[Federal Register Volume 64, Number 25 (Monday, February 8, 1999)]
[Notices]
[Pages 6120-6122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2932]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23674; 812-11484]


Gradison Growth Trust, et al.; Notice of Application February 2, 
1999

AGENCY: Securities and Exchange Commission (``SEC'').

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

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SUMMARY OF THE APPLICATION: The requested order would permit the 
implementation, without prior shareholder approval, of a new investment 
subadvisory agreement (``New Agreement'') for a period commencing on 
the later of the date on which the sale of a controlling interest of 
the subadviser is consummated or the date the requested order is issued 
and continuing until the New Agreement is approved or disapproved by 
shareholders of the investment company (but in no event later than 
March 22, 1999) (``Interim Period''). The order also would permit, 
following shareholder approval, the payment to the subadviser of all 
fees it earns under the New Agreement during the Interim Period.

APPLICANTS: Gradison Growth Trust (``Trust''), McDonald Investments, 
Inc. (``Adviser''), and Blairlogie Capital Management (``Subadviser'').

FILING DATES: The application was filed on January 27, 1999. Applicants 
have agreed to file an amendment, the substance of which is included in 
this notice, during the notice period.

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 Applicant 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 25,1999 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 contested. Persons 
may request notification by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, c/o Kirkpatrick & Lockhart, Attn: Robert J. Zutz, 
Esq. or Francine J. Rosenberger, Esq., 1800 Massachusetts Avenue, NW, 
Suite 200, Washington, D.C. 20036.

FOR FURTHER INFORMATION CONTACT: Rachel H. Graham, Senior Counsel, at 
(202) 942-0583, or Nadya B. Roytblat, Assistant Director, 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, N.W., Washington, 
D.C. 20549 (telephone (202) 942-8090).

Applicants' Representations

    1. The Trust is an Ohio business trust that is registered under the 
Act as an open-end management investment company. The Trust currently 
offers four portfolios, one of which is the International Fund 
(``Fund'').
    2. The Adviser is registered under the Investment Advisers Act of 
1940 (``Advisers Act'') and serves an investment adviser to the Fund 
pursuant to an investment advisory agreement. The Adviser is a wholly-
owned subsidiary of KeyCorp.
    3. The Subadviser, which is organized as a Scottish limited 
partnership, is registered under the Advisers Act. The Subadviser 
serves as a subadviser to the Fund pursuant to an investment 
subadvisory agreement with the Adviser. The Adviser pays the Subadviser 
out of the fee that the Adviser receives from the Fund.
    4. On October 24, 1998, PIMCO Advisors LP (``PIMCO''), a general 
partner of the Subadviser, and certain of

[[Page 6121]]

