[Federal Register Volume 65, Number 251 (Friday, December 29, 2000)]
[Notices]
[Pages 83116-83119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33260]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24794; File No. 812-12124]


Market Street Fund, Inc., et al.; Notice of Application

December 21, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order of exemption pursuant to 
Section 17(b) of the Investment Company Act of 1940 (the ``Act'') from 
Section 17(a) of Act.

-----------------------------------------------------------------------

    Applicants: Market Street Fund, Inc. (the ``Fund''), Market Street 
Fund (the ``Trust''), Provident Mutual Life Insurance Company 
(``PMLIC''), Market Street Investment Management Company (``MSIM''), 
and Providentmutual Life and Annuity Company of America (``PLACA'').
    Summary of Application: Applicants seek an order exempting certain 
transactions from the provisions of Section 17(a) of the Act to the 
extent necessary to permit the reorganization of the Fund, a Maryland 
corporation, into a Delaware business trust. At the conclusion of the 
transactions, the assets and liabilities currently held in the Money 
Market, Equity 500 Index, Growth, Bond, Managed, Aggressive Growth, 
International, All Pro Large Cap Growth, All Pro Small Cap Growth, All 
Pro Large Cap Value, and All Pro Small Cap Value Portfolios 
(collectively, the ``Fund Portfolios'') of the Fund will be held by the 
corresponding portfolios of the Trust (collectively, the ``Trust 
Portfolios'') which previously will have had no operations. Because of 
certain affiliations, Applicants may not rely on Rule 17a-8 under the 
Act.
    Filing Dates: The application was filed on May 19, 2000, and 
amended and restated on December 20, 2000.
    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 Secretary of 
the Commission 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 January 16, 2001, and should be accompanied 
by proof of service on the 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 of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. For the Applicants: James A 
Bernstein, Esq., Market Street Fund Inc., Market Street Trust, 103 
Bellevue Parkway, Wilmington, Delaware 19809; Provident Mutual Life 
Insurance Company, Market Street Investment Management Company, 1000 
Chesterbrook Boulevard, Berwyn, Pennsylvania 19312-1181; Michael 
Berenson, Esq., Jorden Burt Boros Cicchetti Berenson & Johnson LLP, 
1025 Thomas Jefferson Street, NW., Suite 400 East, Washington, DC 
20007-0805; Providentmutual Life and Annuity Company of America, 300 
Continental Drive, Newark, Delaware 19713-4399.

FOR FURTHER INFORMATION CONTACT: Keith A. O'Connell, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 5th Street, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicant's Representations

    1. The Fund, a Maryland corporation incorporated on March 21, 1985, 
is an open-end, management investment company registered under the Act. 
Eleven of the twelve portfolios will participate in the reorganization: 
the Money Market, Equity 500 Index, Growth, Bond, Managed, Aggressive 
Growth, International, All Pro Large Cap Growth, All Pro Small Cap 
Growth, All Pro Large Cap Value, and All Pro Small Cap Value Portfolios 
(each, a ``Portfolio''). The Fund receives investment advisory services 
from Sentinel Advisors Company (``SAC'')\1\ for the Money Market, Bond, 
Growth, Managed, and Aggressive Growth Portfolios and from Market 
Street Investment Management Company (``MSIM'') for the Equity 500 
Index, International, All Pro Large Cap Growth, All Pro Small Cap 
Growth, All Pro Large Cap Value, and All Pro Small Cap Value 
Portfolios. MSIM retains various sub-advisers that are responsible for 
the day-to-day decision making for the portfolios for which it serves 
as investment adviser.
---------------------------------------------------------------------------

    \1\ SAC is registered as an investment adviser under the 
Investment Advisers Act of 1940 and is a Vermont general partnership 
indirectly wholly owned by PMLIC, National Life Insurance Company 
and Penn Mutual Life Insurance Company.
---------------------------------------------------------------------------

    2. The Trust, a Delaware business trust, was created on October 30, 
2000. On or about January 26, 2001, the Trust will adopt the Fund's 
registration statement under the Act as an open-end management 
investment company. The Trust will offer 11 investment portfolios 
corresponding to the various portfolios of the Fund, excluding the 
Sentinel Growth Portfolio. The Trust will receive investment advisory 
services from MSIM for all of the Trust Portfolios. Each of the Trust 
Portfolios into which the Fund Portfolios will be merged has the same 
investment objective as the corresponding Fund Portfolios. In addition 
to the reorganization, shareholders of the Fund Portfolios are being 
asked to approve by proxy (1) A proposal to change the investment 
approaches of and rename certain Portfolios and to change the 
investment objective of the Growth Portfolio, (2) a proposal for a new 
investment advisory agreement between the Fund and MSIM for all of its 
Portfolios, and (3) a proposal to permit MSIM to enter and materially 
amend subadvisory agreements for certain Portfolios without shareholder 
approval.

