[Federal Register Volume 66, Number 114 (Wednesday, June 13, 2001)]
[Notices]
[Pages 31953-31960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14872]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24999; 812-12406]


AB Funds Trust, et al.; Notice of Application

June 7, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under: (a) Section 12(d)(1)(J) of the 
Investment Company Act of 1940 (the ``Act'') requesting an exemption 
from section 12(d)(1) of the Act; sections 6(c) and 17(b) of the Act 
requesting an exemption from section 17(a) of the Act; and section 
17(d) of the Act and rule 17d-1 under the Act to permit certain joint 
transactions; (b) section 12(d)(1)(J) of the Act requesting an 
exemption from section 12(d)(1)(G)(i)(II) of the Act; (c) sections 
6(c), 10(f) and 17(b) of the Act requesting an exemption from sections 
17(a), 17(e), 10(f) and 12(d)(3) of the Act and rule 17e-1 under the 
Act; and (d) section 17(b) of the Act requesting an exemption from 
section 17(a) of the Act.

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[[Page 31954]]

    Summary of the Application: Applicants seek an order to permit 
certain common trust funds to transfer their assets to certain series 
of a registered open-end management investment company in exchange for 
shares of the series, and to permit certain series of the open-end 
management investment company (a) to invest cash reserves in an 
affiliated money market fund; (b) to operate as funds of funds, 
investing a portion of their assets directly in securities; and (c) 
advised by several investment advisers, to engage in principal and 
brokerage transactions with a broker-dealer affiliated with one of the 
investment advisers or to purchase securities in certain underwritings. 
The transactions would be between a broker-dealer and a portion of the 
investment company's portfolio not advised by the adviser affiliated 
with that broker-dealer. The order also would permit these investment 
companies not to aggregate certain purchases from an underwriting 
syndicate in which an affiliated person of one of the investment 
advisers is a principal underwriter. Further, applicants request relief 
to permit a portion of an investment company's portfolio to purchase 
securities issued by an affiliated person of an investment adviser to 
another portion, subject to the limits in rule 12d3-1 under the Act.
    Applicants: AB Funds Trust (``Trust''), Annuity Board of the 
Southern Baptist Convention (``Annuity Board'') and SBC Financial 
Services, Inc. (``Adviser'').
    Filing Dates: The application was filed on January 12, 2001 and 
amended on June 7, 2001. Applicants have agreed to file another 
amendment 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 June 28, 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 who wish to be notified of a hearing 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, Rodney R. Miller, 
Esq., Annuity Board of the Southern Baptist Convention, 2401 Cedar 
Springs Road, Dallas, Texas 75201-1407.

FOR FURTHER INFORMATION CONTACT: Karen L. Goldstein, Senior Counsel, at 
(202) 942-0646 (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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102, (tel. (202) 942-8090).

Applicants' Representations

A. Overview

    1. The Annuity Board is a Texas non-profit corporation that 
sponsors and maintains retirement and welfare benefit plans (``plans'') 
for the employees of churches and organizations controlled by, or 
associated with, the Southern Baptist Convention (``SBC''). The plans 
invest primarily in four Southern Baptist investment funds (``BIFs'') 
and nine Southern Baptist investment pools (``BIPs''), all of which are 
maintained by the Annuity Board. The BIFs allocate investments among 
the BIPs to achieve an asset allocation that is appropriate to each 
BIF's investment strategy, generally balancing fixed income and equity 
exposure in proportion to a BIF's risk level. The BIFs and the BIPs are 
managed in accordance with the moral and ethical principles of the SBC 
and are exempt from registration as investment companies pursuant to 
section 3(c)(14) of the Act.
    2. The Annuity Board has been charged with providing an expanded 
range of investment opportunities to Southern Baptist organizations and 
to persons eligible to participate in the plans provided by the Annuity 
Board. These expanded services, which would not be consistent with 
maintenance of the BIPs' and BIFs' exemption from registration under 
the Act, will be provided by the Trust.
    3. The Trust, established as a Delaware business trust, will 
register under the Act as an open-end management investment company. 
The Trust will have thirteen series (collectively, the ``Funds''). Four 
of the Funds will operate as funds of funds pursuant to Section 
12(d)(1)(G) under the Act (the ``Blended Funds''). The Blended Funds 
will allocate their investments among the nine other Funds (the 
``Select Funds''). Investors may also purchase shares of the Select 
Funds directly.
    4. The Adviser, a controlled affiliate of the Annuity Board, will 
act as investment adviser to the Trust, and will register as an 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act''), prior to serving as investment adviser to the 
Trust. With the exception of two Funds, at least two subadvisers will 
exercise discretion over each Select Fund's assets (``Subadvisers''). 
Each Subadviser will be registered, or exempt from registration, under 
the Advisers Act. The Board of Trustees of the Trust (``Board'') will 
have overall responsibility for the management of the Funds.
    5. The Annuity Board proposes to transfer the assets of the BIPs 
and the BIFs to the corresponding Select Funds and the Blended Funds, 
in exchange for shares of those Funds (the ``Transfer''). Following the 
Transfer, the BIPs and BIFs will terminate. Applicants request an order 
under the Act to permit the Transfer and exemptions from certain 
provisions of the Act relating to the operation of the Trust. 
Applicants request that the relief (except the relief relating to the 
Transfer) apply to any future series of the Trust and to any future 
registered open-end management investment company advised by the 
Adviser or any entity controlling, controlled by, or under common 
control with the Adviser.\1\
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    \1\ Applicants state that any entity that currently intends to 
rely on the exemptive order requested is named as an applicant and 
that any other existing or future entity that relies on the order 
will comply with the terms and conditions of the application.
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B. Investment of Cash Reserves in the Money Market Fund

