[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1710]
[[Page Unknown]]
[Federal Register: January 27, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20028; 812-7913]
The Laurel Funds, Inc., et al.; Notice of Application
January 19, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: The Laurel Funds, Inc. (``Laurel Fund''); The Boston
Company Fund (``TBC Fund''); The Boston Company Investment Series
(``TBCIS Fund''); and The Boston Company Tax-Free Municipal Funds
(``TBCTF Fund'') (together, the ``Funds''); Frank Russell Investment
Management Company (``FRIMCo''); Mellon Bank, N.A. (``Mellon Bank'');
Russell Fund Distributors, Inc. (``RFD''), and Funds Distributor, Inc.
(``FDI'' and together with RFD, the ``Distributors'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from the
provisions of sections 2(a)(32), 2(a)(35), 18(f)(1), 18(g), 18(i),
22(c), and 22(d) and rule 22c-1.
SUMMARY OF APPLICATION: Applicants seek an order to permit the Funds to
issue an unlimited number of classes of shares representing interest in
the same portfolio of securities, and assess a contingent deferred
sales charge (``CDSC'') on certain redemptions of shares, and waive the
CDSC in certain instances.
FILING DATES: The application was filed on May 4, 1992, and amended on
August 24, 1992, November 20, 1992, February 19, 1993, May 20, 1993,
and January 19, 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 14,
1994, 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
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW, Washington, DC 20549.
Applicants: The Laurel Funds, Inc., Frank Russell Investment Management
Company, and Russell Fund Distributors, Inc., 909 A Street, Tacoma,
Washington 98402; Mellon Bank, N.A., One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258; Fund Distributors, Inc., One Exchange
Place, Boston, Massachusetts 02109.
FOR FURTHER INFORMATION CONTACT: Marc Duffy, Staff Attorney, at (202)
272-2511, or C. David Messman, 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. Laurel Fund is a Maryland corporation registered under the Act
as an open-end management investment company. Laurel presently consists
of the following separate investment portfolios: The Laurel Funds,
Inc., Laurel Prime Money Market I Portfolio, Laurel U.S. Treasury Money
Market I Portfolio, Laurel Tax-Exempt Money Market I Portfolio, Laurel
Prime Money Market II Portfolio, Laurel Government Money Market II
Portfolio, Laurel U.S. Treasury Money Market II Portfolio, Laurel Stock
Portfolio, Laurel Ginnie Mae Portfolio, Laurel Intermidate Income
Portfolio, Laurel Short-Term Bond Fund Portfolio, Laurel Tactical Asset
Allocation Portfolio, Laurel U.S. Treasury Only Money Market Portfolio,
Laurel S&P 500 Stock Index Portfolio, Laurel Balanced Portfolio, Laurel
Midcap Stock Portfolio, Laurel Bond Market Index Portfolio, and Laurel
European Portfolio.
2. FRIMCo is the administrator, and the RFD is the distributor of
Laurel Fund. Mellon Bank is Laurel Fund's investment adviser,
custodian, and transfer agent.
3. TBC Fund, TBCIS Fund, and TBCTF Fund are Massachusetts business
trusts. TBC Fund presently consists of the following series: Capital
Appreciation Fund, Special Growth Fund, Government Money Fund, Cash
Management Fund, Managed Income Fund, Asset Manager's Fund, and
Intermediate Term Government Securities Fund. TBCIS Fund presently
consists of the following series: International Fund, Short-Term Bond
Fund, Asset Allocation Fund, and Contrarian Fund. TBCTF Fund consists
of the Massachusetts Tax-Free Money Fund, Massachusetts Tax-Free Bond
Fund, Tax-Free Money Fund, Tax-Free Bond Fund, California Tax-Free
Money Fund, California Tax-Free Bond Fund, New York Tax-Free Money
Fund, and New York Tax-Free Bond Fund. The Boston Company Advisors,
Inc. is the investment adviser for, and FDI is the Distributor for TBC
Fund, TBCIS Fund, and TBCTF Fund. The Boston Company Advisors, Inc. is
an indirect subsidiary of Mellon Bank Corporation.
4. Applicants request that the relief granted hereby apply to all
existing and future portfolios of Laurel Fund, TBC Fund, TBCIS Fund,
and TBCTF Fund (the ``Portfolios''), and to all future registered
investment companies distributed by RFD or FDI, or for which Mellon
Bank serves in the future as investment adviser, or for which any
person controlling, controlled by, or under common control with Mellon
Bank (within the meaning of section 2(a)(9) of the Act) may in the
future serve as investment adviser. Any such future investment
companies that rely on the requested relief will abide by all of the
representations and conditions to the application.
