[Federal Register Volume 59, Number 13 (Thursday, January 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1342]
[[Page Unknown]]
[Federal Register: January 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20017; 812-8358]
Cowen Funds, Inc., et al.; Notice of Application
January 13, 1994
AGENCY: Securities and Exchange Commission (the ``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Cowen Funds, Inc., Cowen Income & Growth Fund, Inc., Cowen
Standby Reserve Fund, Inc., Cowen Standby Tax-Exempt Reserve Fund, Inc.
(together with each series of the Cowen Funds, Inc. described below,
the ``Funds'') and Cowen & Company (``Cowen'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) granting a
conditional exemption from sections 2(a)(32), 2(a)(35), 18(f), 18(g),
18(i), 22(c), and 22(d) of the Act, and rule 22c-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek an order permitting certain
open-end management investment companies to issue multiple classes of
shares representing interests in the same portfolio of securities, and
assess and, under certain circumstances, waive a contingent deferred
sales charge (``CDSC'') on certain redemptions of the shares.
FILING DATES: The application was filed on April 19, 1993, and amended
on November 9, 1993 and January 6, 1994.
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 February 7,
1994, 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
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, Financial Square, New York, New York 10005.
FOR FURTHER INFORMATION CONTACT:
Felice R. Foundos, Senior Attorney, at (202) 272-2190, or Robert A.
Robertson, Branch Chief, at (202) 272-3018 (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
SEC's Public Reference Branch.
Applicants' Representations
1. Each of the Funds is an open-end management investment company
registered under the Act. Cowen Funds, Inc. consists of multiple
series: Cowen Opportunity Fund, Cowen Special Value Fund, Cowen
Intermediate Fixed Income Fund, and Cowen Tradition Fixed Income Fund.
Each Fund has entered into an investment management agreement with
Cowen under which Cowen Asset Management, a division of Cowen, provides
management and investment advisory services to the Funds. Each Fund has
also entered into a distribution agreement with Cowen under which Cowen
acts as principal underwriter for each Fund. Cowen Asset Management is
referred to herein as the ``Adviser'' and Cowen as the ``Distributor.''
2. Currently, four of the Funds (Cowen Income & Growth Fund, Inc.,
Cowen Opportunity Fund, Cowen Intermediate Fixed Income Fund, and Cowen
Tradition Fixed Income Fund) offer their shares at net asset value plus
a front-end sales load. Two of the Funds (Cowen Standby Reserve Fund,
Inc. and Cowen Standby Tax-Exempt Reserve Fund, Inc.) are money market
funds (the ``Money Market Funds'') and issue their shares at net asset
value without the imposition of any sales charges.
3. Applicants request that any order issued concerning this
application also apply to shares of any future open-end investment
company registered under the Act that is advised by the Adviser and
whose principal underwriter is (1) Cowen or (2) any person controlling,
controlled by or under common control with Cowen and whose shares are
identical in all material respects to those described in the
application.
4. Applicants seek relief to implement a dual distribution system.
Under this system, each of the Funds may offer investors the option of
purchasing shares subject to a conventional front-end sales load and
possibly a service fee (the ``Front-End Load Option'') or subject to a
CDSC and distribution and service fees (the ``Deferred Option''). In
addition, under the dual distribution system, applicants may from time
to time create one or more additional classes of shares.
5. Under the Front-End Load Option, investors would purchase shares
designated as Class A at the then current net asset value plus a front-
end sales load. In addition, Class A shareholders of certain Funds may
be assessed a ``service fee'' under a rule 12b-1 plan at an annual rate
of up to .25% of the average daily net assets of the Class A shares.
The term ``service fee'' has the meaning given to that term in Section
26 of Article III of the NASD's Rules of Fair Practice.