    1. Other than the Select Fund that is a money market Fund that 
complies with rule 2a-7 under the Act (``Money Market Fund''), each 
Select Fund (an ``Investing Select Fund'') has, or may be expected to 
have, cash balances that have not been invested in portfolio securities 
(``Cash Reserves''). The Cash Reserves may result from a variety of 
sources, including dividends or interest received from portfolio 
securities, unsettled securities transactions, reserves held for 
investment strategy purposes, scheduled maturity of investments, 
liquidation of investment securities to meet anticipated redemptions or 
dividend payments, and new cash received from investors.
    2. Applicants request an order to permit the Investing Select Funds 
to invest their Cash Reserves in shares of the Money Market Fund and to 
permit the Money Market Fund to sell its

[[Page 31955]]

shares to, and redeem such shares from, the Investing Select Funds. The 
investment by each Investing Select Fund in shares of the Money Market 
Fund will be made in accordance with that Investing Select Fund's 
investment policies and restrictions as set forth in its registration 
statement.

C. Funds of Funds

    Each Blended Fund proposes to invest in shares of the Select Funds 
while also investing a portion of its assets directly in exchange 
listed equity futures contracts and exchange listed U.S. Treasury 
futures contracts. Applicants request an exemption pursuant to Section 
12(d)(1)(J) of the Act from Section 12(d)(1)(G)(i)(II) of the Act to 
the extent necessary to permit each of the Blended Funds, which will 
otherwise operate pursuant to Section 12(d)(1)(G) of the Act, to make 
such direct investments. These direct investments will not include 
shares of any investment companies.

D. Transactions Involving Funds With Multiple Subadvisers

    1. With the exception of two Select Funds, each of the Select Funds 
will have more than one Subadviser. Each Subadviser will exercise 
discretion to purchase and sell securities for a discrete portion of a 
Select Fund's assets (each portion, a ``Segment'') in accordance with 
the Select Fund's objectives, policies and restrictions. Each 
Subadviser is paid directly by the Select Fund it advises, based on a 
percentage of the value of the Select Fund's assets allocated to its 
management. The Adviser also may directly advise a Segment of a Select 
Fund.
    2. Applicants request an exemption to permit: (a) Any broker-dealer 
registered under the Securities Exchange Act of 1934 (the ``1934 Act'') 
that itself serves as Subadviser (either directly or through a separate 
operation division) (``Affiliated Subadviser'') or is an affiliated 
person of a Subadviser to a Segment of a Select Fund (``Affiliated 
Broker-Dealer'') to engage in principal transactions with a Segment of 
the Select Fund that is advised by another Subadviser that is not an 
affiliated person of the Affiliated Broker-Dealer or the Affiliated 
Subadviser (an ``Unaffiliated Subadviser'') (each such Segment, an 
``Unaffiliated Segment'');\2\ (b) an Affiliated Broker-Dealer to 
provide brokerage services to an Unaffiliated Segment, and the 
Unaffiliated Segment to utilize such brokerage services, without 
complying with rule 17e-1(b) and (c) under the Act; (c) an Unaffiliated 
Segment to purchase securities during the existence of an underwriting 
syndicate, a principal underwriter of which is an Affiliated Subadviser 
or a person of which an Affiliated Subadviser is an affiliated person 
(an ``Affiliated Underwriter''); (d) a Segment advised by an Affiliated 
Subadviser (``Affiliated Segment'') to purchase securities during the 
existence of an underwriting syndicate, a principal underwriter of 
which is an Affiliated Underwriter, in accordance with the conditions 
of rule 10f-3 except that paragraph (b)(7) of the rule would not 
require the aggregation of purchases by the Affiliated Segment with 
purchases by an Unaffiliated Segment, and (e) an Unaffiliated Segment 
to purchase securities issued by an Affiliated Subadviser or an 
affiliated person of the Affiliated Subadviser engaged in securities-
related activities (``Securities Affiliate''), within the limits of 
rule 12d3-1 under the Act.
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    \2\ The terms ``Unaffiliated Subadviser,'' ``Subadviser,'' and 
``Unaffiliated Segment'' include the Adviser and the Segment of a 
Select Fund directly advised by the Adviser, respectively, provided 
that the Adviser manages its Segment of the Select Fund 
independently of the Segments managed by the other Subadvisers to 
the Select Fund, and the Adviser does not control or influence any 
other Subadviser's investment decisions for its Segment of the 
Select Fund. The Adviser does not currently manage any Select Fund.
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E. The Transfer