[[Page 83117]]

    3. The shares of the Fund are sold generally only to insurance 
companies and their separate accounts as the underlying investment 
media for variable life insurance and variable annuity contracts issued 
by such insurance companies. The shares of the Trust, similarly, will 
be sold generally only to insurance companies and their separate 
accounts as the underlying investment media for variable life insurance 
and variable annuity contracts issued by such insurance companies. As 
of November 28, 2000, PMLIC had contributed seed capital equal to 
approximately 34% of the All Pro Large Cap Value Portfolio, 6% of the 
All Pro Small Cap Growth Portfolio, and 16% of the All Pro Small Cap 
Value Portfolio. These seed capital holdings represent the only shares 
held by PMLIC and PLACA other than through their separate accounts.
    4. As of December 20, 2000, PMLIC, PLACA, and National Life 
Insurance Company (``NLIC'') and certain of their separate accounts are 
the only shareholders of the Fund Portfolios. As the primary holders of 
the Portfolio's shares, PMLIC, PLACA, and NLIC currently control the 
Fund. On November 27, 2000, NLIC received an order of approval from the 
Commission pursuant to Section 26(b) of the Act permitting NLIC to 
substitute shares of various investment companies for shares of the 
various Fund Portfolios currently held by its separate accounts on 
behalf of its contract owners. The substitution took place at the close 
of business on November 30, 2000, with respect to all of the Fund 
Portfolios except the Bond and Managed Portfolios. SAC will resign on 
or about January 26, 2001, as the investment adviser to the Money 
Market, Bond, Growth, Managed and Aggressive Growth Portfolios. On 
November 3, 2000, the Fund's Board of Directors and the Trust's Board 
of Trustees approved MSIM as investment adviser to these five 
Portfolios. As a result of the NLIC substitution, NLIC and its separate 
accounts continue to be shareholders in only two of the Fund Portfolios 
(the Managed and Bond Portfolios). PMLIC, PLACA, NLIC, and their 
separate accounts, are the only shareholders of the Fund Portfolios, 
and upon consummation of the Reorganization (defined below), will be 
the only shareholders of the Trust Portfolios. As stated above, PMLIC 
has contributed seed capital to certain portfolios and therefore 
beneficially owns shares in such portfolios. Following the 
Reorganization, PMLIC and PLACA will control the Trust as the primary 
shareholders of the Trust Portfolios.
    5. The Fund plans to reorganize and redomesticate from a Maryland 
corporation into a Delaware business trust (the ``Reorganization''). 
The Reorganization will take place pursuant to the terms and conditions 
stated in the Agreement and Plan of Reorganization, Redomestication and 
Pro Rata Distribution (the ``Plan''). The Reorganization process can be 
summarized as follows. First, a Delaware business trust has been 
created. If shareholders owners approve the Reorganization, the Fund 
will assign, transfer and convey the assets of each of the Fund 
Portfolios to the corresponding series of the Trust. Each Trust 
Portfolio will acquire all of the assets and liabilities of each 
corresponding Fund Portfolio in exchange for full and fractional shares 
of beneficial interest of the Trust Portfolio. The shares of the Trust 
Portfolios will have an aggregate net asset value equal to the 
aggregate net asset value of the shares of the corresponding Fund 
Portfolios immediately prior to the Reorganization. The value of the 
assets will be determined in accordance with the current prospectus and 
statement of additional information of the Fund and Trust.
    6. In connection with the Reorganization, shares of each Trust 
portfolio will be distributed to holders of the shares of the 
respective corresponding Fund Portfolio. The number of full and 
fractional shares of a Trust Portfolio received by a shareholder of the 
corresponding Fund Portfolio will be equal in value to the value of 
that shareholder's shares of the corresponding Fund Portfolio 
immediately prior to the Reorganization as of the close of regularly 
scheduled trading on the New York Stock Exchange on the closing date of 
the Reorganization. The Reorganization is intended to be a 
reorganization within the meaning of Section 368(a)(1) of the United 
States Internal Revenue Code of 1986, as amended. The Reorganization 
will not result in the merger or reorganization of the various separate 
accounts that hold shares of the Fund.
    7. On April 24, 2000, the Board of Directors of the Fund authorized 
the Fund's officers to take steps necessary to effect the 
Reorganization. On November 3, 2000, both the Board of Directors of the 
Fund and the Board of Trustees of the Trust (together, the ``Board'') 
authorized and approved the Reorganization. The Board's vote and 
findings were recorded in the minutes of the November 3 Board Meeting. 
The Reorganization will be submitted to a vote of the shareholders of 
the Fund Portfolios for approval at a Special Meeting of Shareholders 
scheduled to be held on January 12, 2001, in accordance with Maryland 
law, the Act and Commission rules. However, at any time prior to the 
Reorganization, the Board may decide that it is in the best interest of 
the Fund and its shareholders not to reorganize into the Trust.
    8. The Reorganization of the Fund from a Maryland corporation to a 
Delaware business trust will not affect the advisory fees or expenses, 
including existing fee waivers or expense reimbursements, if any, of 
the Trust Portfolios. These fees and expenses may change as a result of 
other proposals that contract owners are being asked to approve. No 
sales charge will be assessed in connection with the Reorganization. 
The expenses of the Reorganization, including any brokerage 
commissions, if any, will be borne by PMLIC.
    9. The Applicants state that the principal purpose of the 
Reorganization is to take advantage of the benefits Delaware business 
trust law offers mutual funds.
    10. In reaching the decision to approve the Reorganization and to 
recommend that shareholders approve it, the Board concluded that the 
Reorganization is in the best interests of each Fund Portfolio and each 
corresponding Trust Portfolio, as well as in the best interests of the 
shareholders and the contract owners whose contract values are invested 
in shares of the Fund Portfolios and will be invested in the 
corresponding Trust Portfolios, and that the interests of existing 
shareholders and contract owners will not be diluted as a result of the 
Reorganization. The Board considered a number of factors including the 
advantages of operating under Delaware law, the fact that the share 
prices will not be affected by the Reorganization, the tax-free 
treatment at the federal level of the Reorganization, and the continued 
protection of shareholders from liability for the Trust's obligations.
    11. The Reorganization is subject to certain conditions precedent, 
including (1) shareholder approval of the Reorganization, (b) 
effectiveness of the Trust's registration statement, and (c) the order 
requested herein.

