[Federal Register Volume 64, Number 195 (Friday, October 8, 1999)]
[Notices]
[Pages 54939-54943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26253]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24067; 812-10986]


Schwab Capital Trust, et al.; Notice of Application

October 1, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 12(d)(1)(J) of 
the Investment Company Act of 1940 (``Act'') for an exemption from 
sections 12(d)(1)(A) and (B) of the Act and under sections 6(c) and 
17(b) of the Act for an exemption from section 17(a) of the Act.

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SUMMARY OF THE APPLICATION: The order would permit certain registered 
open-end management investment companies to acquire shares of other 
registered open-end management investment companies both within and 
outside the same group of investment companies.

APPLICANTS: Schwab Capital Trust, Schwab Investments, and The Charles 
Schwab Family of Funds (the ``Trusts'') and Charles Schwab Investment 
Management, Inc. (``Adviser'').

Filing Dates: The application was filed on February 2, 1998 and amended 
on August 31, 1999. Applicants have agreed to file an amendment to the 
application, the substance of which is reflected 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 October 26, 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

[[Page 54940]]

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, N.W., Washington, 
D.C. 20549-0609. Applicants, 101 Montgomery Street, 120KNY-14, San 
Francisco, CA 94104.

FOR FURTHER INFORMATION CONTACT: Michael W. Mundt, Branch Chief, and 
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 Fifth Street, N.W., 
Washington, D.C. 20549-0102, (202) 942-8090.

Applicants' Representations

    1. The Trusts are open-end management investment companies 
registered under the Act that are comprised of separate series, each of 
which pursues a distinct set of investment objectives and policies. The 
Adviser, a wholly-owned subsidiary of The Charles Schwab Corporation 
(``Schwab''), is registered as an investment adviser under the 
Investment Advisers Act of 1940 and serves as investment adviser to the 
Trusts. Another wholly-owned subsidiary of Schwab, Charles Schwab & 
Co., Inc. (the ``Distributor''), is a broker-dealer and transfer agent 
registered under the Securities Exchange Act of 1934 and serves as the 
principal underwriter/distributor, transfer agent, and shareholder 
servicing agent for the Trusts. The Distributor also operates Schwab's 
Mutual Fund OneSource Service (``OneSource Service''), which provides 
services to investment companies in return for a fee based on the 
assets invested in the investment companies through the OneSource 
Service.
    2. Applicant request relief to permit certain series of the Trusts 
(the ``Funds of Funds'') to invest: (a) In other series of the Trusts 
and other registered open-end management investment companies that are 
part of the same ``group of investment companies,'' as that term is 
defined in section 12(d)(1)(G) of the Act discussed below, as the 
Trusts (``Affiliated Funds''), and (b) in other registered open-end 
management investment companies that are not part of the same group of 
investment companies as the Trusts (``Unaffiliated Funds'').\1\ The 
Affiliated and Unaffiliated Funds collectively are referred to as 
``Underlying Funds.'' \2\ A Fund of Funds also may make direct 
investments in stocks, bonds, and any other securities which are 
consistent with its investment objective.
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    \1\ With regard to purchases of shares of Unaffiliated Funds, 
the requested order would apply to purchases made by the Fund of 
Funds only where the Fund of Funds could not rely on the provisions 
of section 12(d)(1)(F) of the Act.
    \2\ All Funds of Funds and Affiliated Funds that currently 
intend to rely on the requested order are named as applicants. Any 
other investment company that relies on the order in the future will 
comply with the terms and conditions of the application.
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    3. Applicants state that each Fund of Funds will enable investors 
to create a comprehensive asset allocation program or achieve 
diversification in a specific segment of the market with just one 
investment. Applicants assert that a Fund of Funds will provide a 
simple, convenient, low-cost investment program for investors who are 
able to identify their long-term investment goals, but who may not be 
comfortable deciding how to invest their assets to achieve those goals.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company from selling its shares to 
another investment 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 
generally.
    2. Section 12(d)(1)(G) provides, in relevant part, that section 
12(d)(1) will not apply to securities of a registered open-end 
investment company acquired by a registered open-end investment company 
if the acquired company and the acquiring company are part of the same 
group of investment companies, provided that certain other requirements 
contained in section 12(d)91)(G) are met. Applicants state that they 
may not rely on section 12(d)(1)(G) because a Fund of Funds will invest 
in Unaffiliated Funds in addition to Affiliated Funds.
    3. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any person, security, or transaction, or any class or classes of 
persons, securities or transactions, from any provision of section 
12(d)(1) if the exemption is consistent with the public interest and 
the protection of investors. Applicants seek an exemption under section 
12(d)(1)(J) to permit the Funds of Funds to acquire shares of 
Underlying Funds and to permit Underlying Funds to sell shares to the 
Funds of Funds beyond the limits set forth in sections 12(d)(1)(A) and 
(B).
    4. Applicants state that section 12(d)(1)(J) was added to the Act 
by the National Securities Markets Improvement Act of 1996 (``NSMIA''). 
Applicants further state that the legislative history of NSMIA 
indicates that Congress intended that, in granting relief under section 
12(d)(1)(J), the Commission consider, among other things, ``the extent 
to which a proposed arrangement is subject to conditions that are 
designed to address conflicts of interest and overreaching by a 
participant in the arrangement, so that the abuses that gave rise to 
the initial adoption of the Act's restrictions against investment 
companies investing in other investment companies are not repeated.'' 
\3\
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    \3\ H.R. Rep. No. 622, 104th Cong., 2d Sess., 44 (1966).
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    5. Applicants state that the proposed arrangement will not give 
rise to the policy concerns underlying sections 12(d)(1)(A) and (B), 
which include concerns about undue influence by a fund of funds over 
underlying funds, excessive layering of fees, and overly complex fund 
structures. Accordingly, applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    6. Applicants state that the proposed arrangement will not result 
in undue influence by a Fund of Funds or its affiliates over Underlying 
Funds. Applicants note that investment by a Fund of Funds in Affiliated 
Funds is permitted under section 12(d)(1)(G) of the Act. To limit the 
control that a Fund of Funds may have over an Unaffiliated Fund, 
applicants propose a condition prohibiting the Adviser, the Fund of 
Funds, and certain affiliates (individually or in the aggregate) from 
controlling an Unaffiliated Fund within the meaning of section 2(a)(9) 
of the Act.
    7. To limit further the potential for undue influence by a Fund of 
Funds or its affiliates over an Unaffiliated Fund, applicants state 
that a Fund of Funds

