[Federal Register Volume 65, Number 44 (Monday, March 6, 2000)]
[Notices]
[Pages 11815-11816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5384]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24320; 812-11872]


STI Classic Funds, et al.; Notice of Application

February 28, 2000.
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 Application: Applicants request an order to permit certain 
series of a registered open-end management investment company to 
acquire all of the assets and certain stated liabilities of the series 
of another registered open-end management investment company. Because 
of certain affiliations, applicants may not rely on rule 17a-8 under 
the Act.

Applicants: STI Classic Funds (``STI Funds''), ESC Strategic Funds, 
Inc. (``ESC Funds'') and SunTrust Banks, Inc. (``SunTrust'').

Filing Dates: The application was filed on December 3, 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 23, 2000, 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, N.W., Washington, 
D.C. 20549-0609. Applicants, c/o W. John McGuire, Esq., Morgan, Lewis & 
Bockius LLP, 1800 M Street, N.W. Washington, D.C. 20036-5869.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., 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, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicant's Representations

    1. STI Funds, a Massachusetts business trust, is registered under 
the Act as an open-end management investment company and offers thirty-
seven series, including the STI Classic Growth and Income Fund 
(``Growth and Income fund''), STI Small Cap Growth Stock Fund (``Small 
Cap Growth Fund'') and STI Classic International Equity Fund 
(``International Equity Fund'') (together, the ``Existing Acquiring 
Funds'') and a newly established series, STI Classic High Income Fund 
(``High Income fund'') (together with the Existing Acquiring Funds, the 
Acquiring Funds''). ESC Funds, a Maryland corporation, is registered 
under the Act as an open-end management investment company and offers 
five series, ESC Strategic Small Cap Fund, ESC Strategic Small Cap II 
Fund, ESC Strategic International Equity Fund, ESC Strategic 
Appreciation Fund, and ESC Strategic Income Fund (together the 
``Acquired Funds'') (the Acquired Funds and the Acquiring Funds, the 
``Funds'').
    2. SunTrust, a Georgia corporation, is a bank holding company and 
the parent of Trusco Capital Management, Inc. (``Trusco'') and STI 
Capital Management, N.A. (``STI Capital''). Trusco is registered under 
the Investment Advisers Act of 1940 (the ``Advisers Act'') and is the 
investment adviser to the Growth and Income Fund, High Income Fund and 
Small Cap Growth Fund. STI Capital, a bank, is exempt from registration 
under the Advisers Act and is the investment adviser to the 
International Equity Fund. SunTrust Equitable Securities (``STES''), a 
wholly-owned subsidiary of SunTrust, and an investment adviser 
registered under the Advisers Act, is the investment adviser to each of 
the Acquired Funds. Currently, bank subsidiaries of SunTrust own in the 
aggregate, in a fiduciary capacity, 25% or more of the outstanding 
voting securities of each of the Existing Acquiring Funds and 5% or 
more of the outstanding voting securities of three of the acquired 
Funds.
    3. On January 15, 2000 and February 15, 2000, the board of trustees 
of the Acquired Funds and the board of directors of the Existing 
Acquiring Funds (together, the ``Boards''), respectively, including all 
the trustees and directors who are not ``interested persons,'' as 
defined in section 2(a)(19) of the Act (``Independent Directors''), 
approved a plan of reorganization between the Funds (the ``Plan''). 
Under the Plan, on the date of exchange (``Closing Date''), each 
Acquiring Fund will acquire all the assets and certain stated 
liabilities of the corresponding Acquired Fund or Funds in exchange for 
shares of the Acquiring Fund (the ``Reorganization'').\1\ The shares of 
each Acquiring Fund exchanged will have an aggregate net asset value 
equal to the aggregate net asset value of the Acquired Fund's shares 
determined as of the close of business on the business day immediately 
before the Closing Date. The net asset value of the assets received by 
the Acquired Fund will be

[[Page 11816]]