    Applicants request an exemption, pursuant to section 17(b) of the 
Act, from section 17(a) to permit the following proposed transactions 
constituting the Transfer: (a) Each BIP will transfer its assets to a 
corresponding Select Fund in exchange for shares of the Select Fund and 
then distribute the Select Fund shares, pro rata, to its shareholders; 
and (b) each BIF will transfer its assets to a corresponding Blended 
Fund in exchange for shares of the Blended Funds and then distribute 
shares of the Blended Funds pro rata to its shareholders.

Applicants' Legal Analysis

A. Investment of Cash Reserves by the Investing Select Funds in the 
Money Market Fund

1. Section 12(d)(1) of the Act
    a. Section 12(d)(1)(A) of the Act provides that a registered 
investment company may not acquire securities of another investment 
company if such securities represent more than 3% of the acquired 
company's outstanding voting stock, more than 5% of the acquiring 
company's total assets, or if such securities, together with the 
securities of other acquired investment companies, represent more than 
10% of the acquiring company's total assets. Section 12(d)(1)(B) 
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 
outstanding voting stock, or if the sale will cause more than 10% of 
the acquired company's voting stock to be owned by investment 
companies.
    b. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any persons or transactions from any provision of section 
12(d)(1) to the extent that the exemption is consistent with the public 
interest and the protection of investors. Applicants request an order 
under section 12(d)(1)(J) of the Act to permit the Investing Select 
Funds to purchase shares of the Money Market Fund in excess of the 
limits of section 12(d)(1)(A) and the Money Market Fund to sell its 
shares to the Investing Select Funds in excess of the limits of section 
12(d)(1)(B).
    c. Applicants maintain that the proposed transactions will not 
result in the abuses that sections 12(d)(1)(A) and (B) were intended to 
address. Applicants state that the Money Market Fund will be managed 
specifically to maintain a highly liquid portfolio, and access to it 
will enhance each Investing Select Fund's ability to manage Cash 
Reserves. Applicants state that there will not be an inappropriate 
layering of fees because shares of the Money Market Fund sold to or 
redeemed by the Investing Select Funds will not be subject to a sales 
load, redemption fee, distribution fee adopted in accordance with rule 
12b-1 under the Act, or a service fee. Applicants state that if the 
Money Market Fund shares were subject to such fees, the Adviser will 
waive its advisory fee for each Investing Select Fund in an amount that 
offsets the amount of the fees. In addition, in connection with 
approving an investment advisory contract under section 15 of the Act, 
the Board of the Investing Select Fund will consider to what extent the 
advisory fee paid by the Investing Select Fund to the Adviser should be 
reduced as a result of the Cash Reserves being invested in the Money 
Market Fund. Each Investing Select Fund also will invest Cash Reserves 
in the Money Market Fund only to the extent that the Investing Select 
Fund's aggregate investment of Cash Reserves in the Money Market Fund 
does not exceed 25% of the Investing Select Fund's total assets. 
Applicants also state that the Money

[[Page 31956]]