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and its Adviser, promoter, and principal underwriter, and any person 
controlling, controlled by, or under common control with any of those 
entities (each a ``Fund of Funds Affiliate'') will not cause any 
investment by the Fund of Funds in shares of an Unaffiliated Fund to 
influence the terms of any services or transactions between the Fund of 
Funds or a Fund of Funds Affiliate and the Unaffiliated Fund or its 
investment adviser, promoter, and principal underwriter, and any person 
controlling, controlled by, or under common control with any of those 
entities (each an ``Unaffiliated Fund Affiliate''). The board of 
trustees of the Fund of Funds, including a majority of the trustees who 
are not ``interested persons'' of the Fund of Funds, as defined in 
section 2(a)(19) of the Act (``disinterested trustees''), also will 
adopt procedures designed to assure that the Adviser is conducting the 
investment program of the Fund of Funds without taking into account any 
consideration received by the Fund of Funds or a Fund of Funds 
Affiliate from an Unaffiliated Fund or an Unaffiliated Fund Affiliate 
in connection with any services or transactions. The board of directors 
of each Unaffiliated Fund, including a majority of the disinterested 
directors, also will determine that any consideration paid by the 
Unaffiliated Fund to the Fund of Funds or a Fund of Funds Affiliate is 
fair and reasonable and does not involve overreaching on the part of 
any person concerned.
    8. To avoid the possibility that a Fund of Funds could force and 
Unaffiliated Fund to purchase unmarketable securities, applicants state 
that a Fund of Funds will not cause an Unaffiliated Fund to purchase a 
security from any underwriting or selling syndicate in which a 
principal underwriter is an officer, director, member of an advisory 
board, investment adviser, or employee of the Fund of Funds, or a 
person of which any such officer, director, member of an advisory 
board, investment adviser, or employee is an affiliated person (each an 
``Underwriting Affiliate''). For the purposes of the requested relief, 
an offering of securities during the existence of an underwriting or 
selling syndicate of which a principal underwriter is an Underwriting 
Affiliate is considered an ``Affiliated Underwriting.''
    9. Applicants further state that the board of directors of an 
Unaffiliated Fund, including a majority of the disinterested directors, 
will adopt procedures designed to monitor any purchases of securities 
by the Unaffiliated Fund in Affiliated Underwritings and directly from 
Underwriting Affiliates, and will make certain findings to assess 
whether the purchases were influenced by the investment by the Fund of 
Funds in shares of the Unaffiliated Fund. An Unaffiliated Fund will 
keep certain records concerning these purchases.
    10. As an additional assurance that an Unaffiliated Fund 
understands the implications of an investment by a Fund of Funds under 
the requested order, the Fund of Funds and Unaffiliated Fund will 
execute an agreement prior to the investment stating that the 
Unaffiliated Fund understands the terms and conditions of the order and 
agrees to fulfill its responsibilities under the order. Applicants note 
that an Unaffiliated Fund may choose to reject an investment from the 
Fund of Funds.
    11. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. Applicants sate that the Adviser 
may charge an investment advisory fee to each Fund of Funds and to 
Affiliated Funds. However, the board of trustees of a Fund of Funds, 
including a majority of the disinterested trustees, will be required to 
determine that the advisory fees charged to the Fund of Funds are based 
on services that are in addition to the services provided under the 
advisory contract of any Underlying Fund. In addition, to avoid the 
inference that fees payable to the Distributor by a Fund of Funds and 
by Unaffilated Funds are duplicative, the Distributor will waive fees 
otherwise payable to the Distributor by a Fund of Funds pursuant to 
transfer agent and shareholder servicing contracts and other similar 
contracts in an amount at least equal to any compensation received by 
the Distributor (including One Source Service fees) from Unaffiliated 
Funds in connection with any investment by the Fund of Funds.
    12. Applicants also state that the aggregate sales charges and/or 
distribution-related fees of a Fund of Funds and any Underlying Fund in 
which it invests will not exceed the limits set forth in rule 2830 of 
the Conduct Rules of the National Association of Securities Dealers 
(``NASD Conduct Rules''). In addition, applicants represent that a Fund 
of Funds' prospectus and sales literature will contain concise, ``plain 
English'' disclosure designed to inform investors of the unique 
characteristics of the Fund of Funds structure, including, but not 
limited to, its expense structure and the additional expenses of 
investing in Underlying Funds.
    13. Applicants state that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that an Underlying 
Fund will be prohibited from acquiring securities of any investment 
company in excess of the limits contained in section 12(d)(1)(A), 
except to the extent permitted by an exemptive order allowing an 
Underlying Fund to purchase shares of an affiliated money market fund 
for short-term cash management purposes.

