acquisition plan without the prior approval of the Commission
staff.
Applicants' Legal Analysis
1. Section 17(a) of the Act prohibits any affiliated person of a
registered investment company, or any affiliated
[[Page 3727]]
person of such a person, acting as principal, from knowingly selling to
or purchasing from such registered company any security or other
property. Section 2(a)(3) of the Act defines an ``affiliated person''
of another person to include (i) any person directly or indirectly
owning, controlling, or holding with the power to vote, 5% or more of
the outstanding voting securities of such other person; (ii) any person
5% or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with the power to vote, by such
other person; (iii) any person directly or indirectly controlling,
controlled by, or under common control with, such other person; and,
(iv) if such other person is an investment company, any investment
adviser thereof.
2. Rule 17a-8 under the Act generally 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, or affiliated persons of an affiliated person,
solely by reason of having a common investment adviser, common
directors, and/or common officers, provided that certain conditions are
satisfied.
3. Applicants state that they may not rely on rule 17a-8 in
connection with the Acquisition because the Funds may be affiliated
persons of each other by reasons other than those set forth in the
rule. Principal Life may be deemed an affiliated person of an
affiliated person of the Funds because its wholly-owned subsidiary
serves as the investment adviser to the Funds. Moreover, Principal Life
may be deemed an affiliated person of the Cash Management Fund
Principal Life owns approximately 9% of the outstanding shares of the
Cash Management Fund.
4. Section 17(b) of the Act authorizes the Commission to exempt a
proposed transaction from section 17(a) of the Act if evidence
establishes that the terms of the transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching on the part of any person concerned, and the
proposed transaction is consistent with the policy of each registered
investment company concerned and the general purposes of the Act.
5. Applicants request an order under section 17(b) of the Act
exempting the Acquisition from section 17(a) of the Act. Applicants
submit that the Acquisition satisfies the requirements of section 17(b)
of the Act. Applicants note that the Boards of the Funds have
determined that the Acquisition is in the best interest of the Funds
and of the shareholders of the Funds and that the Acquisition will not
result in dilution of the interests of the existing shareholders of the
Funds. Applicants state that the Acquisition is consistent with the
principal investment objective of each Fund because each Fund operates
as a money market fund and seeks to preserve capital and maintain
liquidly by investing in short-term investments. Applicants state that
neither Fund will incur any expenses in connection with the Acquisition
because the Adviser has agreed to pay all these fees. Finally,
applicants state that the exchange of the Tax-Exempt Fund's shares for
shares of the Cash Management Fund will be based on relative NAVs, and,
in the opinion of counsel to the Funds, no gain or loss will be
recognized by either the Fund or its shareholders in connection with
the Acquisition.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-1531 Filed 1-22-99; 8:45 am]
BILLING CODE 8010-01-M