[Federal Register Volume 68, Number 83 (Wednesday, April 30, 2003)]
[Notices]
[Pages 23164-23167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10629]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26027; 812-12861]


The Commerce Funds and Commerce Investment Advisors, Inc.; Notice 
of Application

April 24, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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SUMMARY: The order would permit certain registered open-end management 
investment companies to acquire shares of other registered open-end 
management investment companies both within and outside the same group 
of investment companies.
    Applicants: The Commerce Funds (the ``Trust'') and Commerce 
Investment Advisors, Inc. (the ``Adviser'').

DATES: The application was filed on July 23, 2002, and amended on 
February 21, 2003. 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 May 19, 2003, 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, NW., Washington, DC 
20549-0609. Applicants, 1000 Walnut Street, Kansas City, MO 64106.

FOR FURTHER INFORMATION CONTACT: Christine Y. Greenlees, Senior 
Counsel, at (202) 942-0581, or Mary Kay Frech, 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, (202) 942-8090.

Applicants' Representations

    1. The Trust is an open-end management investment company 
registered under the Act that is comprised of eleven investment 
portfolios (each a ``Fund''), each of which pursues a distinct set of 
investment objectives and policies. The Adviser is registered as an 
investment adviser under the Investment Advisers Act of 1940 and serves 
as investment adviser to the Trust. The Adviser is a wholly-owned 
subsidiary of Commerce Bank, N.A. and an indirect subsidiary of 
Commerce Bancshares, Inc., a registered multi-bank holding company.
    2. Goldman, Sachs & Co. (``Goldman Sachs'') is a broker-dealer 
registered under the Securities Exchange Act of 1934 and serves as the 
principal underwriter/distributor of the Trust. Goldman Sachs is a 
business unit of The Goldman Sachs Group, Inc. (``GS Group''). Goldman 
Sachs Asset Management (``GSAM'') serves as administrator to the Trust. 
As administrator, GSAM supplies the Trust with administrative officers 
who are responsible for performing administrative functions on behalf 
of the Trust.\1\
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    \1\ The Trust and Goldman Sachs have received an order to permit 
principal transactions effected in the ordinary course of business 
between the Trust and Goldman Sachs. See Benchmark Funds, et al., 
Investment Company Act Rel. Nos. 22882 (Nov. 12, 1997) (notice) and 
22929 (Dec. 9, 1997) (order) (the ``Benchmark Order'').
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    3. Applicants request relief to permit: (a) One or more series of 
the Trust and

[[Page 23165]]

