[Federal Register Volume 62, Number 8 (Monday, January 13, 1997)]
[Notices]
[Pages 1783-1786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-686]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22441; 812-10300]
The OFFITBANK Investment Fund, Inc., et al.; Notice of
Application
January 6, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: The OFFITBANK Investment Fund, Inc. (``OFFITBANK Fund''),
on behalf of OFFITBANK Total Return Fund (``TRF''), and on behalf of
OFFITBANK High Yield Fund, OFFITBANK Emerging Markets Fund, OFFITBANK
Latin America Total Return Fund, OFFITBANK Investment Grade Global Debt
Fund, OFFITBANK Global Convertible Fund, OFFITBANK California Municipal
Fund, OFFITBANK New York Municipal Fund, and OFFITBANK National
Municipal Fund, and any future series; The OFFITBANK Variable Insurance
Fund, Inc. (``OFFITBANK VIF''), on behalf of OFFITBANK VIF-Total Return
Fund (``VTRF'' and, together with TRF, the ``Parent Funds'') and
OFFITBANK VIF-High Yield Fund, OFFITBANK VIF-Emerging Markets Fund,
OFFITBANK VIF-U.S. Government Securities Fund, OFFITBANK VIF-Investment
Grade Global Debt Fund, OFFITBANK VIF-High Grade Fixed-Income Fund, and
OFFITBANK VIF-Global Convertible Fund, and any future series; each
open-end management investment company or series thereof to be
organized in the future and which is advised by OFFITBANK (each such
company or series, other than TRF and VTRF, an ``Underlying Fund,'' and
collectively, the ``Underlying Funds''); and OFFITBANK (``OFFITBANK'').
RELEVANT ACT SECTIONS: Order requested under section 12(d)(1)(J) of the
Act exempting applicants from section 12(d)(1) of the Act, and under
sections 6(c) and 17(b) of the Act exempting applicants from section
17(a) of the Act.
SUMMARY OF APPLICATION: The requested order would permit each Parent
Fund to invest all or a portion of its assets in the Underlying Funds
in excess of the percentage limitations of section 12(d) (1).
FILING DATES: The application was filed on August 16, 1996, and amended
on December 17, 1996.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on January 31,
1997, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: OFFITBANK Fund and OFFITBANK VIF, 125 W. 55th
Street,
[[Page 1784]]
New York, N.Y. 10019; OFFITBANK, 520 Madison Avenue, New York, N.Y.
10022.
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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. OFFITBANK Fund and OFFITBANK VIF are each Maryland corporations
that are registered under the Act as open-end management investment
companies. OFFITBANK Fund intends to establish TRF as a new series.
VTRF is an existing series of OFFITBANK-VIF which has not yet commenced
investment operations. OFFITBANK Fund is available to institutional and
retail investors, while OFFITBANK-VIF is designed to serve as a funding
vehicle for variable annuity contracts and variable life insurance
policies offered by certain participating insurance companies.
2. OFFITBANK is a New York State chartered trust company that
currently provides investment advisory services to the Underlying
Funds, and will serve as investment adviser to the Parent Funds.\1\
OFFITBANK's principal business is rendering discretionary investment
management services to high net worth individuals and family groups,
foundations, endowments, and corporations.
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\1\ Applicants state that OFFITBANK is a ``bank,'' as defined in
section 202(a)(2) of the Investment Advisers Act of 1940, and
therefore is not required to be, and is not, registered as an
investment adviser.
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3. The Parent Funds are designed to provide investors with one or
more diversified investment programs to meet particular investment
goals and risk tolerances. The Parent Funds are intended for persons
who are able to identify their long-term goals and risk tolerances, but
prefer to allow OFFITBANK to decide which specific funds to choose at
any particular time to seek to achieve these goals.
4. Each Parent Fund proposes to invest all or a portion of its
assets in shares of the Underlying Funds, and, therefore, to operate as
a fund of funds. Any assets that are not invested in the Underlying
Funds will be invested directly in stocks, bonds, and other
instruments, including money market instruments.\2\ Allocations of a
Parent Fund's assets among Underlying Funds will be made consistent
with its investment objective as described in the applicable
prospectus. The Underlying Funds in which a Parent Fund may invest also
will be described in the Parent Fund's prospectus. To the extent the
identity of the Underlying Funds in which a Parent Fund may invest
changes over time (such as through the inclusion of new Underlying
Funds), shareholders and investors will receive disclosure of such
changes.
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\2\ Each Parent Fund that will make investments in reliance on
the proposed order will invest in other investment companies only to
the extent contemplated by the requested relief.
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5. OFFITBANK anticipates charging an advisory fee to each Parent
Fund with respect to that portion of the Parent Fund's assets invested
directly in stocks, bonds, and other instruments. With respect to the
portion of a Parent Fund's assets invested in the Underlying Funds,
OFFITBANK will not charge any advisory fee to the Parent Fund unless
such fee is found to be based upon services under an investment
advisory contract that are additional to, rather than duplicative of,
services provided pursuant to any Underlying Fund's advisory contract.
Shareholder servicing costs, which include transfer agency functions,
and mailing and printing of prospectuses, shareholder reports and
proxies to existing shareholders, also will be borne by investors at
the Parent Fund level.