PIMCO's affiliates entered into an agreement pursuant to which they 
will sell 75% general partner interest in the Subadviser to Alleghany 
Asset Management, Inc. (``AAM'') and certain of its affiliates (the 
``Transaction''). Upon consummation of the Transaction, the Subadviser 
will become a subsidiary of AAM, which in turn is the investment 
management of Alleghany Corporation. Applicants expect consummation of 
the Transaction on or about March 1, 1999.
    5. Applicants state that the Transaction may result in an 
assignment, and thus termination, of the existing subadvisory agreement 
between the Adviser and the Subadviser. Applicants request an exemption 
to permit the implementation, during the Interim Period and prior to 
obtaining shareholder approval, of the New Agreement. The requested 
exemption would cover an Interim Period commencing on the later of the 
date the Transaction is consummated or the date the requested order is 
issued \1\ and continuing until the New Agreement is approved or 
disapproved by Fund shareholders (but in no event later than March 22, 
1999).\2\ The requested order also would permit the Subadviser to 
receive all fees earned under the New Agreement during the Interim 
Period, subject to approval of the New Agreement by Fund shareholders. 
Applicants state that the New Agreement will contain substantially the 
same terms and conditions as the subadvisory agreement most recently 
approved by the Fund's shareholders, except for changes to the 
commencement and termination dates.
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    \1\ Applicants state that if the consummation of the Transaction 
precedes the issuance of the requested order, the Subadviser will 
serve after the consummation of the Transaction and prior to the 
issuance of the order in a manner consistent with its fiduciary duty 
to provide investment subadvisory services to the Fund even though 
approval of the New Agreement has not yet been secured from the 
Fund's shareholders. Applicants submit that, in such an event, the 
Subadviser will be entitled to receive from the Adviser, from the 
date of the consummation of the Transaction until the issuance of 
the order, no more than the actual out-of-pocket cost to the 
Subadviser for providing investment subadvisory services to the 
Fund.
    \2\ On October 23 1998, the Adviser's parent company was 
acquired by KeyCorp. In anticipation of that acquisition, Applicants 
obtained an order from the Commission to permit the implementation, 
without shareholder approval, of new investment advisory and 
subadvisory agreements with the Fund for a period of up to 150 days. 
See Gradison-McDonald Cash Reserve Trust, Investment Company Act 
Rel. Nos. 23442 (Sept. 22, 1998) (notice) and 23484 (Oct. 14, 1998) 
(order) (``Prior Order''). Under the Prior Order, the Fund must hold 
a shareholder meeting no later than March 22, 1999.
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    6. On September 14 and November 6, 1998, the Trust's Board of 
Trustees (``Board'') met to evaluate whether the terms of the New 
Agreement are in the best interests of the Fund and its shareholders. 
The Board, including a majority of the trustees who are not 
``interested persons'' of the Fund, as that term is defined in section 
2(a)(19) of the Act (``Independent Trustees''), approved the New 
Agreement and voted to recommend that the Fund's shareholders approve 
the New Agreement. Proxy materials for the shareholders meeting were 
mailed on February 1, 1999.
    7. Fees earned by the Subadviser under the New Agreement during the 
Interim Period will be maintained in an interest-bearing escrow account 
with an unaffiliated financial institution. The escrow agent will 
release the amounts held in the escrow account (Including any interest 
earned): (i) to the Subadviser upon approval of the New Agreement by 
the Fund's shareholders; or (ii) to the Fund, if the Interim Period has 
ended and the Fund's shareholders have not approved the New Agreement. 
Before any such release is made, the Board will be notified.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to serve as an investment adviser to 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 the investment company. Section 15(a) further 
requires the written contract to provide for its 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 
controlling block of the assignor's outstanding voting securities by a 
security holder of the assignor. Section 2(a)(9) of the Act defines 
``control'' as the power to exercise a controlling influence over the 
management or policies of a company, and beneficial ownership of more 
than 25% of the voting securities of a company is presumed under 
Section 2(a)(9) to reflect control. Applicants state that the 
Transaction may result in an assignment of the existing subadvisory 
agreement and that such agreement will terminate according to its 
terms.
    2. Rule 15a-4 under the Act provides, in relevant part, that if an 
investment advisory contract with a registered investment company is 
terminated by an assignment, an investment adviser may 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; (i) the new 
contract is approved by that company's board of directors,including a 
majority of the non-interested directors; (ii) 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 (iii) 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 may not be entitled to rely on rule 15a-4 because the 
Subadviser may be deemed to receive a benefit in connection with the 
Transaction.
    3. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act or any 
rule thereunder if and to the extent that such exemption is necessary 
or appropriate in the public interest and consistent with both the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants believe that the requested relief 
meets this standard.
    4. Applicants state that the terms and timing of the Transaction 
were determined in response to a number of business factors beyond the 
scope of the Act and substantially unrelated to the Fund. Applicants 
assert that there is insufficient time to obtain shareholder approval 
of the New Agreement before the Transaction is consummated. Applicants 
further assert that the requested relief would prevent any disruption 
in the delivery of investment subadvisory services to the Fund during 
the period following consummation of the Transaction.
    5. Applicants represent that, under the New Agreement during the 
Interim Period, the Fund will receive substantially identical 
investment subadvisory services, provided in substantially the same 
manner, as it received prior to the consummation of the Transaction. 
Applicants state that, in the event of any material change in personnel 
of the Subadviser providing services pursuant to the New Agreement 
during the Interim Period, the Subadviser will apprise and consult the 
Board to assure that the Board, including a majority of the independent 
Trustees,is satisfied that the services provided by the Subadviser will 
not be diminished in scope and quality.
    6. Applicants note that the fees payable to the Subadviser under 
the New Agreement during the Interim Period will be at the same rate as 
the fees paid under the subadvisory agreement most recently approved by 
the Fund's shareholders.

[[Page 6122]]

Applicants' Conditions

    Applicants agree as conditions to the issuance of the exemptive 
order requested by the application that:
    1. The New Agreement will have substantially the same terms and 
conditions as the subadvisory agreement most recently approved by the 
Fund's shareholders, except for the commencement and termination dates.
    2. Fees earned by the Subadviser under the New Agreement during the 
Interim Period will be maintained in an interest-bearing escrow account 
with an unaffiliated financial institution. The escrow agent will 
release those fees (including any interest earned on those fees): (i) 
to the Subadviser upon approval of the New Agreement by the Fund's 
shareholders; or (ii) to the Fund, if the Interim Period has ended and 
the Fund's shareholders have not approved the New Agreement.
    3. The Fund will promptly schedule a meeting of its shareholders to 
vote on approval of the New Agreement, which will be held within the 
Interim Period (but in no event later than March 22, 1999).
    4. The Adviser and/or one or more of its affiliates or subsidiaries 
or the Subadviser, but not the Fund, will pay the cost of preparing and 
filing the application. The Adviser and/or one or more of its 
affiliates or subsidiaries, but not the Fund, will pay the costs 
relating to the solicitation of shareholder approval of the New 
Agreement.
    5. The Subadviser will take all appropriate actions to ensure that 
the scope and quality of subadvisory and other services provided to the 
Fund during the Interim Period under the New Agreement will be at least 
equivalent, in the judgment of the Board, including a majority of the 
Independent Trustees, to the scope and quality of services provided 
under the subadvisory agreement most recently approved by the Fund's 
shareholders. In the event of any material change in personnel 
providing services pursuant to the New Agreement during the Interim 
Period, the Subadviser will apprise and consult the Board to assure 
that the Board, including a majority of the Independent Trustees, is 
satisfied that the services provided by the Subadviser will not be 
diminished in scope or quality.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2932 Filed 2-5-99; 8:45 am]
BILLING CODE 8010-01-M