[Federal Register Volume 67, Number 135 (Monday, July 15, 2002)]
[Notices]
[Pages 46552-46553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17678]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25651; 812-12811]


Principal Bond Fund, Inc., et al.; Notice of Application

July 8, 2002.
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 a 
registered open-end management investment company to acquire all of the 
assets and assume all of the liabilities of another registered open-end 
management investment company. Because of certain affiliations, 
applicants may not rely on rule 17a-8 under the Act.

Applicants: Principal Bond Fund, Inc. (the ``Bond Fund''), Principal 
High Yield Fund, Inc. (the ``High Yield Fund''), and Principal 
Management Corporation (the ``Adviser'').

FILING DATES: The application was filed on April 18, 2002. Applicants 
have agreed to file an 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 July 30, 2002, 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, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609; Applicants, c/o The Principal Financial Group, 711 High 
Street, Des Moines, Iowa 50392-0200.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0634, or Todd Kuehl, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, 
DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations:

    1. The Bond Fund (the ``Acquiring Fund'') and the High Yield Fund 
(the ``Acquired Fund,'' together with the Acquiring Fund, the 
``Funds'') are Maryland corporations and are registered under the Act 
as open-end management investment companies. The Adviser serves as the 
investment adviser to each Fund and is registered under the Investment 
Advisers Act of 1940. The Adviser is an indirect wholly-owned 
subsidiary of Principal Financial Group, Inc. (``Principal 
Financial''). Principal Life Insurance Company (``Principal Life'') is 
also an indirect wholly-owned subsidiary of Principal Financial. 
Principal Life, for its own account, owns more than 5% of the 
outstanding voting securities of the Acquired Fund.
    2. On March 11, 2002, the board of directors of each Fund (each a 
``Board,'' together, the ``Boards''), including in each case all of the 
directors who are not ``interested persons,'' as defined in section 
2(a)(19) of the Act (``Independent Directors''), approved an Agreement 
and Plan of Reorganization (the ``Plan''). Under the Plan, the 
Acquiring Fund will acquire all of the assets and assume all of the 
liabilities of the Acquired Fund in exchange for shares of the 
designated class of the Acquiring Fund (the ``Reorganization''). The 
closing of the Reorganization (``Closing'') is expected to occur on 
July 31, 2002, (the ``Closing Date''). The shares of the 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 regular trading on the New York Stock Exchange on the Closing 
Date. The value of assets of the Funds will be determined in accordance 
with the Acquiring Fund's then current prospectus and statement of 
additional information (whose valuation procedures are identical to the 
Acquired Fund's). As soon as practicable after the Closing, the 
Acquired Fund will distribute pro rata to its shareholders of record, 
determined as of the close of business on the Closing Date, its shares 
of the Acquiring Fund received at the Closing and will be liquidated.
    3. Each Fund offers Class A and Class B shares. Class A shares are 
subject to a front-end sales charge, rule 12b-1 distribution fees, 
service fees, and in some cases, a contingent deferred sales charge 
(``CDSC'') and Class B shares are subject to rule 12b-1 distribution 
fees, service fees and a CDSC. Applicants state that the rights and 
obligations of each class of the Acquiring Fund are identical to those 
of the corresponding share class of the Acquired Fund. Shareholders of 
each class of the Acquired Fund will receive shares of the 
corresponding class of the Acquiring Fund. No sales charges or other 
fees will be imposed in connection with the Reorganization. For 
purposes of calculating any CDSC on shares of the Acquiring Fund, 
shareholders of the Acquired Fund will be deemed to have held the 
shares of the Acquiring Fund