Market Fund will not acquire securities of any investment company in 
excess of the limits of section 12(d)(1)(A) of the Act.
2. Section 17(a) of the Act
    a. Sections 17(a)(1) and (2) of the Act make it unlawful for any 
affiliated person of a registered investment company, or an affiliated 
person of the affiliated person, acting as principal, to sell or 
purchase any security to or from 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; any person directly or indirectly controlling, controlled 
by, or under common control with the other person; and, in the case of 
an investment company, its investment adviser.
    b. Because the Adviser will serve as each Select Fund's investment 
adviser, the Funds may be deemed to be under common control and 
therefore affiliated persons, or affiliated persons of an affiliated 
person, of each other. In addition, the Funds could be deemed to be 
under common control by virtue of the fact that they share a common 
Board. In addition, if an Investing Select Fund purchases more than 5% 
of the outstanding voting securities of the Money Market Fund, the 
Investing Select Fund and Money Market Fund would be affiliated persons 
of each other. Accordingly, applicants state that the sale and 
redemption of shares of the Money Market Fund by the Investing Select 
Fund may be prohibited by section 17(a).
    c. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from section 17(a) of the Act if 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 the proposed transaction is consistent with the 
policy of each investment company concerned and the general purposes of 
the Act. Section 6(c) of the Act authorizes the Commission to exempt 
persons or transactions, from the provisions of the Act to the extent 
that such exemptions are necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policies and provisions of the Act.
    d. Applicants request an order under sections 6(c) and 17(b) of the 
Act to permit the Investing Select Funds to purchase and redeem shares 
of the Money Market Fund. Applicants state that the proposed 
transactions satisfy the standards of sections 6(c) and 17(b) of the 
Act. Applicants state that the consideration paid and received on the 
sale and redemption of shares of the Money Market Fund will be based on 
the current net asset value per share of the Money Market Fund. 
Applicants also state that the Investing Select Funds will retain their 
ability to invest their Cash Reserves directly in money market 
instruments and other short-term instruments if they can obtain a 
higher rate of return or for any other reason. The Money Market Fund 
also reserves the right to discontinue selling shares to any of the 
Investing Select Funds if the Board determines that the sales would 
adversely affect the Money Market Fund's management and operations. In 
addition, applicants state that the investment of Cash Reserves of the 
Investing Select Funds in shares of the Money Market Fund will be 
effected in accordance with each Investing Select Fund's investment 
restrictions and will be consistent with each Investing Select Fund's 
policies as set forth in its registration statement.
3. Section 17(d) of the Act and Rule 17d-1 under the Act
    a. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit an affiliated person of a registered investment company, 
acting as principal, from participating in or effecting any transaction 
in connection with any joint enterprise or joint arrangement in which 
the investment company participates unless the Commission has approved 
the joint arrangement by an order. Applicants state that each Investing 
Select Fund and the Money Market Fund, by participating in the proposed 
transactions, and the Adviser, by effecting the proposed transactions, 
could be deemed to be participants in a joint enterprise for the 
purposes of section 17(d) of the Act and rule 17d-1 under the Act.
    b. In passing on applications for orders under section 17(d), rule 
17d-1 requires that the Commission consider whether an investment 
company's participation in a joint enterprise or joint arrangement is 
consistent with the provisions, policies, and purposes of the Act, and 
the extent to which such participation is on a basis different from or 
less advantageous than that of other participants. Applicants state 
that the proposed transactions meet the standards for an order under 
rule 17d-1. Applicants state that the investment by the Investing 
Select Funds of Cash Reserves in shares of the Money Market Fund would 
be on the same basis and would be indistinguishable from any other 
shareholder account maintained by the Money Market Fund. The proposed 
transactions will provide the potential for increased returns and 
reduced costs and reduced risks for the Investing Select Funds and 
their shareholders and are consistent with the policies and purposes of 
the Act.

B. Investment by the Blended Funds in the Select Funds

    1. Section 12(d)(1)(G) of the Act 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: (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 1934 Act 
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 in reliance on section 12(d)(1)(F) or 
(G). Applicants state that the proposed investment by the Blended Funds 
in the Select Funds would comply with the provisions of section 
12(d)(1)(G), but for the fact that each Blended Fund's policies 
contemplate that it may invest a portion of its assets directly in 
securities other than those specified in section 12(d)(1)(G)(i)(II).
    2. Applicants request an exemption under section 12(d)(1)(J) of the 
Act from section 12(d)(1)(G)(i)(II). Applicants assert that permitting 
the Blended Funds to invest directly in securities as described in the 
application would not raise any of the concerns that the requirements 
of section 12(d)(1)(G)(i)(II) were designed to address.

C. Transactions Involving Funds With Multiple Subadvisers

1. Principal Transactions Between an Unaffiliated Segment and an 
Affiliated Broker-Dealer
    a. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and an affiliated 
person of, promoter of, or principal underwriter for such company, or 
any affiliated

[[Page 31957]]