6. Under the Deferred Option, investors would purchase shares
designated as Class B shares at net asset value without the imposition
of a sales load at the time of purchase. However, the shares would be
subject to a rule 12b-1 plan with a service fee of up to .25% and a
distribution fee of up to .75% of the average daily net asset value of
the Class B shares. In addition, the Class B shares may be subject to a
CDSC, as described below. The sum of any front-end sale charge, CDSC,
and asset based sales charge imposed by the Funds will not exceed the
maximum sales charge provided for in article III, section 26(d) of the
Rules of Fair Practice of the NASD.
7. The Funds may create additional classes of shares, the terms of
which may differ from the Class A and Class B shares only in the
following respects: (1) Each class would have a different designation;
(2) each class might be sold under different sales arrangements (e.g.,
sales with a front-end sales load, subject to a CDSC, or at net asset
value); (3) each class would bear any payments incurred in connection
with a rule 12b-1 plan or a non-rule 12b-1 service plan related to that
class (and any other costs relating to obtaining shareholder approval
of the rule 12b-1 plan for that class or an amendment to its plan); (4)
each class would bear expenses attributable to the particular class as
set forth in condition 1 below (the ``Class Expenses'') and any other
expenses that are subsequently identified and determined to be properly
allocated to one class which shall be approved by the Commission
pursuant to an amended order; (5) the related voting rights as to
matters exclusively affecting one class (e.g., the adoption, amendment
or termination of the rule 12b-1 plan) in accordance with the
procedures set forth in rule 12b-1; and (6) each class would have
different exchange privileges.
8. If a Fund offers a shareholder services plan, these shares would
be available for purchase by banks and other financial intermediaries
for the benefit of their customers. The financial intermediaries would
provide support services to their customers, such as processing
shareholder orders to purchase and redeem shares, processing dividend
payments, providing information to shareholders with respect to their
holdings, arranging bank wires, answering shareholder inquiries
relating to the services performed by the financial intermediary, and
other similar services.These services will augment and not replace the
services provided to the Funds by Cowen and the Funds' transfer agent
and custodian pursuant to their respective agreements with the Funds.
9. Under the dual distribution system, all expenses incurred by a
Fund (other than a Money Market Fund) will be allocated among the
various classes of shares based on the net assets of the Fund
attributable to that class and all expenses incurred by a Money Market
Fund will be allocated among the shares of the Fund based on the number
of outstanding shares of such Fund regardless of class, except that
each class's net asset value and expenses will reflect the expenses
associated with that class's rule 12b-1 plan or service plan (if any)
and any Class Expenses attributable to a particular class. Because of
the higher distribution fees paid by the holders of certain classes
(Class B), the net income attributable to and the dividends payable on
each class with higher distribution fees would be lower than the net
income attributable to and the dividends payable on each class with
lower distribution fees or with no distribution fee at all (Class A).
As a result, the net asset value per share of the classes will differ
at times. The Money Market Funds will take steps detailed in condition
15 below to ensure that the net asset value per share of each class of
a Money Market Fund does not deviate from the net asset value per share
of the other classes of such Fund.
10. Currently, shares of the Funds generally may be exchanged for
shares of other Funds. Applicants contemplate that each class of a Fund
will be exchangeable only for the same class of the other Funds,
including shares of the Money Market funds. The exchange privileges
applicable to each class will comply with rule 11a-3 under the Act.
11. Applicants also seek relief to permit the Funds to assess a
CDSC on redemptions of certain classes of shares, and to permit the
Funds to waive the CDSC on redemptions of certain shares. Shares of the
Funds may be subject to the imposition of a CDSC if such shares are
redeemed within a specified period after their purchase. Applicants
currently expect that the percentage generally will vary from 5% for
redemptions made during the first year from initial purchase to 0% for
redemptions made after the sixth year from purchase. The CDSC will
apply only to those shares that are issued by the Fund after the
Commission grants the requested exemption.
12. No CDSC would be imposed with respect to: (a) Redemptions of
shares that were purchased more than a fixed number of years prior to
the redemptions; (b) shares derived from reinvestment of distributions;
or (c) the amount that represents an increase in the value of the
shareholder's account resulting from capital appreciation. The amount
of the CDSC will be calculated as the lesser of the amount that
represents a specified percentage of the net asset value of the shares
at the time of purchase, or the amount that represents such percentage
of the net asset value of the shares at the time of redemption.