Applicant's Legal Analysis

    1. Section 17(a) of the Act provides in part that it is unlawful 
for any affiliated person of a registered investment company, or any 
affiliated person of such an affiliated person, acting as principal, 
knowingly to sell to such

[[Page 83118]]

investment company or to purchase from such investment company any 
securities or other property.
    2. Section 2(a)(3) of the Act defines the term affiliated persons 
of another person, in part, as:

    (A) any person directly or indirectly owning, controlling, or 
holding with power to vote, 5 per centum or more of the outstanding 
voting securities of such other person; (B) any person 5 per centum 
or more of whose outstanding voting securities are directly or 
indirectly owned, controlled, or held with power to vote, by such 
other person; (C) any person directly or indirectly controlling, 
controlled by, or under common control with, such other person; * * 
* (E) if such other person is an investment company, any investment 
adviser thereof or any member of any advisory board thereof * * *

Section 2(a)(9) of the Act defines control in part to mean ``the power 
to exercise a controlling influence over the management or policies of 
a company, unless such power is solely the result of an official 
position with such company.''
    3. The Applicants state that as of the date of the Reorganization, 
all of the outstanding shares of the Fund Portfolios will be legally 
owned by PMLIC, PLACA and NLIC, and their separate accounts and PMLIC 
will beneficially own shares of certain Portfolios. All of the 
outstanding shares of the Trust Portfolios will, immediately prior to 
the Reorganization, be legally owned by PMLIC. The Applicants state 
that as a result of these relationships, the Fund Portfolios and the 
Trust Portfolios may be deemed to be under common control and, 
therefore, affiliated persons of each other for the purposes of the 
prohibitions set forth in Section 17(a) of the Act.
    4. In addition, the Applicants state that MSIM currently serves as 
investment adviser to the Equity 500 Index, International, All Pro 
Large Cap Growth, All Pro Small Cap Growth, All Pro Large Cap Value, 
and All Pro Small Cap Value Portfolios of the Fund, and will serve as 
investment adviser for the corresponding Trust Portfolios. SAC gave 
formal notice of its intent to resign effective on or around January 
26, 2001, as investment adviser to the Fund Portfolios that it 
currently manages. As noted above, the Board has already approved MSIM 
as investment adviser to these five portfolios. All of the portfolios, 
except the Money Market Portfolio, will implement a manager-of- 
managers approach to management. As a result of these relationships, 
the Applicants state that these Fund Portfolios and the corresponding 
Trust Portfolios might also be deemed to be affiliated persons of 
affiliated persons of each other. Thus, the Applicants state that, 
absent exemptive relief, consummation of these portions of the 
Reorganization could result in a violation of Section 17(a).
    5. Section 17(b) of the Act provides that, notwithstanding Section 
17(a), a person may file with the Commission an application for an 
order exempting a proposed transaction from one or more of the 
prohibitions of section 17(a). The Commission shall grant such 
application if evidence establishes that: (1) The terms of the proposed 
transaction, including the consideration to be paid or received, are 
fair and reasonable, and do not involve overreaching on the part of any 
person concerned; (2) the proposed transaction is consistent with the 
policy of each registered investment company concerned, as recited in 
its registration statement and in reports filed under the Act; and (3) 
the proposed transaction is consistent with the general purposes of the 
Act. Applicants request an order of the Commission, pursuant to Section 
17(b) of the Act, exempting them from the provisions of Section 17(a) 
of the Act.
    6. Rule 17a-8 under the Act provides, in part, that a merger of 
registered investment companies which are affiliated persons solely by 
reason of having a common investment adviser, director, and/or officers 
is exempt from the prohibitions of Section 17(a), provided that the 
board of directors of each affiliated company in question, including a 
majority of independent directors/trustees, determines: (1) That 
participation in the transaction is in the best interests of that 
registered company and (2) that the interests of existing shareholders 
of that registered company will not be diluted as a result of the 
merger.
    7. The Applicants state that, due to the fact that 100% of the 
shares of the Fund and Trust Portfolios are legally owned by PMLIC and 
PLACA, through their separate accounts and for general investment 