person of an affiliated person, promoter, or principal underwriter. 
Section 2(a)(3)(E) of the Act defines an affiliated person to be any 
investment adviser of an investment company, and section 2(a)(3)(C) of 
the Act defines an affiliated person of another person to include any 
person directly or indirectly controlling, controlled by, or under 
common control with such person. Applicants assert that an Affiliated 
Subadviser would be an affiliated person of a Select Fund, and an 
Affiliated Broker-Dealer would be either an Affiliated Subadviser or an 
affiliated person of an Affiliated Subadviser, and thus an affiliated 
person of an affiliated person (``second-tier affiliate'') of a Select 
Fund, including the Unaffiliated Segment. Accordingly, applicants state 
that any transactions to be effected by an Unaffiliated Subadviser on 
behalf of an Unaffiliated Segment of a Select Fund with an Affiliated 
Broker-Dealer are subject to the prohibitions of section 17(a).
    b. Applicants seek relief under sections 6(c) and 17(b) to exempt 
principal transactions prohibited by section 17(a) because an 
Affiliated Broker-Dealer is deemed to be an affiliated person or a 
second-tier affiliate of an Unaffiliated Segment of a Select Fund 
solely because an Affiliated Subadviser is the Subadviser to another 
Segment of the Select Fund. The requested relief would not be available 
if the Affiliated Broker-Dealer (except by virtue of serving as a 
Subadviser) is an affiliated person or a second-tier affiliate of the 
Adviser, principal underwriter or promoter of the Trust, the 
Unaffiliated Subadviser making the investment decision or any officer, 
director or employee of the Select Fund.
    c. Applicants contend that section 17(a) is intended to prevent 
persons who have the power to control an investment company from using 
that power to the person's own pecuniary advantage. Applicants assert 
that when the person acting on behalf of an investment company has no 
direct or indirect pecuniary interest in a party to a principal 
transaction, the abuses that section 17(a) is designed to prevent are 
not present. Applicants state that if an Unaffiliated Subadviser 
purchases securities on behalf of an Unaffiliated Segment in principal 
transaction with an Affiliated Broker-Dealer, any benefit that might 
inure to the Affiliated Broker-Dealer would not be shared by the 
Unaffiliated Subadviser. In addition, applicants state that Subadvisers 
are paid on the basis of a percentage of the value of the assets of the 
Segment allocated to their management. The execution of a transaction 
to the disadvantage of the Unaffiliated Segment would disadvantage the 
Unaffiliated Subadviser to the extent that it diminishes the value of 
the Unaffiliated segment.
    d. Applicants state that each Subadviser's contract assigns it 
responsibility to manage a Segment of the Select Fund and that each 
Subadviser is responsible for making independent investment and 
brokerage allocation decisions based on its own research and credit 
evaluations. Applicants represent that the Adviser does not dictate 
brokerage allocation or investment decisions to any Select Fund advised 
by a Subadviser, or have the contractual right to do so, except with 
respect to a Segment advised directly by the Adviser. Applicants 
contend that, in managing a discrete Segment of a Select Fund, each 
Subadviser acts for all practical purposes as though it is managing a 
separate investment company.
    e. Applicants state that the proposed transactions will be 
consistent with the policies of the Select Fund involved, since each 
Unaffiliated Subadviser is required to manage the Unaffiliated Segment 
in accordance with the investment objectives and related investment 
policies of the Select Fund as described in its registration statement. 
Applicants also assert that permitting the transactions will be 
consistent with the general purposes of the Act and in the public 
interest because the ability to engage in the transactions increases 
the likelihood of a Select fund achieving best price and execution on 
its principal transactions, while giving rise to none of the abuses 
that the Act was designed to prevent.
Payment of Brokerage Compensation by an Unaffiliated Segment to an 
Affiliated Broker-Dealer
    a. Section 17(e)(2) of the Act prohibits an affiliated person or a 
second-tier affiliate of a registered investment company from receiving 
compensation for acting as broker in connection with the sale of 
securities to or by the investment company if the compensation exceeds 
the limits prescribed by the section unless otherwise permitted by rule 
17e-1 under the Act. Rule 17-1 sets forth the conditions under which an 
affiliated person or a second-tier affiliate of an investment company 
may receive a commission which would not exceed the ``usual and 
customary broker's commission'' for purposes of section 17(e)(2). Rule 
17e-1(b) requires the investment company's board of directors, 
including a majority of the directors who are not interested persons 
under section 2(a)(19) of the Act, to adopt certain procedures and to 
determine at least quarterly that all transactions effected in reliance 
on the rule complied with the procedures. Rule 17e-1(c) specifies the 
records that must be maintained by each investment company with respect 
to any transaction effected pursuant to rule 17e-1.
    b. As discussed above, applicants state that an Affiliated Broker-
Dealer is either an affiliated person (as Subadviser to another segment 
of a Select Fund) or a second-tier affiliate of an Unaffiliated Segment 
and thus subject to section 17(e). Applicants request an exemption 
under section 6(c) from section 17(e) and rule 17e-1 to the extent 
necessary to permit an Unaffiliated Segment to pay brokerage 
compensation to an Affiliated Broker-Dealer acting as broker in the 
ordinary course of business in connection with the sale of securities 
to or by such Unaffiliated Segment, without complying with the 
requirements of rule 17e-1 (b) and (c). The requested exemption would 
apply only where an Affiliated Broker-Dealer is deemed to be an 
affiliated person or a second-tier affiliate of an Unaffiliated Segment 
solely because an Affiliated Subadviser is the Subadviser to another 
Segment of the same Select Fund. The relief would not apply if the 
Affiliated Broker-Dealer (except by virtue of serving as Subadviser) is 
an affiliated person or a second-tier affiliate of the Adviser, 
principal underwriter or promoter of the Trust, the Unaffiliated 
Subadviser to the Unaffiliated Segment of the Select Fund, or any 
officer, director or employee of the Select Fund.
    c. Applicants believe that the proposed brokerage transactions 
involve no conflicts of interest or possibility of self-dealing and 
will meet the standards of section 6(c). Applicants state that the 
interests of an Unaffiliated Subadviser are directly aligned with the 
interests of the Unaffiliated Segment it advises, and an Unaffiliated 
Subadviser will enter into brokerage transactions with Affiliated 
Broker-Dealers only if the fees charged are reasonable and fair, as 
required by rule 17e-1(a) under the Act. Applicants also note that an 
Unaffiliated Subadviser has a fiduciary duty to obtain best price and 
execution for the Unaffiliated Segment.
3. Purchases of Securities from Offerings with an Affiliated 
Underwriter
    a. Section 10(f) of the Act, in relevant part, prohibits a 
registered investment company from knowingly purchasing or otherwise 
acquiring, during the existence of any underwriting or selling 
syndicate, any security (except a