13. In determining the applicability and rate of any CDSC, it will
be assumed that a redemption is made first of amounts due to capital
appreciation, next of shares representing reinvestment of dividends and
capital gain distributions, and then of other shares held by the
shareholder for the longest period of time. This will result in the
charge, if any, being imposed at the lowest possible rate. If a
shareholder who owns both Class A and Class B shares places a
redemption request, the shareholder will be required to elect
specifically whether the Class A or Class B shares are to be redeemed.
14. The CDSC would be waived for the following redemptions: (a)
Following the death or disability, as defined in section 72(m)(7) of
the Internal Revenue Code of 1986, of a shareholder if redemption is
made within one year of death or disability of a shareholder and (b) in
connection with a lump-sum or other distribution following retirement
or, in the case of an IRA or Keogh Plan or custodial account pursuant
to section 403(b)(7) of the Code, after attaining the age of 59\1/2\.
The charge also may be waived on any redemption that results from a
tax-free return of an excess contribution pursuant to section 408(d)(4)
or (5) of the Code or from death or disability of the employee. In sum,
the CDSC may be waived on redemptions of shares that constitute
retirement plan distributions that are permitted to be made without
penalty pursuant to the Code, other than tax-free rollovers or
transfers of assets. If the Funds waive the CDSC, the waiver or
reduction will be uniformly applied to all offerees in the class
specified.
Applicants' Legal Analysis
1. Applicants request an exemption under section 6(c) from sections
18(f), 18(g), and 18(i) to issue multiple classes of shares
representing interests in the same portfolio of securities. Applicants
believe that, by implementing the multiple class distribution system,
the Funds would be able to facilitate the distribution of their shares
and provide a broad array of services without assuming excessive
accounting and bookkeeping costs. Applicants also believe that the
proposed allocation of expenses and voting rights is equitable and
would not discriminate against any group of shareholders. The proposed
arrangement does not involve borrowings, affect the Funds' existing
assets or reserves, or increase the speculative character of the shares
of a Fund.
2. Applicants also request an exemption under section 6(c) from
sections 2(a)(32), 2(a)(35), 22(c), and 22(d), and rule 22c-1, to
assess and, under certain circumstances, waive a CDSC on redemptions of
shares. Applicants believe that their request to permit the CDSC
arrangement would place the purchaser in a better position than if a
sales load were imposed at the time of sale, since the shareholder may
have to pay only a reduced sales charge, or no sales charge at all.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each class of shares will represent interests in the same
portfolio of investments of a Fund and be identical in all respects,
except as set forth below. The only differences among the terms of the
various classes of shares of the same Fund will relate solely to: (a)
The designation of each class of shares of a Fund; (b) expenses
assessed to a class as a result of a rule 12b-1 plan providing for a
distribution fee or a service fee or a service plan (e.g., Class B, and
possible Class A, shares would pay a rule 12b-1 service fee and Class B
shares would pay a rule 12b-1 distribution fee); (c) different Class
Expenses for each class of shares, which are limited to: (i) Transfer
agency fees as identified by the transfer agent as being attributable
to a specific class; (ii) printing and postage expenses related to
preparing and distributing materials such as shareholder reports,
prospectuses, and proxies to current shareholders; (iii) Blue Sky
registration fees incurred by a class of shares; (iv) SEC registration
fees incurred by a class of shares; (v) the expenses of administrative
personnel and services as required to support the shareholders of a
specific class; (vi) litigation or other legal expenses relating solely
to one class of shares; and (vii) directors' fees incurred as a result
of issues relating to one class of shares; (d) the related voting
rights as to matters exclusively affecting one class of shares (e.g.,
the adoption, amendment or termination of a rule 12b-1 plan) in
accordance with the procedures set forth in rule 12b-1, and (e)
different exchange privileges. Any additional incremental expenses not
specifically identified above that are subsequently identified and
determined to be properly allocated to one class of shares shall not be
so allocated until approved by the SEC.