6. The Underlying Funds currently are sold without front-end or
contingent deferred sales charges. Certain of the Underlying Funds are
subject to rule 12b-1 fees and shareholder servicing fees. While it is
currently anticipated that the Parent Funds will be sold without any
front-end or contingent deferred sales charges, and will not be subject
to any rule 12b-1 or shareholder servicing fees, applicants serve the
right to impose sales charges and service fees in the future with
respect to any entities subject to the requested order, as permitted in
condition 4 below, and any other provisions or limitations of
applicable law.
Applicant's Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) of the Act would prevent, in substance, each
Parent Fund from purchasing or acquiring shares of any Underlying Fund
if immediately after such purchase or acquisition it would own in the
aggregate: (a) more than 3% of the total outstanding voting stock of
the acquired company; (b) securities issued by the acquired company
having an aggregate value in excess of 5% of the value of the total
assets of the acquiring company; or (c) securities issued by the
acquired company and all other investment companies having an aggregate
value in excess of 10% of the value of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act would prevent, in
substance, each Underlying Fund from selling its shares to its
respective Parent Fund if, immediately after such sale, more than 3% of
the total outstanding voting stock of the Underlying Fund is owned by
the Parent Fund, or more than 10% of the total outstanding voting stock
of the Underlying Fund is owned by the Parent Fund and other investment
companies.
2. In October 1996, the National Securities Markets Improvement Act
of 1996 (the ``1996 Act'') was adopted.\3\ Among other things, the 1996
Act amended the Act by adding section 12(d)(1)(G), which exempts from
the limitations of section 12(d)(1) certain ``fund of funds''
structures that comply with the conditions prescribed in section
12(d)(1)(G). Applicants state that, but for the fact that applicants
propose that the Parent Funds have the flexibility to invest directly
in stocks, bonds, and other instruments, in addition to investing in
the Underlying Funds, applicants would be able to rely on the exemption
now provided in the Act.\4\
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\3\ Pub. L. No. 104-290 (1996).
\4\ Section 12(d)(1)(G) limits direct investing outside of
affiliated funds to certain government securities and short-term
instruments.
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3. The 1996 Act also added section 12(d)(1)(J), which provides, in
relevant part, that the SEC may by order conditionally or
unconditionally exempt any person, security, or transaction from the
limitations of section 12(d)(1) if, and to the extent that, such
exemption is consistent with the public interest and the protection of
investors. Applicants request an order under section 12(d)(1)(J)
exempting them from section 12(d)(1) to permit each Parent Fund to
invest in any Underlying Fund in excess of the percentage limitations
of that section.
4. Applicants state that section 12(d)(1) is intended to prevent
unregulated pyramiding of investment companies, and the abuses which
are perceived to arise from such pyramiding. Applicants note that,
prior to the enactment of section 12(d)(1), there was concern that
unregulated pyramiding of investment companies would provide, for those
in control at the top of the pyramid, an element of power and
domination over funds
[[Page 1785]]
further down in the pyramid. For example, applicants note that a Parent
Fund might be able to influence, without proper authority, the
activities of the persons operating an Underlying Fund or the
activities of the Fund itself. Applicants state that, arguably, this
control could arise via a threat of large-scale redemptions or the fact
that an acquired fund, faced with substantial investment in its shares
by an acquiring fund, might feel constrained to manage its assets in a
manner different from the fund's normal practice in order to be able to
satisfy unexpected, disruptive, large redemption requests.
5. Applicants believe that none of the dangers that were of concern
to Congress in drafting section 12(d)(1) are present in the proposed
Parent Fund arrangement. Unlike the fund of funds operations that
prompted enactment of section 12(d)(1), the Parent Funds and the
Underlying Funds will all be part of the same group of investment
companies. Further, applicants state that OFFITBANK, which will be the
adviser to the Underlying Funds as well as to the Parent Funds, is
governed by its obligations to the Parent Funds and the Underlying
Funds and their shareholders and any allocation or reallocation by
OFFITBANK of a Parent Fund's assets among Underlying Funds would be
required to be made in accordance with those obligations. Applicants
also believe that OFFIBANK's own self-interest will prompt it to
maximize benefits to all shareholders, and not disrupt the operations
of any of the Parent Funds or the Underlying Funds. Finally, applicants
reiterate that, but for the fact that the Parent Funds may invest
directly in stocks, bonds, and other instruments, applicants' proposal
is consistent with fund of funds structures now explicitly permitted
under section 12(d)(1)(G) of the Act.
6. As noted above, OFFITBANK anticipates charging an advisory fee
to the Parent Fund to the extent that the Fund's assets are invested
directly in stocks, bonds, or other instruments, rather than shares of
the Underlying Funds. With respect to the portion of a Parent Fund's
assets invested in the Underlying Funds, applicants represent that,
before approving any advisory contract under section 15 of the Act, the
directors of each Parent Fund, including a majority of the directors of
each Parent Fund who are not ``interested persons,'' as defined in
section 2(a)(19) of the Act (``Independent Directors''), shall find
that the advisory fees, if any, charged under such contract are based
on services provided that are in addition to, rather than duplicative
of, services provided pursuant to any Underlying Fund's advisory
contract.