[[Page 31958]]

security of which the company is the issuer) a principal underwriter of 
which is an officer, director, member of an advisory board, investment 
adviser, or employee of the company, or an affiliated person of any of 
those persons. Section 10(f) also provides that the Commission may 
exempt by order any transaction or classes of transactions from any of 
the provisions of section 10(f), if and to the extent that such 
exemption is consistent with the protection of investors. Rule 10f-3 
under the Act exempts certain transactions from the prohibitions of 
section 10(f) if specified conditions are met. Paragraph (b)(7) of rule 
10f-3 limits the securities purchased by the investment company, or by 
two or more investment companies having the same investment adviser, to 
25% of the principal amount of the offering of the class of securities.
    b. Applicants state that each Subadviser to a Select Fund, although 
under contract to manage only a distinct Segment of the Select Fund, is 
considered an investment adviser to the entire Select Fund. As a 
result, applicants, state that all purchases of securities by an 
Unaffiliated Segment from an underwriting syndicate a principal 
underwriter of which is an Affiliated Underwriter would be subject to 
section 10(f).
    c. Applicants request relief under section 10(f) from section 10(f) 
to permit an Unaffiliated Segment to purchase securities during the 
existence of an underwriting or selling syndicate, a principal 
underwriter of which is an Affiliated Underwriter. Applicants request 
relief from section 10(f) only to the extent those provisions apply 
solely because an Affiliated Subadviser is an investment adviser to the 
Select Fund. The requested relief would not be available if the 
Affiliated Underwriter (except by virtue of serving as Subadviser) is 
an affiliated person or a second-tier affiliate of the Adviser, 
principal underwriter or promoter of the Trust, the Unaffiliated 
Subadviser making the investment decision with respect to the 
Unaffiliated Segment of the Select Fund, or any officer, director, or 
employee of the Select Fund. Applicants also seek relief from section 
10(f) to permit an Affiliated Segment to purchase securities during the 
existence of an underwriting syndicate, a principal underwriter of 
which is an Affiliated Underwriter, provided that the purchase will be 
in accordance with the conditions of rule 10f-3, except that paragraph 
(b)(7) of the rule will not require the aggregation of purchases by the 
Affiliated Segment with purchases by an Unaffiliated Segment.
    d. Applicants state that section 10(f) was adopted in response to 
concerns about the ``dumping'' of otherwise unmarketable securities on 
investment companies, either by forcing the investment company to 
purchase unmarketable securities from its underwriting affiliate, or by 
forcing or encouraging the investment company to purchase the 
securities from another member of the syndicate. Applicants submit that 
these abuses are not present in the context of the Select Funds because 
a decision by an Unaffiliated Subadviser to purchase securities from an 
underwriting syndicate, a principal underwriter of which is an 
Affiliated Underwriter, involves no potential for ``dumping.'' In 
addition, applicants assert that aggregating purchases would serve no 
purpose because there is no collaboration among Subadvisers to the same 
Select Fund, and any common purchases by an Affiliated Subadviser and 
an Unaffiliated Subadviser would be coincidence.
4. Purchases of Securities Issued by a Securities Affiliate
    a. Section 12(d)(3) of the Act generally prohibits a registered 
investment company from acquiring any security issued by any person who 
is a broker, dealer, investment adviser, or engaged in the business of 
underwriting (collectively, ``securities-related activities''). 
Applicants assert that because a Securities Affiliate is engaged in 
securities-related activities, an Unaffiliated Segment of a Select Fund 
advised by an Unaffiliated Subadviser would be prohibited by section 
12(d)(3) from purchasing the securities issued by the Securities 
Affiliate.
    b. Rule 12d3-1 under the Act exempts from the prohibition of 
section 12(d)(3) purchases of securities of an issuer engaged in 
securities-related activities if certain conditions are met. One of 
these conditions, set forth in rule 12d3-1(c), prohibits the 
acquisition of a security issued by the investment company's investment 
adviser, promoter, or principal underwriter, or any affiliated person 
of the investment adviser, promoter, or principal underwriter.
    c. Applicants state that each Subadviser to a Segment is considered 
to be an investment adviser to the entire Select Fund. Thus, applicants 
state that a purchase by an Unaffiliated Segment of securities issued 
by a Securities Affiliate would not meet rule 12d3-1(c) and that 
applicants are therefore unable to rely on the rule.
    d. Applicants request an exemption under section 6(c) from section 
12(d)(3) to permit an Unaffiliated Segment to purchase securities 
issued by a Securities Affiliate, provided that all of the requirements 
of rule 12d3-1, except rule 12d3-1(c), are met. Applicants state that 
their proposal does not raise the conflicts of interest that rule 12d3-
1(c) was designed to address because of the nature of the affiliation 
between a Securities Affiliate and the Unaffiliated Segment. Applicants 
submit that each Subadviser acts independently of the other Subadvisers 
in making investment and brokerage allocation decisions for the assets 
allocated to its Segment and that Unaffiliated Subadvisers have no 
economic incentive to purchase shares of a Securities Affiliate other 
than to increase the value of the Unaffiliated Segment or Select Fund 
for the benefit its shareholders. Applicants state that the requested 
relief would not extend to securities issued by the Subadviser making 
the purchase, the Adviser, a principal underwriter or promoter of the 
Trust or to any affiliated person of these entities. Applicants assert 
that prohibiting an Unaffiliated Segment of a Select Fund from 
purchasing securities issued by a Securities Affiliate may cause 
Unaffiliated Subadvisers to forego investment opportunities that would 
be in the best interests of the Funds' shareholders.