any other registered open-end investment company or series thereof that 
is part of the same group of investment companies as the Trust (each a 
``Fund of Funds'') to acquire shares of registered open-end management 
investment companies that are not part of the same group of investment 
companies as the Fund of Funds (the ``Non-Affiliated Underlying 
Funds'') and the Non-Affiliated Underlying Funds to sell such shares to 
the Fund of Funds; and (b) the Fund of Funds to acquire shares of 
certain other series of the Trust and any other registered open-end 
investment company or series thereof that is part of the same group of 
investment companies as the Trust (the ``Affiliated Underlying Funds'') 
(together with the Non-Affiliated Underlying Funds, the ``Underlying 
Funds'') and the Affiliated Underlying Funds to sell such shares to the 
Fund of Funds.\2\ The requested order would apply to purchases made by 
the Fund of Funds only where the Fund of Funds could not rely on the 
provisions of section 12(d)(1)(F) of the Act. A Fund of Funds also may 
make direct investments in stocks, bonds, and any other securities 
which are consistent with its investment objective.
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    \2\ All existing entities that currently intend to rely on the 
requested order are named as applicants. Any other investment 
company that relies on the order in the future will comply with the 
terms and conditions of the application.
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    4. Applicants state that each Fund of Funds will enable investors 
to create either a comprehensive asset allocation program or achieve 
diversification in a specific segment of the market with just one 
investment. Applicants assert that a Fund of Funds will provide a 
simple, convenient, low cost investment program for investors who are 
able to identify their long-term investment goals but who may not be 
comfortable deciding how to invest their assets to achieve those goals.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company from selling its shares to 
another investment company if the sale will cause the acquiring company 
to own more than 3% of the acquired company's voting stock, or if the 
sale will cause more than 10% of the acquired company's voting stock to 
be owned by investment companies generally.
    2. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any person, security, or transaction, or any class or classes of 
persons, securities or transactions, from any provisions of section 
12(d)(1) if the exemption is consistent with the public interest and 
the protection of investors. Applicants seek an exemption under section 
12(d)(1)(J) to permit the Fund of Funds to acquire shares of the 
Underlying Funds and the Underlying Funds to sell their shares to the 
Fund of Funds beyond the limits set forth in sections 12(d)(1)(A) and 
(B).
    3. Applicants state that the proposed arrangement will adequately 
address the policy concerns underlying sections 12(d)(1)(A) and (B), 
which include concerns about undue influence by a fund of funds over 
underlying funds, excessive layering of fees, and overly complex fund 
structures. Accordingly, applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    4. Applicants state that the proposed arrangement will not result 
in undue influence by a Fund of Funds or its affiliates over Underlying 
Funds. To limit the influence that a Fund of Funds may have over a Non-
Affiliated Underlying Fund, applicants propose a condition prohibiting 
the Adviser, the Fund of Funds, and certain affiliates (individually or 
in the aggregate) from controlling a Non-Affiliated Underlying Fund 
within the meaning of section 2(a)(9) of the Act. To limit further the 
potential for undue influence over the Non-Affiliated Underlying Funds, 
applicants propose conditions 2 through 7, stated below, to preclude a 
Fund of Funds and its affiliated entities from taking advantage of a 
Non-Affiliated Underlying Fund with respect to transactions between the 
entities and to ensure the transactions will be on an arm's length 
basis.\3\
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    \3\ Applicants assert that Goldman Sachs has no control or 
influence over the investment decisions of the Trust (including the 
Fund of Funds), and therefore cannot use the Fund of Funds structure 
to exercise an undue influence over a Non-Affiliated Underlying Fund 
in any way. Therefore, conditions 4, 6, and 7 would not apply to a 
GS Group entity.
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    5. As an additional assurance that a Non-Affiliated Underlying Fund 
understands the implications of an investment by a Fund of Funds under 
the requested order, the Fund of Funds and Non-Affiliated Underlying 
Fund will execute an agreement (prior to an investment in the shares of 
the Non-Affiliated Underlying Fund in excess of the limits of section 
12(d)(1)(A)(i) of the Act) stating that the board of directors or 
trustees of the Non-Affiliated Underlying Fund and the adviser to the 
Non-Affiliated Underlying Fund understand the terms and conditions of 
the order and agree to fulfill their responsibilities under the order. 
Applicants note that a Non-Affiliated Underlying Fund may choose to 
reject an investment from the Fund of Funds.
    6. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. Applicants state that the board of 
trustees of the Fund of Funds (the ``Board''), including a majority of 
the trustees who are not ``interested persons'' as such term is defined 
in section 2(a)(19) of the Act (``Disinterested Trustees''), will find 
that the investment advisory fees charged under any investment advisory 
agreements are based on services provided that will be in addition to, 
rather than duplicative of, services provided under the investment 
advisory agreement of any Underlying Fund in which a Fund of Funds may 
invest. In addition, the Adviser will waive fees otherwise payable to 
the Adviser by a Fund of Funds in an amount at least equal to any 
compensation received by the Adviser, or an affiliated person of the 
Adviser, from a Non-Affiliated Underlying Fund in connection with the 
investment by the Fund of Funds in the Non-Affiliated Underlying Fund. 
Applicants also state that the aggregate sales charges and/or service 
fees charged with respect to shares of a Fund of Funds will not exceed 
the limits applicable to funds of funds set forth in rule 2830 of the 
Conduct Rules of the National Association of Securities Dealers (``NASD 
Conduct Rules'').
    7. Applicants state that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that an Underlying 
Fund will be prohibited from acquiring securities of any investment 
company in excess of the limits contained in section 12(d)(1)(A), 
except to the extent that such Underlying Fund (a) receives securities 
of another investment company as a dividend or as a result of a plan of 
reorganization of a company (other than a plan devised for the purpose 
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed 
to have acquired) securities of another investment company pursuant to 
exemptive relief from the Commission permitting such Underlying Fund to 
(i) acquire securities of one or more