[[Page 46553]]

since the date the shareholders initially purchased the shares of the 
Acquired Fund.
    4. The Boards, including all of the Independent Directors, 
determined that the Reorganization is in the best interests of each 
Fund and its shareholders and that the interests of shareholders would 
not be diluted as a result of the Reorganization. In determining 
whether to approve the Reorganization, the Boards considered various 
factors, including: (a) The terms and conditions of the Reorganization; 
(b) the comparative investment performance of the Funds; (c) the 
possible advantages to the Acquired Fund's shareholders of investing in 
a larger asset pool with a higher quality of securities; (d) the 
federal income tax consequences to the Acquired Fund's shareholders; 
(e) the possible benefits of a larger asset base to portfolio 
management of the Acquiring Fund; (f) the compatibility of investment 
objectives and policies of the Funds and any changes to the objectives 
and policies of the Acquired Fund that will result from the 
Reorganization; and (g) the tax-free nature of the Reorganization.
    5. Applicants also state that the Boards determined that the 
investment objectives, restrictions and policies of the Funds, though 
not identical, are similar and the range of credit qualities in which 
the Acquiring Fund invests should offer the Acquired Fund's 
shareholders some degree of continuity in investment exposure to high 
yield bonds as well as potential for reduced risk. Although there is 
overlap in the range of securities in which the Funds may invest, 
Applicants state, however, that the Acquired Fund's assets that are not 
eligible investment for the Acquiring Fund will be liquidated prior to 
the Closing and the Acquired Fund and its shareholders will be 
responsible for any brokerage expenses and tax consequences resulting 
from this liquidation. The Adviser will bear all of the other costs 
associated with the Reorganization.
    6. The Reorganization is subject to a number of conditions 
precedent, including that: (a) The Acquired Fund's shareholders will 
have approved the Reorganization; (b) the Funds will have received 
opinions of counsel that the Reorganization will be tax-free for the 
Funds and their shareholders; (c) applicants will have received from 
the Commission the exemptive relief requested by the application; (d) 
an N-14 registration statement relating to the Reorganization will have 
become effective with the Commission; and (e) the Acquired Fund will 
declare to shareholders of record on or prior to the Closing Date a 
dividend, which together with all previous dividends will have the 
effect of distributing to shareholders all of its income and all net 
realized capital gains, if any, as of the Closing. The Plan may be 
terminated by mutual consent of each Board at any time prior to the 
Closing Date. No material changes will be made to the Plan without 
prior approval of the Commission.
    7. A registration statement on Form N-14 relating to the 
Reorganization, containing a proxy statement/prospectus, was filed with 
the Commission and declared effective and was mailed to the Acquired 
Fund's shareholders on May 20, 2002. A special meeting of the Acquired 
Fund's shareholders was held on June 26, 2002, and the Reorganization 
was approved.

Applicants' Legal Analysis

    1. Section 17(a) of the Act prohibits any affiliated person of a 
registered investment company, or any affiliated person of that person, 
acting as principal, from selling to or purchasing from the registered 
investment company any security or other property. 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 outstanding voting 
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 are satisfied.
    3. Applicants state that they may not rely on rule 17a-8 because 
the Funds may be deemed to be affiliated persons for reasons other than 
those set forth in the rule. Applicants state that Principal Financial 
and the Adviser may be deemed to control the Funds. Also, Principal 
Life owns more than 5% of the total outstanding voting securities of 
the Acquired Fund. The Acquired Fund, pursuant to section 2(a)(3)(B) of 
the Act, is an affiliated person of Principal Life and Principal 
Financial because Principal Life has the power to vote more than 5% of 
the outstanding voting securities of the Acquired Fund. The Acquired 
Fund therefore may be an affiliated person of an affiliated person of 
the Acquiring Fund.
    4. Section 17(b) of the Act provides, in relevant part, that the 
Commission may exempt a transaction from the provisions 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 the proposed transaction is consistent with the 
policy of each registered investment company concerned and the general 
purposes of the Act.
    5. Applicants request an order under section 17(b) of the Act 
exempting them from section 17(a) to the extent necessary to effect the 
Reorganization. Applicants submit that the Reorganization satisfies the 
conditions of section 17(b) of the Act. Applicants also state that the 
Boards, including all of the Independent Directors, have determined 
that the participation of the Funds in the Reorganization is in the 
best interests of each Fund and that such participation will not dilute 
the interests of existing shareholders of each Fund. Applicants also 
state that the Reorganization will be effected 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. 02-17678 Filed 7-12-02; 8:45 am]
BILLING CODE 8010-01-U