purposes, the exemption provided by Rule 17a-8 may not be available 
with respect to the proposed transactions. Applicants assert that, 
while the affiliations involved may not be, as a substantive matter, 
within the scope of the express relief provided by Rule 17a-8, the 
Reorganization is consistent with the routine mergers that otherwise do 
not require exemptive relief, as well as with the spirit of Rule 17a-8. 
The Applicants state that the additional affiliations presented here do 
not implicate any greater danger of overreaching than do the 
affiliations within the scope of Rule 17a-8, and are rendered of less 
concern because contract owners participating in registered separate 
accounts holding shares of the Fund Portfolios at the record date will 
have the opportunity to provide voting instructions on the 
Reorganization and that all shares owned by PMLIC and PLACA will be 
voted in proportion to voting instructions received from such contract 
owners.
    8. The Applicants state that the Board has reviewed the 
transactions proposed in light of the determinations required by Rule 
17a-8. The Board, including the independent directors/trustees, has 
reviewed the contemplated transactions and unanimously determined that 
the transactions are in the best interests of the shareholders of the 
Fund and Trust Portfolios, and that the transactions are in the best 
interests of the contract owners with values currently allocated to the 
Fund Portfolios and ultimately allocated to the Trust Portfolios. The 
Board, including the independent directors/trustees, has also 
determined that the interests of existing shareholders and contract 
owners will not be diluted as a result of the Reorganization. The 
Board's vote and findings were recorded in the minutes of the November 
3 Board Meeting. The Applicants state that, accordingly, if Rule 17a-8 
were available, its conditions would be satisfied.
    9. Applicants assert that the requirements of Section 17(b) set 
forth above are met by the proposed transaction. Applicants note that 
the Plan will provide that the exchange of assets and liabilities, as 
described above, of the Fund Portfolios for shares of the Trust 
Portfolios shall be accomplished on the basis of the net asset value of 
the respective Portfolios, and thus the Reorganization will not involve 
dilution of the interests of existing shareholders or contract owners. 
The method for determining the number of shares of the Fund Portfolios 
for which shares of the corresponding Trust Portfolios will be 
exchanged is set out in the Plan and will be summarized in the proxy 
statement delivered to contract owners.\2\ Applicants assert that the 
terms of the proposed transactions are fair and reasonable and do not 
involve overreaching on the part of any person concerned.
---------------------------------------------------------------------------

    \2\ The preliminary proxy statement was filed with the 
Commission on November 17, 2000, and the definitive proxy statement 
was filed on December 1, 2000.
---------------------------------------------------------------------------

    10. Applicants assert that the proposed transactions are consistent 
with the policies of the Fund, of the Trust, and of the individual 
portfolios involved in the proposed transaction.

[[Page 83119]]

The Applicants state that each of the Trust Portfolios into which the 
Fund Portfolios will be merged has the same investment objectives as 
the corresponding Fund Portfolios. In addition, the Applicants state 
that although the investment approaches and names of certain of the 
Fund Portfolios may change, subject to shareholder approval, based on 
proposals disclosed in the proxy statement, these changes are distinct 
from those caused by the Reorganization.
    11. Applicants assert that the proposed transaction is consistent 
with the general purposes of the Act. The transactions must receive the 
approval of a majority of the outstanding voting shares of the Fund. 
Contract owners have received a proxy statement containing all material 
disclosures. Each contract owner will be entitled to instruct how the 
number of shares related to his or her interest in the separate 
accounts will be voted. All other shares will be mirrored voted in 
proportion to the shares voted in accordance with those instructions.

Conclusion

    For all the reasons stated above, Applicants assert that the terms 
of the contemplated transactions meet all of the requirements of 
Section 17(b) of the Act. Accordingly, Applicants request that the 
Commission issue an order exempting the proposed transactions from the 
provisions of Section 17(a) of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33260 Filed 12-28-00; 8:45 am]
BILLING CODE 8010-01-M