5. The Portfolios consist of both money market funds and non-money
market funds. Shares of the Portfolios are sold and redeemed daily at
net asset value without a sales or redemption charge. The Funds have
adopted plans pursuant to rule 12b-1 under the Act for using up to
0.35% of each Portfolio's net assets annually to aid in the
distribution of their shares.
6. Applicants propose to create a multi-class distribution system
(the ``Multi-Class System''). The Funds will create an unlimited number
of additional classes of shares in some or all of their existing and
future Portfolios. Shares will be issued in connection with either a
plan adopted pursuant to rule 12b-1 under the Act (the ``12b-1 Plan'')
and/or a non-rule 12b-1 administrative plan (the ``Administrative
Plan,'' and collectively with the 12b-1 Plan, the ``Plans'').
7. With respect to each class of shares, the Funds will enter into
a 12b-1 Plan agreement and/or an Administrative Plan agreement (the
``Plan Agreements'') with groups, organizations or institutions
(``Organizations'') to provide certain services to the clients,
members, or customers of such Organizations who beneficially own shares
offered in connection with a particular class (``Class Shareholders'').
8. The services to be provided by Organizations to their Class
Shareholders under the 12b-1 Plan could include: providing facilities
to answer questions from prospective investors about the Funds;
receiving and answering correspondence, including requests for
prospectuses and statements of additional information; preparing,
printing, and delivering prospectuses and shareholder reports to
prospective Class Shareholders; complying with federal and state
securities laws pertaining to the sale of shares; and assisting
investors in completing application forms and selecting dividend and
other account options.
9. The services to be provided by Organizations to their Class
Shareholders under the Administrative Plan could include: receiving,
aggregating, and processing Class Shareholder orders; sweep program
servicing; shareholder sub-accounting; providing and maintaining
elective Class Shareholder services such as check writing and wire
transfer services; providing and maintaining pre-authorized investment
plans; periodic communications with Class Shareholders; acting as the
sole shareholder of record and nominee for Class Shareholders;
maintaining account records for Class Shareholders; answering questions
and handling correspondence from Class Shareholders about their
accounts; issuing confirmations for transactions by Class Shareholders;
and similar account administrative services.
10. The services provided pursuant to the Plans will augment or
replace (and not be duplicative of) the services to be provided to the
Portfolios by Mellon Bank, the Distributors, or FRIMCo. Applicants
propose to ``unbundle'' services provided to the Portfolios to permit
Organizations to select services they wish to provide to their Class
Shareholders, with such services to be tailored to their Class
Shareholders' needs.
11. With respect to each class of shares, a Portfolio will pay an
Organization for its services and assistance in accordance with the
terms of its Plan and related Plan Agreement (``Plan Payments'') and
the expense of such payments will be borne entirely by the owners of
the class of shares of the Portfolio to which each Plan Agreement
relates. Plan Payments will not exceed 0.50% per year of the average
daily net asset value of shares owned by Class Shareholders covered by
such Plan Agreement. In addition, for any Organization having both a
12b-1 Plan and Administrative Plan, aggregate Plan Payments will not
exceed 1.00% per year. Such maximum limits on Plan Payments might be
increased in the future, upon compliance with the provisions of the
related Plan, but will not be increased over the limits stated above
unless the requested exemptive order is amended, or a no-action
position obtained from the SEC staff permitting such increase.
12. Applicants at all times will comply with Article III, section
26 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., as amended, with respect to asset-based
distribution charges.
13. All expenses of the Funds that cannot be attributed directly to
any one Portfolio (``Fund Expenses'') will be allocated to each
Portfolio based on the relative net assets of such Portfolio. Fund
Expenses could include, for example, directors' fees and expenses,
audit and legal fees, insurance premiums, SEC and state blue sky
registration fees, and dues paid to organizations such as the
Investment Company Institute.
14. Certain expenses may be attributable to a Portfolio, but not to
a particular class (``Portfolio Expenses''). Portfolio Expenses will be
allocated to a class based upon the relative percentage of net assets
of such class. Portfolio expenses could include, for example, advisory
fees, accounting fees, custodian fees, and fees related to preparation
of separate documents of the Portfolio. In addition, the gross income
of each Portfolio will be allocated on a pro rata basis to each class
based on the relative net assets of each class, and then divided by the
number of outstanding shares in each class.