B. Section 17(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include 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 and 
any person directly or indirectly controlling, controlled by, or under 
common control with the other person.
    2. Applicants state that the Funds of Funds and the Affiliated 
Funds might be deemed to be under common control. Applicants also state 
that a Fund of Funds and an Unaffiliated Fund might become affiliated 
persons if the Fund of Funds acquires more than 5% of the Unaffiliated 
Fund's outstanding voting securities. In light of these possible 
affiliations, section 17(a) could prevent an Underlying Fund from 
selling shares to and redeeming shares from the Fund of Funds.
    3. Section 17(b) of the Act authorizes the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that: (a) The terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (b) the proposed transaction is consistent with the policies 
of each registered investment company involved; and (c) the proposed 
transaction is consistent with the general purposes of the Act. Section 
6(c) of the Act permits the Commission to exempt any person 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.
    4. Applicants submit that the proposed arrangement satisfies the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the arrangement are fair and 
reasonable and do not involve overreaching. Applicants note that the 
consideration paid for the sale and

[[Page 54942]]

redemption of shares of the Underlying Funds will be based on the net 
asset values of the Underlying Funds. Applicants state that the 
proposed arrangement will be consistent with the policies of each Fund 
of Funds, as set forth in each Fund of Funds' registration statement, 
and with the general purposes of the Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. (a) The Adviser, (b) any person controlling, controlled by, or 
under common control with the Adviser, and (c) any investment company 
and any issuer that would be an investment company but for section 
3(c)(1) or section 3(c)(7) of the Act advised by the Adviser or any 
person controlling, controlled by, or under common control with the 
Adviser (collectively, the ``Group'') will not control (individually or 
in the aggregate) an Unaffiliated Fund within the meaning of section 
2(a)(9) of the Act. If, as a result of a decrease in the outstanding 
voting securities of an Unaffiliated Fund, the Group, in the aggregate, 
becomes a holder of more than 25% of the outstanding voting securities 
of the Unaffiliated Fund, the Group will vote its shares of the 
Unaffiliated Fund in the same proportion as the vote of all other 
holders of the Unaffiliated Fund's shares.
    2. A Fund of Funds and a Fund of Funds Affiliate will not cause any 
existing or potential investment by the Fund of Funds in shares of an 
Unaffiliated Fund to influence the terms of any services or 
transactions between the Fund of Funds or Funds of Funds Affiliate and 
the Unaffiliated Fund or an Unaffiliated Fund Affiliate.
    3. The board of trustees of the Fund of Funds, including a majority 
of the disinterested trustees, will adopt procedures reasonably 
designed to assure that the Adviser is conducting the investment 
program of the Fund of Funds without taking into account any 
consideration received by the Fund of Funds or a Fund of Funds 
Affiliate from an Unaffiliated Fund or an Unaffiliated Fund Affiliate 
in connection with any services or transactions.
    4. The board of directors of each Unaffiliated Fund, including a 
majority of the disinterested directors, will determine that any 
consideration paid by the Unaffiliated Fund to the Fund of Funds or a 
Fund of Fund Affiliate in connection with any services or transactions: 
(a) Is fair and reasonable in relation to the nature and quality of the 
services and benefits received by the Unaffiliated Fund; (b) is within 
the range of consideration that the Unaffiliated Fund would be required 
to pay to another unaffiliated entity in connection with the same 
services or transactions; and (c) does not involve overreaching on the 
part of any person concerned.
    5. A Fund of Funds will not cause an Unaffiliated Fund to purchase 
a security from any Affiliated Underwriting.
    6. The board of directors of an Unaffiliated Fund, including a 
majority of the disinterested directors, will adopt procedures 
reasonably designed to monitor any purchase of securities by an 
Unaffiliated Fund in an Affiliated Underwriting, including any 
purchases made directly from an Underwriting Affiliate. The board of 
directors will review these purchases periodically, but no less 
frequently than annually, to determine whether the purchases were 
influenced by the investment by the Fund of Funds in shares of the 