[[Page 23166]]

affiliated investment companies for short-term cash management 
purposes, or (ii) engage in interfund borrowing and lending 
transactions. In addition, applicants represent that a Fund of Funds' 
prospectus contains and will contain concise, ``plain English'' 
disclosure designed to inform investors of the unique characteristics 
of the Fund of Funds structure, including, but not limited to, its 
expense structure and the additional expenses of investing in the 
Underlying Funds.

B. Section 17(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include any person 5% or 
more of whose outstanding voting securities are directly or indirectly 
owned, controlled, or held with power to vote by the other person and 
any person directly or indirectly controlling, controlled by, or under 
common control with the other person.
    2. Applicants state that the Fund of Funds and the Affiliated 
Underlying Funds may be deemed to be under common control by virtue of 
having the same Adviser. Applicants also state that a Fund of Funds and 
an Underlying Fund might become affiliated persons if the Fund of Funds 
acquires more than 5% of the Underlying Fund's outstanding voting 
securities. In light of this possible affiliation, section 17(a) could 
prevent an Underlying Fund from selling shares to and redeeming shares 
from the Fund of Funds.
    3. Section 17(b) of the Act authorizes the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that (a) the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (b) the proposed transaction is consistent with the policies 
of each registered investment company involved; and (c) the proposed 
transaction is consistent with the general purposes of the Act. Section 
6(c) of the Act permits the Commission to exempt any person or 
transactions from any provisions of the Act if such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act.
    4. Applicants submit that the proposed arrangement satisfies the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the arrangement are fair and 
reasonable and do not involve overreaching. Applicants note that the 
consideration paid for the sale and redemption of shares of the 
Underlying Funds will be based on the net asset values of the 
Underlying Funds. Applicants state that the proposed arrangement will 
be consistent with the policies of each Fund of Funds as set forth in 
each Fund of Funds' registration statement, the policies of each 
Underlying Fund, and with the general purposes of the Act.