15. In addition to the cost of Plan Payments, each class will bear
certain expenses attributable specifically to such class, as set forth
in Condition 1 (``Class Expenses''). The determination of which Class
Expenses will be allocated to a particular class and any subsequent
changes thereto will be determined by the Board of Directors of the
Fund in the manner described in Condition 3.
16. The Funds' investment adviser may choose to reimburse or waive
Class Expenses on certain classes on a voluntary, temporary basis. The
amount of Class Expenses waived or reimbursed by the investment adviser
may vary from class to class. Class Expenses are by their nature
specific to a given class and obviously expected to vary from one class
to another. Applicants thus believe that it is acceptable and
consistent with shareholder expectations to reimburse or waive Class
Expenses at different levels for different classes of the same
portfolio.
17. In addition, the investment adviser may waive or reimburse Fund
Expenses and/or Portfolio Expenses (with or without a waiver or
reimbursement of Class Expenses) but only if the same proportionate
amount of Fund Expenses and/or Portfolio Expenses are waived or
reimbursed for each class. Thus, any Fund Expenses that are waived or
reimbursed would be credited to each class of a Portfolio based on the
relative net assets of the classes. Similarly, any Portfolio Expenses
that are waived or reimbursed would be credited to each class of that
Portfolio according to the relative net assets of the classes. Fund
Expenses and Portfolio Expenses apply equally to all classes of a given
Portfolio. Accordingly, it may not be appropriate to waive or reimburse
Fund Expenses or Portfolio Expenses at different levels for different
classes of the same Portfolio.
18. Dividends paid to each class of shares will be declared and
paid on the same days and at the same times, and except as noted below,
will be determined in the same manner and paid in the same amounts.
Because different Plan Payments and Class Expenses may be borne by each
class of shares, the net income of (and dividends payable to) each
class may be different from the net income of the other classes of
shares of a Portfolio.
19. Applicants also request an exemption from sections 2(a)(32),
2(a)(35), 22(c) and 22(d), of the Act and rule 22c-1 thereunder, to the
extent necessary to permit the Funds to assess a CDSC on certain
redemptions of shares, and waive the CDSC in certain instances. The
amount of the CDSC charged will vary, depending on the length of time
shares have been held.
20. The CDSC typically will range from 4% to 6% (but can be higher
or lower) on shares redeemed in the first year of purchase and will be
reduced, typically at a rate of 1% per year over the applicable CDSC
period, so that redemptions of shares held after that period will not
be subject to a CDSC.
21. The CDSC will not be imposed on redemptions of shares purchased
in connection with the reinvestment of distributions. Furthermore, no
CDSC will be imposed on an amount which represents an increase in the
value of a shareholder's account resulting from capital appreciation
above the amount paid for shares purchased during the CDSC period. In
determining whether a CDSC is applicable, a redemption will be made
first of shares derived from reinvestment of distributions, second of
shares purchased prior to the CDSC period, and third of shares
purchased during the CDSC period.
22. The Portfolios will waive the CDSC on redemptions: (a)
following a shareholder's death or disability, as defined in section
72(m)(7) of the Internal Revenue Code, (b) in connection with
distributions from an individual retirement account or other qualified
retirement plan following death, total or permanent disability, or
reaching retirement age, and (c) in whole or in part in connection with
shares sold to: (i) Customers of Mellon Bank Corporation, its
subsidiaries, and affiliates (``Mellon Bank Corp.''), and The Boston
Company, its subsidiaries (including The Boston Company Advisors, Inc.)
and affiliates (``The Boston Company''), (ii) directors and officers of
the Funds, and (iii) employees and retirees of Mellon Bank Corp., The
Boston Company, the Distributors, and FRIMCo, as disclosed in the
registration statement for the class.
Applicants' Legal Analysis:
1. Applicants seek an exemptive order to the extent that the Multi-
Class System might be deemed to (a) result in a ``senior security''
within the meaning of section 18(g) of the Act, and thus be prohibited
by section 18(f)(1); and (b) violate the equal voting provisions of
section 18(i) of the Act.
2. Section 18 is intended to prevent investment companies from
issuing excessive amounts of senior securities and thereby increasing
unduly the speculative character of their junior securities, or from
operating without adequate assets or reserves. The proposed arrangement
does not involve borrowings and does not affect the Portfolios'
existing assets or reserves. Nor will the proposed arrangement increase
the speculative character of the shares of a Portfolio since all shares
will participate pro rata in all of a Portfolio's income and expenses,
with the exception of Plan Payments and Class Expenses.