2. The directors of each of the Funds, including a majority of the
independent directors, shall have approved the dual distribution system
prior to the implementation of the dual distribution system by a
particular Fund. The minutes of the meetings of the directors of each
of the Funds regarding the deliberations of the directors with respect
to the approvals necessary to implement the dual distribution system
will reflect in detail the reasons for determining that the proposal
dual distribution system is in the best interests of both the Funds and
their respective shareholders.
3. The initial determination of the Class Expenses that will be
allocated to a particular class and any subsequent changes thereto will
be reviewed and approved by a vote of the directors of the affected
Fund, including a majority of the independent directors. Any person
authorized to direct the allocation and disposition of monies paid or
payable by the Fund to meet Class Expenses shall provide to the
directors, and the directors shall review, at least quarterly, a
written report of the amounts so expended and the purpose for which the
expenditures were made.
4. On an ongoing basis, the directors of the Funds, pursuant to
their fiduciary responsibilities under the Act and otherwise, will
monitor each Fund for the existence of any material conflicts among the
interests of the various classes of shares. The directors, including a
majority of the independent directors, shall take such action as is
reasonably necessary to eliminate any conflicts that may develop. The
Adviser and the Distributor will be responsible for reporting any
potential or existing conflicts to the directors. If a conflict arises,
the Adviser and the Distributor at their own expense will remedy the
conflict up to and including establishing a new registered management
investment company.
5. If any class will be subject to a service plan, the service plan
will be adopted and operated in accordance with the procedures set
forth in rule 12b-1 (b) through (f) as if the expenditures made
thereunder were subject to rule 12b-1, except that shareholders will
not enjoy the voting rights specified in rule 12b-1.
6. The directors of the Funds will receive quarterly and annual
statements concerning distribution and shareholder servicing
expenditures and service payments complying with paragraph (b)(3)(ii)
of rule 12b-1, as it may be amended from time to time. In the
statements, only distribution or shareholder servicing expenditures
properly attributable to the sale or servicing of one class of shares
will be used to support any distribution or shareholder servicing fee
charged to shareholders of that class of shares. Expenditures not
related to the sale or servicing of a specific class of shares will not
be presented to the directors to support any fees charged to
shareholders of that class of shares. The statements, including the
allocations upon which they are based, will be subject to the review
and approval of the independent directors in the exercise of their
fiduciary duties.
7. Dividends paid by a Fund with respect to each class of shares,
to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day, and will be in the same
amount, except that Class Expenses and costs and distribution fees
associated with any rule 12b-1 plan and service plan relating to a
particular class will be borne exclusively by each respective class.
8. The methodology and procedures for calculating the net asset
value and dividends/distributions of the various classes and the proper
allocation of expenses among the various classes have been reviewed by
an expert (the ``Independent Examiner''). The Independent Examiner has
rendered a report to applicants which has been provided to the staff of
the SEC stating that the methodology and procedures are adequate to
ensure that the calculations and allocations will be made in an
appropriate manner. On an ongoing basis, the Independent Examiner, or
an appropriate substitute Independent Examiner, will monitor the manner
in which the calculations and allocations are being made and, based
upon such review, will render at least annually a report to the Funds
that the calculations and allocations are being made properly. The
reports of the Independent Examiner shall be filed as part of the
periodic reports filed with the SEC pursuant to sections 30(a) and
30(b)(1) of the Act. The work papers of the Independent Examiner with
respect to these reports, following request by the Funds which the
Funds agree to make, will be available for inspection by the SEC's
staff upon the written request for these work papers by a senior member
of the Division of Investment Management or of a Regional Office of the
SEC, limited to the Director, an Associate Director, the Chief
Accountant, the Chief Financial Analyst, an Assistant Director, and any
Regional Administrators or Associate or Assistant Administrators. The
initial report of the Independent Examiner is a ``report on policies
and procedures placed in operation'' and the ongoing reports will be
``reports on policies and procedures placed in operation and tests of
operating effectiveness'' as defined and described in Statement of
Auditing Standards No. 70 of the American Institute of Certified Public
Accountants (``AICPA''), as it may be amended from time to time, or in
similar auditing standards as may be adopted by the AICPA from time to
time.