Applicants' Conditions

    1. (a) The Adviser, (b) any person controlling, controlled by, or 
under common control with the Adviser, and (c) any investment company 
and any issuer that would be an investment company but for section 
3(c)(1) or section 3(c)(7) of the Act advised by the Adviser or any 
person controlling, controlled by, or under common control with the 
Adviser (collectively, the ``Group'') will not control (individually or 
in the aggregate) a Non-Affiliated Underlying Fund within the meaning 
of section 2(a)(9) of the Act. If, as a result of a decrease in the 
outstanding voting securities of a Non-Affiliated Underlying Fund, the 
Group, in the aggregate, becomes a holder of more than 25% of the 
outstanding voting securities of the Non-Affiliated Underlying Fund, 
the Group will vote its shares of the Non-Affiliated Underlying Fund in 
the same proportion as the vote of all other holders of the Non-
Affiliated Underlying Fund's shares.
    2. The Fund of Funds and its Adviser, promoter, and principal 
underwriter, and any person controlling, controlled by, or under common 
control with any of those entities (each a ``Fund of Funds Affiliate'') 
will not cause any existing or potential investment by the Fund of 
Funds in shares of a Non-Affiliated Underlying Fund to influence the 
terms of any services or transactions between the Fund of Funds or a 
Fund of Funds Affiliate and the Non-Affiliated Underlying Fund or its 
investment adviser, sponsor, promoter, and principal underwriter, and 
any person controlling, controlled by, or under common control with any 
of those entities (each a ``Non-Affiliated Underlying Fund 
Affiliate'').
    3. The Board of the Fund of Funds, including a majority of the 
Disinterested Trustees, will adopt procedures reasonably designed to 
ensure that the Adviser is conducting the investment program of the 
Fund of Funds without taking into account any consideration received by 
the Fund of Funds or Fund of Funds Affiliate from a Non-Affiliated 
Underlying Fund or a Non-Affiliated Underlying Fund Affiliate in 
connection with any services or transactions.
    4. Once an investment by the Fund of Funds in the securities of a 
Non-Affiliated Underlying Fund exceeds the limits of section 
12(d)(1)(A)(i) of the Act, the board of directors or trustees of each 
Non-Affiliated Underlying Fund, including a majority of the 
disinterested directors or trustees, will determine that any 
consideration paid by the Non-Affiliated Underlying Fund to the Fund of 
Funds or a Fund of Funds Affiliate (other than a GS Group entity) in 
connection with any services or transactions: (a) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Non-Affiliated Underlying Fund; (b) is within 
the range of consideration that the Non-Affiliated Underlying Fund 
would be required to pay to another unaffiliated entity in connection 
with the same services or transactions; and (c) does not involve 
overreaching on the part of any person concerned.
    5. No Fund of Funds or Fund of Funds Affiliate will cause a Non-
Affiliated Underlying Fund to purchase a security from an underwriting 
or selling syndicate in which a principal underwriter is an officer, 
director, member of an advisory board, investment adviser, or employee 
of the Fund of Funds or a person of which any such officer, director, 
member of an advisory board, investment adviser, or employee is an 
affiliated person (each an ``Underwriting Affiliate''). An offering of 
securities during the existence of an underwriting or selling syndicate 
of which a principal underwriter is an Underwriting Affiliate (other 
than a GS Group entity) is referred to as an ``Affiliated 
Underwriting.''
    6. The board of directors or trustees of a Non-Affiliated 
Underlying Fund, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to monitor any 
purchases by the Non-Affiliated Underlying Fund of securities in 
Affiliated Underwritings once an investment by the Fund of Funds in the 
securities of the Non-Affiliated Underlying Fund exceeds the limits of 
section 12(d)(1)(A)(i) of the Act, including any purchases made 
directly from an Underwriting Affiliate (other than a GS Group entity). 
The board of directors or trustees of the Non-Affiliated Underlying 
Fund will review these purchases periodically, but no less frequently 
than annually, to determine whether the purchases were influenced by 
the investment by the Fund of Funds

