[Federal Register Volume 64, Number 144 (Wednesday, July 28, 1999)]
[Notices]
[Pages 40923-40924]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19225]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23918; 812-11270]


Smith Breeden Trust, et al.; Notice of Application

July 21, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 12(d)(1)(J) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
12(d)(1)(G)(i)(II) of the Act.

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SUMMARY OF THE APPLICATION: Applicants request an order to permit funds 
of funds relying on section 12(d)(1)(G) of the Act of invest in 
securities and other instruments.

APPLICANTS: Smith Breeden Trust (``Trust''), Smith Breeden Series Fund 
(``Series Fund''), and Smith Breeden Associates, Inc. (``SBA'').

FILING DATES: The application was filed on August 25, 1998 and amended 
on December 22, 1998 and April 16, 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 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 August 16, 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 may request notification by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants 100 Europa Drive, 
Suite 200 Chapel Hill, NC 27514.

FOR FURTHER INFORMATION CONTACT: Rachel H. Graham, Senior Counsel, at 
(202) 942-0583, or Christine Y. Greenlees, 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 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. Each of the Trust and the Series Fund is organized as a 
Massachusetts business trust and registered under the Act as an open-
end management investment company. The Trust currently offers five 
series, including Smith Breeden U.S. Equity Market Plus Fund (``Equity 
Fund''), Smith Breeden European Market Fund (``Europe Fund''), and 
Smith Breeden Asian/Pacific Market Fund (``Asia Pacific Fund'') 
(collectively, the ``Index Plus Funds''). The series Fund currently 
offers two series, one of which is Smith Breeden Short Duration U.S. 
Government Fund (``Short Fund''). SBA, as investment adviser registered 
under the Investment Advisers Act of 1940, serves as investment adviser 
for each series of the Trust and of the Series Fund (each a ``Fund''). 
Applicants request that the relief also apply, to any existing or 
future open-end management investment company or series thereof advised 
by SBA (together with the Index Plus Funds, the ``Upper Tier Funds'') 
that wishes to invest in a registered open-end management investment 
company or series thereof that is advised by SBA and is part of the 
same ``group of investment companies'' (as defined in section 
12(d)(1)(G)(ii) of the Act) (together with the series of the trust and 
of the Series Fund, excluding the Index Plus Funds, the ``Underlying 
Funds'') as the investing Upper Tier Fund.\1\
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    \1\ All existing entities that currently intend to rely on the 
order are named as applicants. Any Upper Tier Fund that may rely on 
this order in the future will do so only in accordance with the 
terms and conditions of the application.
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    2. The Equity Fund seeks to provide a total return greater than 
that of the Standard & Poor's 500 Composite Stock Price Index. To 
achieve this objective, the Equity Fund proposes to invest in shares of 
the Short Fund while also investing in futures and options, equity swap 
contracts, and other investments (collectively, ``Index Securities''). 
Similarly, the Europe Fund and the Asia Pacific Fund each propose to 
invest in both shares of the Short Fund and Index Securities in order 
to obtain a total return greater than that of indices reflecting, 
respectively, the major equity markets of Europe and of the Asia/
Pacific region. The Short Fund seeks to provide a high level of current 
income by investing primarily in mortgage-backed securities issued by 
the U.S. Government, its agencies, and instrumentalities. Applicants 
state that, by purchasing shares of the short Fund, each Index Plus 
Fund will avoid the need to duplicate the strategies and positions of 
the Short Fund and will lower the transaction cost incurred by the 
Index Plus Funds. The Index Plus Funds and other Upper Tier Funds also 
want the flexibility to invest in other securities and financial 
instruments, including financial futures and options, swaps, and 
reverse repurchase agreements (``Other Securities'').
    3. Applicants state that it is SBA's practice to reduce its 
advisory fees and bear certain expenses to the extent that a Fund's 
total annual operating expenses (excluding extraordinary expenses) 
exceed a specified percentage of net assets. Applicants represent that

[[Page 40924]]

SBA will waive the duplicative portion of an Index Plus Fund's advisory 
fee to the extent that an Index Plus invests in shares of the Short 
Fund. Applicants further represent that the Index Plus Funds will not 
pay any sales charges or distribution fees in connection with their 
investment in shares of the Short Fund.

Applicants' Legal Analysis

    1. Section 12(d)(1)(A) 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 or more than 5% of the acquiring company's 
total assets, or if such securities, together with the securities of 
other 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 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) 
will not apply to 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) of the Act by a securities association registered under section 
15A of the Securities Exchange Act of 1934 or by the Commission; and 
(iv) the acquired company has a policy that prohibits it from acquiring 
securities of registered open-end management investment companies or 
registered unit investment trusts in reliance on section 12(d)(1) (F) 
or (G). Applicants state that the proposed arrangement would comply 
with the provisions of section 12(d)(1)(G), but for the fact that each 
Index Plus Fund's policies contemplate that it will invest in Index 
Securities and Other Securities while also investing in shares of the 
Short Fund.
    3. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt persons or transactions from any provision of section 12(d)(1) 
if, and to the extent that, the exemption is consistent with the public 
interest and the protection of investors. Applicants assert that 
permitting the Index Plus Funds and other Upper Tier Funds to invest in 
securities as described in the application would not raise any of the 
concerns that the requirements of section 12(d)(1)(G) were designed to 
address.

Applicants' Condition

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Before approving any advisory contract under section 15 of the 
Act, the board of trustees of an Index Plus or other Upper Tier Fund, 
including a majority of the trustees who are not ``interested persons'' 
as defined in section 2(a)(19) of the Act, will find that advisory 
fees, if any, charged under the contract are based on services provided 
that are in addition to, rather than duplicative of, services provided 
pursuant to any Underlying Fund's advisory contract. This finding, and 
the basis upon which it was made, will be recorded fully in the minute 
books of the Index Plus Fund or Upper Tier Fund.
    2. Applicants will comply with all provisions of section 
129d)(1)(G), except for section 12(d)(1)(G)(i)(II) to the extent that 
it restricts an Index Plus Fund or Other Upper Tier Fund from investing 
in Index Securities and Other Securities as described in the 
application.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19225 Filed 7-27-99; 8:45 am]
BILLING CODE 8010-01-M