[Federal Register Volume 64, Number 43 (Friday, March 5, 1999)]
[Notices]
[Pages 10730-10732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5443]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23722; 812-11470]


The Victory Portfolios, et al.; Notice of Application

February 26, 1999.
agency: Securities and Exchange Commission (``Commission'').

action: Notice of an application 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 the application: Applicants request an order to permit the 
Victory Special Growth Fund, a series of The Victory Portfolios, to 
acquire all of the assets and liabilities of the Gradison Opportunity 
Growth Trust, a series of Gradison Growth Trust. Because of certain 
affiliations, applicants may not rely on rule 17a-8 under the Act.

applicants: The Victory Portfolios (``Victory''), Gradison Growth Trust 
(``Gradison''), and Key Asset Management Inc. (``Adviser'').

filing dates: The application was filed on January 13, 1999. Applicants 
have agreed to file an amendment to the application 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 March 22, 1999, 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 Commission's Secretary.

addresses: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549. Applicants, c/o S. Elliot Cohan, Esq., Kramer Levin Naftalis & 
Frankel LLP, 919 Third Avenue, New York, New York 10022-3852.

for further information contact: Emerson S. Davis, Sr., Senior Counsel, 
at (202) 942-0714, 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 from 
the Commission's Public Reference Branch, 450 Fifth Street, NW, 
Washington, DC 20549 (telephone (202) 942-8090).

Applicants' Representations

    1. Victory, a Delaware business trust, is registered under the Act 
as an open-end management investment company and is currently comprised 
of thirty series, including the Victory Special Growth Fund (the 
``Acquiring Fund''). Gradison, an Ohio business trust, is registered 
under the Act as an open-end management investment company. Gradison 
Opportunity Value Fund (the ``Acquired Fund'') is a series of Gradison.
    2. The Adviser, a New York corporation, is registered under the 
Investment Advisers Act of 1940 (``Advisers Act'') and is the 
investment adviser to the Acquiring Fund. At the time of the 
Reorganization, as defined below, the Adviser will be a bank holding 
company subsidiary of KeyCorp, a financial services holding company. 
McDonald Investments, Inc. (``McDonald'') is registered under the

[[Page 10731]]

Advisers Act and is the investment adviser to the Acquired Fund. 
McDonald's parent corporation has merged with Key Corp and McDonald 
plans to combine its advisory services with the Adviser. A pooled 
investment vehicle managed by a division of the Adviser for the benefit 
of KeyCorp employees (the ``Cash Balance Fund'') owns 42.6% of the 
Acquiring Fund.
    3. On November 6, 1998, and December 11, 1998, the boards of 
trustees of Victory and Gradison (together, the ``Boards''), including 
a majority of the trustees who are not ``interested persons,'' as 
defined in section 2(a)(19) of the Act (``Independent Trustees''), 
respectively, approved an Agreement and Plan Reorganization and 
Termination (``Plan''). Under the Plan, on the date of the exchange 
(the ``Closing Date''), which is currently anticipated to be March 25, 
1999, the Acquiring Fund will acquire all of the assets and liabilities 
of the Acquired Fund in exchange for Class G shares of the Acquiring 
Fund that have an aggregate net asset value (``NAV'') equal to the 
aggregate NAV of the Acquired Fund as of the close of business on the 
business day preceding the Closing Date. On the Closing Date, or as 
soon as practical thereafter, the Acquired Fund will liquidate and 
distribute pro rata the Class G shares of the Acquiring Fund to the 
shareholders of the Acquired Fund (the ``Reorganization''). The value 
of the assets of the Funds will be determined in the manner set forth 
in the Funds' then-current prospectuses and statements of additional 
information.
    4. Applicants state that the investment objectives, policies, and 
limitations of the Acquiring Fund are similar to those of the Acquired 
Fund. Class G shares of the acquiring Fund are not subject to any sales 
charge or redemption fee, but do pay and asset-based sales charge that 
is the same as the asset-base sales charge imposed on shares of the 
Acquired Fund. For a period of at least two years following the 
Reorganization, the Adviser has agreed to waive or reimburse expenses 
so that the total fund operating expenses of the Acquiring Fund would 
not exceed the total fund operating expenses of the Acquired Fund. 
Shareholders of the Acquired Fund will not incur any sales charges in 
connection with the Reorganization. Legal and audit expenses of the 
Reorganization will be borne by Victory and expenses related to the 
registration of shares will be borne by the Acquiring Fund's 
distributor, BISYS Fund Services, Inc.
    5. The Boards, including all of the Independent Trustees, 
determined that the Reorganization is in the best interests of the 
shareholders of the Acquired Fund and the Acquiring Fund, and that the 
interests of the existing shareholders of the Acquired Fund and 
Acquiring Fund would not be diluted by the Reorganization. In assessing 
the Reorganization, the Boards considered various factors, including: 
(a) The investment objectives, policies and limitations of the Acquired 
and Acquiring Funds; (b) the terms and conditions of the 
Reorganization; (c) the tax free-nature of the Reorganization; (d) the 
expense ratios of the Acquiring and Acquired Funds; and (e) alternative 
options to the Reorganization.
    6. The Reorganization is subject to a number of conditions 
precedent, including that: (a) The shareholders of the Acquired Fund 
approve the Plan; (b) the Acquiring and Acquired Funds receive opinions 
of counsel that the Reorganization will be tax-free for the Funds; and 
(c) applicants receive from the Commission an exemption from section 
17(a) of the Act for the Reorganization. The Plan may be terminated and 
the Reorganization abandoned by mutual consent of the Boards or by 
either party in case of a breach of the Plan. Applicants agree not to 
make any material changes to the Plan without prior Commission 
approval.
    7. Definitive proxy solicitation materials have been filed with the 
Commission and were mailed to shareholders of the Acquired Fund on 
January 31, 1999. A special meeting of shareholders is scheduled for 
March 5, 1999.

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 
such a 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 directly or indirectly owning, controlling, or holding with 
power to vote 5% or more of the outstanding voting securities of the 
other person; (b) any person 5% or more of whose 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, 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 set 
forth in the rule are satisfied.
    3. Applicants believe that they may not rely on rule 17a-8 in 
connection with the Reorganization because the Funds may be deemed to 
be affiliated by reasons other than having a common investment adviser, 
common directors, and/or common officers. Applicants state that KeyCorp 
may be deemed to have an indirect pecuniary interest in the assets held 
by the Cash Balance Fund. Applicants further state that because the 
Cash Balance Fund owns 42.6% of the Acquiring Fund, the Acquiring Fund 
may be deemed an affiliated person of an affiliated person of the 
Acquired Fund for a reason other than having a common investment 
adviser, common directors and/or common officers.
    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) to the extent necessary to consummate 
the Reorganization. Applicants submit that the Reorganization satisfies 
the standards of section 17(b) of the Act. Applicants believe that the 
terms of the Reorganization are fair and reasonable and do not involve 
overreaching. Applicants state that the Reorganization will be based on 
the relative NAVs of the Acquiring and Acquired Funds' shares. 
Applicants also state that the investment objectives, policies and 
restrictions of the Funds are, in material respects, substantially 
similar. In addition, applicants state that the Boards, including all 
of the Independent Trustees, have made the requisite determinations 
that the participation of the Acquiring and Acquired Funds in the 
Reorganization is in the best interests of each Fund and that such 
participation will not dilute the interests of shareholders of the 
Funds.


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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-5443 Filed 3-4-99; 8:45 am]
BILLING CODE 8010-01-M