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in shares of the Non-Affiliated Underlying Fund. The board of directors 
or trustees of the Non-Affiliated Underlying Fund will consider, among 
other things, (a) whether the purchases were consistent with the 
investment objectives and policies of the Non-Affiliated Underlying 
Fund; (b) how the performance of securities purchased in an Affiliated 
Underwriting compares to the performance of comparable securities 
purchased during a comparable period of time in underwritings other 
than Affiliated Underwritings or to a benchmark such as a comparable 
market index; and (c) whether the amount of securities purchased by the 
Non-Affiliated Underlying Fund in Affiliated Underwritings and the 
amount purchased directly from Underwriting Affiliates (other than a GS 
Group entity) have changed significantly from prior years. The board of 
directors or trustees of the Non-Affiliated Underlying Fund shall take 
any appropriate actions based on its review, including, if appropriate, 
the institution of procedures designed to assure that purchases of 
securities from Affiliated Underwritings are in the best interests of 
shareholders.
    7. A Non-Affiliated Underlying Fund shall maintain and preserve 
permanently in an easily accessible place a written copy of the 
procedures described in the preceding condition, and any modifications, 
and shall maintain and preserve for a period of not less than six years 
from the end of the fiscal year in which any purchase from an 
Affiliated Underwriting occurred, the first two years in an easily 
accessible place, a written record of each purchase made once an 
investment by the Fund of Funds in the securities of a Non-Affiliated 
Underlying Fund exceeded the limits of section 12(d)(1)(A)(i) of the 
Act, setting forth from whom the securities were acquired, the identity 
of the underwriting syndicate's members, the terms of the purchase, and 
the information or materials upon which the board's determinations were 
made.
    8. Prior to an investment in shares of a Non-Affiliated Underlying 
Fund in excess of the limit in section 12(d)(1)(A)(i), the Fund of 
Funds and the Non-Affiliated Underlying Fund will execute an agreement 
stating, without limitation, that the board of directors or trustees of 
the Non-Affiliated Underlying Fund and the investment adviser to the 
Non-Affiliated Underlying Fund understand the terms and conditions of 
the order and agree to fulfill their responsibilities under the order. 
At the time of its investment in shares of a Non-Affiliated Underlying 
Fund in excess of the limit in section 12(d)(1)(A)(i), the Fund of 
Funds will notify the Non-Affiliated Underlying Fund of the investment. 
At such time, the Fund of Funds also will transmit to the Non-
Affiliated Underlying Fund a list of the names of each Fund of Funds 
Affiliate and Underwriting Affiliate. The Fund of Funds will notify the 
Non-Affiliated Underlying Fund of any changes to the list as soon as 
reasonably practicable after a change occurs. The Non-Affiliated 
Underlying Fund and the Fund of Funds will maintain and preserve a copy 
of the order, the agreement, and the list with any updated information 
for a period of not less than six years from the end of the fiscal year 
in which any investment occurred, the first two years in an easily 
accessible place.
    9. Prior to approving any investment advisory or management 
contract under section 15 of the Act, the Board of the Fund of Funds, 
including a majority of the Disinterested Trustees, will find that the 
advisory or management fees charged under the contract are based on 
services provided that are in addition to, rather than duplicative of, 
the services provided to Underlying Funds in which the Fund of Funds 
will invest. This finding, and the basis upon which the finding was 
made, will be recorded fully in the minute books of the Fund of Funds.
    10. Any sales charges and/or service fees (as those terms are 
defined in rule 2830 of the Conduct Rules of the NASD) charged with 
respect to shares of the Fund of Funds will not exceed the limits 
applicable to a fund of funds as set forth in rule 2830 of the Conduct 
Rules of the NASD.
    11. No Underlying Fund will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act, except to the extent that such Underlying Fund 
(a) receives securities of another investment company as a dividend or 
as a result of a plan of reorganization of a company (other than a plan 
devised for the purpose of evading section 12(d)(1) of the Act); or (b) 
acquires (or is deemed to have acquired) securities of another 
investment company pursuant to exemptive relief from the Commission 
permitting such Underlying Fund to (i) acquire securities of one or 
more affiliated investment companies for short-term cash management 
purposes, or (ii) engage in interfund borrowing and lending 
transactions.
    12. The Adviser will waive fees otherwise payable to the Adviser by 
the Fund of Funds in an amount at least equal to any compensation 
(including fees received pursuant to a plan adopted by a Non-Affiliated 
Underlying Fund pursuant to rule 12b-1 under the Act) received by the 
Adviser, or an affiliated person of the Adviser, from a Non-Affiliated 
Underlying Fund in connection with the investment by the Fund of Funds 
in the Non-Affiliated Underlying Fund.
    13. The nature of the services provided by Goldman Sachs to and the 
relationship with Goldman Sachs of any Fund of Funds relying on the 
requested order will be consistent with the representations made in the 
Benchmark Order. Goldman Sachs will not be an affiliated person or a 
second-tier affiliate of any investment adviser to any registered 
investment company relying on the requested order. Goldman Sachs and 
its affiliated persons will have no influence or control over the 
investments made by any registered investment company relying on the 
requested order. No affiliated person of Goldman Sachs will serve as a 
director of any registered investment company relying on the requested 
order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-10629 Filed 4-29-03; 8:45 am]
BILLING CODE 8010-01-P