9. The applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends/distributions among the various classes
of shares and the proper allocation of expenses among the classes of
shares and this representation has been concurred with by the
Independent Examiner in the initial report referred to in condition 8
above and will be concurred with by the Independent Examiner, or an
appropriate substitute Independent Examiner, on an ongoing basis at
least annually in the ongoing reports referred to in condition 8 above.
The applicants agree to take immediate corrective action if the
Independent Examiner, or appropriate substitute Independent Examiner,
does not so concur in the ongoing reports.
10. The prospectuses of the Funds will contain a statement to the
effect that a salesperson and any other person entitled to receive any
compensation for selling or servicing Fund shares may receive different
compensation with respect to one particular class of shares over
another in the Fund.
11. The Distributor will adopt compliance standards as to when
shares of a particular class may appropriately be sold to particular
investors. The applicants will require all persons selling shares of
the Funds to agree to conform to these standards.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the directors of the Funds with
respect to the dual distribution system will be set forth in guidelines
that will be furnished to the directors as part of the materials
setting forth the duties and responsibilities of the directors.
13. Each Fund will disclose in its prospectus the respective
expenses, performance data, distribution arrangements, services, fees,
sales loads, CDSCs, and exchange privileges applicable to each class of
shares in every prospectus, regardless of whether all classes of shares
are offered through each prospectus. The shareholder reports of each
Fund will disclose the respective expenses and performance data
applicable to each class of shares in every shareholder report. The
shareholder reports will contain, in the statement of assets and
liabilities and statement of operations, information related to the
Fund as a whole generally and not on a per class basis. Each Fund's per
share data, however, will be prepared on a per class basis with respect
to the classes of shares of the Fund. To the extent any advertisement
or sales literature describes the expenses or performance data
applicable to any class of shares, it will disclose the respective
expenses and/or performance data applicable to all classes of shares.
The information provided by applicants for publication in any newspaper
or similar listing of the Fund's net asset values and public offering
prices will present each class of shares separately.
14. Applicants acknowledge that the grant of the exemptive order
requested by this application will not imply SEC approval,
authorization, or acquiescence in any particular level of payments that
the Funds may make pursuant to rule 12b-1 plans or service plans in
reliance on the exemptive order.
15. To ensure that the net asset value per share of each class of
shares of a Money Market Fund remains the same regardless of variations
in net income among the classes from day to day, no class will on any
day bear any expenses associated with that class's rule 12b-1 plan or
service plan (if any) and Class Expenses that would cause the accrued
expenses of such class for such day to exceed its allocated gross
income. To accomplish this, each Money Market Fund may seek to obtain
undertakings from its service providers stating that, if necessary to
prevent the accrued expenses of any class from exceeding the allocated
gross income of such class on any given day, they will waive some or
all of the payments to which they otherwise would have been entitled.
If such waivers are not obtained or they are not sufficient to prevent
the expenses associated with a class's rule 12b-1 plan or service plan
(if any) and Class Expenses from exceeding its gross income on any
given day, the Adviser and/or the Distributor will within five business
days, reimburse the Money Market Fund in such amount as may be
necessary to prevent such expenses from exceeding a class's gross
income for the day. Fees and expenses waived by a service provider or
reimbursed to the Fund by the Adviser and/or the Distributor will not
be carried forward or recouped at a future date.
16. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act, Release No. 16619 (November 2, 1988), as the rule is
currently proposed and as it may be reproposed, adopted, or amended.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1342 Filed 1-19-94; 8:45 am]
BILLING CODE 8010-01-M