Unaffiliated Fund. The board of directors should consider, among other 
things: (a) Whether the purchases were consistent with the investment 
objectives and policies of the Unaffiliated Fund: (b) how the 
performance of securities purchased in an Affiliated Underwriting 
compares to the performance of comparable securities purchased during a 
comparable period of time in underwritings other than Affiliated 
Underwritings or to a benchmark such as a comparable market index; and 
(c) whether the amount of securities purchased by the Unaffiliated Fund 
in Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
board of directors will take any appropriate actions based on its 
review, including, if appropriate, the institution of procedures 
designed to assure that purchases of securities from Affiliated 
Underwritings are in the best interests of shareholders.
    7. The Unaffiliated Fund will maintain and preserve permanently in 
an easily accessible place a written copy of the procedures described 
in the preceding condition, and any modifications, and will maintain 
and preserve for a period not less than six years from the end of the 
fiscal year in which any purchase from an Affiliated Underwriting 
occurred, the first two years in an easily accessible place, a written 
record of each purchase, setting forth from whom the securities were 
acquired, the identify of the underwriting syndicate's members, the 
terms of the purchase, and the information or materials upon which the 
board's determinations were made.
    8. Prior to an investment in shares of an Unaffiliated Fund in 
excess of the limit in section 12(d)(1)(F), the Fund of Funds and the 
Unaffiliated Fund will execute an agreement stating, without 
limitation, that the Unaffiliated Fund understands the terms and 
conditions of the order and agrees to fulfill its responsibilities 
under the order. At the time of its investment in shares of an 
Unaffiliated Fund in excess of the limit in section 12(d)(1)(F), a Fund 
of Funds will notify the Unaffiliated Fund of the investment. At such 
time, the Fund and Funds also will transmit to the Unaffiliated Fund a 
list of the names of each Fund of Funds Affiliates and Underwriting 
Affiliate. The Fund of Funds will notify the Unaffiliated Fund of any 
change to the list as soon as reasonably practicable after a change 
occurs. The Unaffiliated Fund and the Fund of Funds will maintain and 
preserve a copy of the order, the agreement, and the list with any 
updated information for a period of not less than six years from the 
end of the fiscal year in which any investment occurred, the first two 
years in an easily accessible place.
    9. Prior to approving any advisory contract under section 15 of the 
Act, the board of trustees of each Fund of Funds, including a majority 
of the disinterested trustees, will find that the advisory fees charged 
under the contract are based on services provided that will be in 
addition to, rather than duplicative of, the services provided under 
the advisory contract of any Underlying Fund in which the Funds of 
Funds may invest. These findings and their basis will be recorded fully 
in the minute books of the appropriate Fund of Funds.
    10. The Distributor will waive fees otherwise payable to the 
Distributor by a Fund of Funds pursuant to transfer agent and 
shareholder servicing contracts and other similar contracts in an 
amount at least equal to any compensation received by the Distributor 
(including OneSource Service fees) from Unaffiliated Funds in 
connection with the investment by a Fund of Funds in the in the 
Unaffiliated Funds.
    11. Any sales charges and/or distribution-related fees charged with 
respect to shares of a Fund of Funds, when aggregated with any sales 
charges and/or distribution-related fees paid by the Fund of Funds with 
respect to its acquisition, holding, or disposition of shares of an 
Underlying Fund, will not exceed the limits set forth in rule 2830 of 
the NASD Conduct Rules. If the Fund of Funds and an Underlying Fund 
both

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charge a ``service fee'' as defined in rule 2830, the board of trustees 
of the Fund of Funds, including a majority of the disinterested 
trustees, will find that the service fee being paid by the Fund of 
Funds to its service providers is based on services that will be in 
addition to, rather than duplicative of, the services provided to the 
Underlying Fund.
    12. No Underlying Fund 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 permitted by an exemptive 
order that allows the Underlying Fund to purchase shares of an 
affiliated money market fund for short-term cash management purposes.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-26253 Filed 10-7-99; 8:45 am]
BILLING CODE 8010-01-M