D. The Transfer

    1. Section 17(a) of the Act provides that it is unlawful for any 
affiliated person of a registered investment company, or any affiliated 
person of such person, acting as principal, knowingly (a) to sell any 
security or other property to such registered investment company, or 
(b) to purchase from such registered investment company any security or 
other property. Section 2(a)(3) of the Act defines the term 
``affiliated person'' of another person to include (a) any person 
owing, controlling, or holding with power to vote, 5% or more of the 
outstanding voting securities of such other person; (b) any person 
controlling, controlled by, or under common control with, any 
investment adviser thereof.
    2. Because the BIPs might be viewed as acting as principal in the 
Transfer, and because the BIPs and the Funds might be viewed as being 
under common control of the Annuity Board within the meaning of section 
2(a)(3) of the Act, the Transfer may be subject to the prohibitions of 
section 17(a).
    3. Rule 17a-7 exempts certain purchase and sale transactions 
otherwise prohibited by section 17(a) if an affiliation exists solely 
by reason of having a common investment adviser, common directors, and/
or common officers, provided, among other requirement, that the 
transaction

[[Page 31959]]

involves a cash payment against prompt delivery of the security. The 
relief provided by rule 17a-7 may not be available for the Transfer 
because the ownership of 5% or more of the outstanding voting shares of 
the Funds by the Annuity Board may create an affiliation ``not solely 
by reason of'' having a common investment adviser, common directors, 
and/or common officers. In addition, the Transfer will be effected on a 
basis other than cash.
    4. Rule 17a-8 exempts mergers, consolidations, and assets sales of 
registered investment companies from the provisions of section 17(a) of 
the Act if an affiliation exists solely by reason of having a common 
investment adviser, common directors, and/or common officers, provided, 
among other requirements, that the board of directors of each 
affiliated investment company make certain determinations that the 
transactions are fair. The relief provided by rule 17a-8 may not be 
available for the Transfer because the BIPs are not registered 
investment companies. In addition, the relief provided by rule 17a-8 
may not be available for the Transfer because the ownership of 5% or 
more of the outstanding voting shares of the Funds by the Annuity Board 
may create an affiliation ``not solely by reason of'' having a common 
investment adviser, common directors, and/or common officers.
    5. Applicants seek an order under section 17(b) to allow the 
Transfer. Applicants submit that the Transfer satisfies the standard 
for relief under section 17(b). Applicants state that the Transfer will 
comply with rule 17a-7(b) through (f) and any applicable no-action 
letters.
    6. The Transfer is designed to provide the current BIP and BIF 
participants substantially the same assets and investment vehicles 
currently available to them, but in a registered investment company 
structure. Applicants state that the assets of the BIPs to be 
transferred to the Select Funds will be valued in accordance with the 
provisions of rule 17a-7(b) under the Act. The BIP corresponding to the 
Money Market Fund will value its assets in accordance with rule 2a-7 
under the Act. The transfer of Select Fund shares by the BIFs to the 
Blended Funds in exchange for Blended Funds' shares will be made at the 
net asset value of the Select Funds' and Blended Funds' shares 
determined in accordance with the Act. The transactions will occur 
simultaneously and will involve no brokerage commissions, fees or other 
expenses, other than customary transfer fees.
    7. Applicants state that the Transfer will not occur unless the 
Board, including a majority of the Trustees who will not be 
``interested trustees'' as defined in section 2(a)(19) of the Act (the 
``Disinterested Trustees''), has determined that participation by the 
Funds in the Transfer is in the best interests of each Fund and its 
shareholders and that the interests of existing shareholders of the 
Funds will not be diluted as a result of the Transfer.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:

A. Investment of Cash Reserves in the Money Market Fund

    1. Investment in shares of the Money Market Fund will be in 
accordance with each Investing Select Fund's policies as set forth in 
its prospectus and statement of additional information.
    2. The shares of the Money Market Fund sold to and redeemed from 
the Investing Select Funds will not be subject to a sales load, 
redemption fee, distribution fee under a plan adopted in accordance 
with rule 12b-1 under the Act or service fee as defined in rule 
2830(b)(9) of the Conduct Rules of the National Association of 
Securities Dealers, Inc. or if such shares are subject to any such fee, 
the Adviser will waive its advisory fee for each Investing Select Fund 
in an amount that offsets the amount of such fees incurred by the 
Investing Select Fund.
    3. Prior to reliance on the requested order by any Investing Select 
Fund, the Board will hold a meeting for the purpose of voting on the 
Advisory Agreement. Before approving the advisory contract, the Board, 
including a majority of the Disinterested Trustees, will consider to 
what extent, if any, the advisory fees charged to an Investing Select 
Fund by the Adviser should be reduced to account for the reduced 
services provided to the Investing Select Fund by the Adviser as a 
result of Cash Reserves being invested in the Money Market Fund. The 
Adviser will provide the Board with specific information regarding the 
approximate cost to the Adviser for, or portion of the advisory fee 
under the existing advisory fee attributable to, managing the Cash 
Reserves of the Investing Select Fund that can be expected to be 
invested in the Money Market Fund. The minute books of the Investing 
Select Fund will fully record the Board's consideration in approving 
the advisory contract, including the fees referred to above.
    4. Each Investing Select Fund will invest Cash Reserves in, and 
hold shares of, the Money Market Fund only to the extent that the 
Investing Select Fund's aggregate investment of Cash Reserves in the 
Money Market Fund does not exceed 25% of the Investing Select Fund's 
total assets. For purposes of this limitation, each Investing Select 
Fund will be treated as a separate investment company.
    5. Each Investing Select Fund, the Money Market Fund, and any 
future registered open-end investment company that may rely on the 
order, will be part of the same group of investment companies as 
defined in section 12(d)(1)(G)(ii) of the Act and will be advised by 
the Adviser, or a person controlling, controlled by, or under common 
control with the Adviser.
    6. The Money Market Fund will not acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.

B. The Blended Funds

    1. Before approving any advisory contract under section 15 of the 
Act, the Board, including a majority of the Disinterested Trustees, 
will find that advisory fees, if any, charged under the contract with a 
Blended Fund are based on services provided that are in addition to, 
rather than duplicative of, services provided pursuant to any 
underlying Select Fund's advisory contract. This finding, and the basis 
upon which it was made, will be recorded fully in the minute books of 
the Blended Funds.
    2. Applicants will comply with all provisions of section 
12(d)(1)(G), except for section 12(d)(1)(G)(i)(II) to the extent that 
it restricts a Blended Fund from investing directly in securities as 
described in the application.

C. Transactions Involving Funds With Multiple Subadvisers

    1. Each Fund relying on the requested order will be advised by an 
Affiliated Subadviser and at least one Unaffiliated Subadviser will be 
operated in the manner described in the application.
    2. No Affiliated Subadviser, Affiliated Broker-Dealer, Affiliated 
Underwriter of Securities Affiliate (except by virtue of serving as 
Subadviser to a Segment of a Fund) will be an affiliated person or a 
second-tier affiliate of the Adviser, any Unaffiliated Subadviser, any 
principal underwriter or promoter of a Select Fund, or any officer, 
director, or employee of a Select Fund.
    3. No Affiliated Subadviser will directly or indirectly consult 
with any Unaffiliated Subadvisers concerning allocation of principal or 
brokerage transactions or concerning the purchase

[[Page 31960]]

of securities issued by Securities Affiliates. Subadvisers may consult 
with the Adviser in order to monitor regulatory compliance, including 
compliance with the limits of rule 12d3-1.
    4. No Affiliated Subadviser will participate in any arrangement 
whereby the amount of its subadvisory fees will be affected by the 
investment performance of an Unaffiliated Subadviser.
    5. With respect to purchases of securities by an Affiliated Segment 
of a Select Fund during the existence of any underwriting or selling 
syndicate, a principal underwriter of which is an Affiliated 
Underwriter, the conditions of rule 10f-3 under the Act will be 
satisfied except that paragraph (b)(7) will not require the aggregation 
of purchases by the Affiliated Segment of the Select Fund with 
purchases by an Unaffiliated Segment.
    6. Each Select Fund will comply with rule 12d3-1, except paragraph 
(c) of that rule solely with respect to purchases by an Unaffiliated 
Segment of a Select Fund of securities issued by a Securities Affiliate 
that would be prohibited by rule 12d3-1 solely because the Securities 
Affiliates is an Affiliated Subadviser, or an affiliated person of an 
Affiliated Subadviser to an Affiliated Segment of the Select Fund.

D. The Transfer

    1. The Transfer will comply with rule 17a-7(b) through (f) and any 
relevant Commission staff no-action positions.
    2. The Transfer will not occur unless and until the Board, 
including a majority of the Disinterested Trustees, finds that 
participation by each Select Fund and each Blended Fund in the Transfer 
is in the best interest of each Select Fund and each Blended Fund and 
their shareholders and that the interests of any existing shareholders 
of each Select Fund and each Blended Fund will not be diluted as a 
result of the Transfer. These findings, and the basis upon which they 
are made, will be recorded in the minute books of the Trust.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14872 Filed 6-12-01; 8:45 am]
BILLING CODE 8010-01-M