determined in the manner set forth in the Funds' current prospectus and 
statement of additional information. As soon as reasonably practical 
after the applicable Closing Date, each Acquired Fund will liquidate 
and distribute pro rata the shares of the Acquiring Fund to the 
shareholders of the Acquired Fund.
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    \1\ Under the Plan, the Acquired Fund will merge into the 
Existing Acquiring Funds as follows: On March 27, 2000, the ESC 
Strategic Small Cap Fund and Small Cap Fund II will merge into the 
Small Cap Growth Fund, the ESC Strategic International Equity Fund 
will merge into the International Equity Fund, and the ESC Strategic 
Appreciation Fund will merge into the Growth and Income Fund. On 
March 28, 2000, the ESC Strategic Income Fund will merge into the 
High Income Fund.
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    4. Applicants state that the investment objectives, policies and 
restrictions of each Acquired Fund are substantially similar to those 
of its corresponding Acquiring Fund. The Acquired Funds each offer 
Class A shares and Class D shares. Both Class A and Class D shares have 
a front-end sales load and are subject to a distribution fee adopted 
under rule 12b-1 under the Act. The Acquiring Funds each offer: (a) 
Investor shares, which are subject to a front-end sales charge and rule 
12b-1 distribution fee, and (b) Flex Shares, which are subject to a 
rule 12b-1 distribution fee and a contingent deferred sales charge 
(``CDSC'').\2\ Shareholders of Class A and Class D shares of the 
Acquired Funds will receive Investor and Flex Shares, respectively, of 
the corresponding Acquiring Fund.\3\ The CDSC for the Flex Shares of 
each Acquiring Fund will be waived for shares issued to shareholders of 
the Acquired Funds as a result of the Reorganization. No sales charges 
will be imposed in connection with the Reorganization. The Acquired 
Funds will pay a portion of the Reorganization expenses as determined 
by their Board, including all of the Independent Directors, and all 
remaining expenses will be paid by STES and/or SunTrust.
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    \2\ The High Income Fund which will not offer Investors Shares 
initially.
    \3\ Shareholders of Class A and Class D shares of the ESC 
Strategic Income Fund will receive Flex Shares of the High Income 
Fund.
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    5. The Boards, including all of the Independent Directors, 
determined that the Reorganization is in the best interests of the 
shareholders of each Fund, and that the interests of the existing 
shareholders of each Fund would not be diluted as a result of the 
Reorganization. In assessing the Reorganization, the Boards considered 
various factors, including: (a) The compatibility of the investment 
objectives, policies and limitations of the Acquired and corresponding 
Acquiring Funds; (b) the expense ratios of the Acquired and Acquiring 
Funds; (c) the terms and conditions of the Reorganization; (d) the tax-
free nature of the Reorganization; and (e) the potential economies of 
scale to be gained from the Reorganization.
    6. The Reorganization is subject to a number of conditions 
precedent, including that: (a) The shareholders of each Acquired Fund 
will have approved the Plan; (b) the Funds will have received opinions 
of counsel that the Reorganization will be tax-free for the Funds and 
their shareholders; and (c) applicants will 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 at any time 
prior to either Closing Date by either Board if it is determined that 
circumstances have changed to make the Reorganization inadvisable. 
Applicants agree not to make any material changes to the Plan without 
prior Commission approval.
    7. Definitive proxy materials have been filed with the Commission 
and were mailed to shareholders of the Acquired Funds on or about 
January 31, 2000. A special meeting of shareholders of the Acquired 
Funds is scheduled for March 22, 2000.

Applicants' Legal Analysis

    1. Section 17(a) of the Act, in relevant part, 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 certain mergers, 
consolidations, and 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. 
Applicants believe that rule 17a-8 may not be available 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 
subsidiary banks of SunTrust own in the aggregate, as a fiduciary, 25% 
or more of the outstanding voting securities of each of the Existing 
Acquiring Funds and that subsidiary banks of SunTrust, as a fiduciary, 
also own 5% or more of the outstanding voting securities of three of 
the Acquired Funds. Applicants state the SunTrust therefore may be 
deemed to be an affiliated person of those Funds, resulting in the 
Acquiring Funds being affiliated persons of an affiliated person of the 
Acquired Funds.
    3. Section 17(b) of the Act provides, in relevant part, that the 
Commission may exempt a transaction from the previous of section 17(a) 
if evidence establishes that the terms of the proposed 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 that the proposed transaction is consistent with the 
policy of each registered investment company concerned and with the 
general purposes of the Act.
    4. Applicants request an order under section 17(b) of the Act 
exempting them from section 17(a) to the extent necessary to complete 
the Reorganization. Applicants submit that the Reorganization satisfies 
the standards of section 17(b) of the Act. Applicants state that the 
terms of the Reorganization are reasonable and fair and do not involve 
overreaching. Applicants state that the investment objectives and 
policies of each Acquired Fund are substantially similar to those of 
its corresponding Acquiring Fund. Applicants also state that the 
Boards, including all of the Independent Directors, have made the 
requisite determinations that the participation of the Acquired and 
Acquiring Funds in the Reorganization is in the best interests of each 
Fund and that such participation will not dilute the interests of the 
existing shareholders of each Fund. In addition, applicants state that 
the Reorganization will be on the basis of relative net asset value.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-5384 Filed 3-3-00; 8:45 am]
BILLING CODE 8010-01-M