7. While investment in the Parent Funds will involve additional
expenses due to the costs of establishing and maintaining the Parent
Funds as separate series, applicants believe that those additional
expenses will not be substantial and that such expenses will be offset
by the benefits which are presumed to be generated for the Underlying
Funds and inure indirectly to the Parent Funds. Applicants believe
that: (a) the addition of assets from each Parent Fund to the
Underlying Fund may reduce the expense ratio for each Underlying Fund;
(b) to the extent that shareholders of the Parent Funds otherwise would
directly open accounts with each of the Underlying Funds, the number of
accounts and related expenses at the Underlying Fund level may be
reduced; and (c) by investing in the Underlying Funds, the Parent Funds
may more efficiently achieve a level of diversification through various
asset classes than if investments were made directly in portfolio
securities, and without incurrence of transaction costs associated with
direct investing. Moreover, applicants will provide to the Chief
Financial Analyst of the SEC's Division of Investment Management annual
expense ratios for each Parent Fund and each Underlying Fund, as
specified in condition 5 below. Applicants believe that this will
enable the SEC to monitor the expenses relating to each Parent Fund.
Based on the foregoing, applicants believe that the proposed
transactions satisfy the requirements of section 12(d)(1)(J).
B. Section 17(a)
1. Section 17(a) makes it unlawful for an affiliated person of a
registered investment company, or an affiliated person of such person,
to sell securities to, or purchase securities from, the company. Under
the proposed structure, the Parent Funds and the Underlying Funds may
be deemed to be affiliates of one another. Purchases by the Parent
Funds of the shares of the Underlying Funds and the sale by the
Underlying Funds of their shares to the Parent funds could thus be
deemed to be principal transactions between affiliated persons under
section 17(a).
2. Section 17(b) provides that the SEC shall exempt a proposed
transaction from section 17(a) if evidence establishes that: (a) the
terms of the proposed transaction are reasonable and fair and do not
involve overreaching; (b) the proposed transaction is consistent with
the policies of the registered investment company involved; and (c) the
proposed transaction is consistent with the general provisions of the
Act.
3. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions if, and to the extent that, 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 terms of the proposed transactions
are fair and reasonable and do not involve overreaching. The
consideration paid for the sale and redemption of shares of the
Underlying Funds will be based on the net asset value of the Underlying
Funds, subject to applicable sales charges. In addition, applicants
assert that the proposed transactions will be consistent with the
policies of each Parent Fund. The investment of assets of the Parent
Funds in shares of the Underlying Funds and the issuance of shares of
the Underlying Funds to the Parent Funds will be effected in accordance
with the investment restrictions of each Parent Fund and will be
consistent with the policies of (as set forth in the registration
statement applicable to) each Parent Fund. Applicants also state that,
for the reasons discussed above, the proposed transactions are
consistent with the general purposes of the Act. Applicants believe
that the proposed transactions meet the standards of sections 6(c) and
17(b).\5\
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\5\ Section 17(b) applies to specific proposed transactions,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c)
frequently is used to grant relief from section 17(a) to permit an
ongoing series of future transactions.
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Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each Parent Fund and each Underlying Fund will be part of the
same ``group of investment companies,'' as defined in rule 11a-3 under
the Act.
2. No Underlying Fund shall acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act.
3. Before approving any advisory contract under section 15 of the
Act, the directors of each Parent Fund, including a majority of the
Independent Directors, shall find that the advisory fees, if any,
charged under such contract are based on services provided that are in
addition to, rather than duplicative of, services provided pursuant to
any Underlying Fund's advisory contract. Such finding,
[[Page 1786]]
and the basis upon which the finding was made, will be recorded fully
in the minute books of the Parent Fund.
4. Any sales charges or service fees charged with respect to shares
of each Parent Fund, when aggregated with any sales charges or service
fees paid by the Parent Fund with respect to shares of any Underlying
Fund, shall not exceed the limits set forth in Rule 2830 of the Rules
of Conduct of the National Association of Securities Dealers, Inc.
5. Applicants will provide the following information, in electronic
format, to the Chief Financial Analyst of the SEC's Division of
Investment Management: monthly average total assets for each Parent
Fund and each of its Underlying Funds; monthly purchases and
redemptions (other than by exchange) for each Parent Fund and each of
its Underlying Funds; monthly exchanges into and out of each Parent
Fund and each of its Underlying Funds; month-end allocations of each
Parent Fund's assets among its Underlying Funds; annual expense ratios
for each Parent Fund and each of its Underlying Funds; and a
description of any vote taken by the shareholders of any Underlying
Fund, including a statement of the percentage of votes cast for and
against the proposal by its Parent Fund and by the other shareholders
of the Underlying Funds. Such information will be provided as soon as
reasonably practicable following each fiscal year-end of the Parent
Funds (unless the Chief Financial Analyst shall notify the Parent Funds
or OFFITBANK in writing that such information need no longer be
submitted).
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-686 Filed 1-10-97; 8:45 am]
BILLING CODE 8010-01-M