3. The proposed allocation of expenses and voting rights is
equitable and will not discriminate against any group of shareholders.
Further, since all shares of a Portfolio will be redeemable at all
times, no class of shares will have any preference or priority in the
usual sense (that is, no class will have distribution or liquidation
preferences will respect to particular assets, and no class will be
protected by any reserve or other account).
4. Applicants believe that the imposition of the CDSC is fair,
consistent with the policy and provisions of the Act, and in the best
interest of those shareholders on whom it is imposed. Shares sold
subject to a CDSC will be designed to permit the investor to purchase
shares without the assessment of a front-end sales load, and at the
same time permit the Distributors to pay securities dealers selling
shares of a class a commission on the sale of those shares. Proceeds
from the CDSC will be used in whole or in part to defray the expenses
of the Distributors and of the selling broker-dealers relating to
providing distribution-related services to the investor choosing those
classes.
Applicants' Conditions
If the requested order is granted, applicants agree to the
following conditions:
1. Each class of shares of a Portfolio will represent interests in
the same portfolio of investments, and be identical in all respects,
except for differences related to: (a) Certain Class Expenses, which
are limited to: (i) Transfer agent fees identified by the transfer
agent as being attributable to a specific class of shares; (ii)
printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses, and proxies to
current shareholders of a specific class; (iii) blue sky registration
fees incurred by a class of shares; (iv) SEC registration fees incurred
by a class of shares; (v) the expense of the Funds' administrator and
other 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; (vii) directors' fees
incurred as a result of issues relating to one class of shares; and
(viii) organizational expenses incurred to establish a particular class
of shares; (b) expenses assessed to a class pursuant to a 12b-1 Plan or
Administrative Plan; (c) voting rights as to matters exclusively
affecting one class of shares; (d) dividend and net asset value
differences reflecting different Plan Payments and Class Expenses; (e)
class designation; and (f) exchange privileges. Any additional
incremental expenses not specifically identified above which are
subsequently identified and determined to be properly allocated to one
class of shares shall not be so allocated until approved by the SEC
pursuant to an amended order.
2. The directors of the Funds, including a majority of the
independent directors will approve the offering of different classes of
shares pursuant to the Multi-Class System. The minutes of the meetings
of the directors regarding the deliberations of the directors with
respect to the approvals necessary to implement the Multi-Class System
will reflect in detail the reasons for the directors' determination
that the proposed Multi-Class System is in the best interests of the
Funds, the Portfolios, and shareholders.
3. The initial determination of the Class Expenses, if any, that
will be allocated to a particular class and any subsequent changes
thereto will be reviewed and approved by a vote of the board of
directors of the Funds, including a majority of the independent
directors. Any person authorized to direct the allocation and
disposition of monies paid or payable by a Portfolio to meet Class
Expenses shall provide to the board of directors, and the directors
shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.
4. On an ongoing basis, the directors, pursuant to their fiduciary
responsibilities under the Act and otherwise, will monitor the
Portfolios 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 such conflicts that may develop.
The investment adviser and distributor of the Funds will be responsible
for reporting any potential or existing conflicts to the directors. If
a conflict arises, the investment adviser and the distributor at their
own cost will remedy such conflict up to and including establishing a
new registered management investment company.
5. The Distributors will adopt compliance standards as to when each
class of shares may be sold to particular investors. Applicants will
require all persons selling shares of the Funds to agree to conform to
such standards.
6. The Administrative Plans 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 need not enjoy the voting rights specified in
rule 12b-1.
7. The directors will receive quarterly and annual statements
concerning the amounts expended under the Administrative Plans and 12b-
1 Plans and the related Plan Agreements complying with paragraphs
(b)(3)(ii) of rule 12b-1, as it may be amended from time to time. In
the statements, only expenditures properly attributable to the sale or
servicing of a particular class of shares will be used to justify any
distribution or servicing fee charged to that class. Expenditures not
related to the sale or servicing of a particular class will not be
presented to the directors to justify any fee attributable to that
class. 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.
8. Dividends paid by a Portfolio with respect to a class of shares
will be calculated in the same manner, at the same time, on the same
day, and will be in the same per share amount as dividends paid by that
Portfolio with respect to each other class of shares of the Portfolio,
except that Plan Payments made by a class under its Plan and any Class
Expenses will be borne exclusively by the affected class.
9. 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 classes has been reviewed by an expert
(the ``Expert'') who has rendered a report to the applicants, which
report has been provided to the staff of the SEC, that such methodology
and procedures are adequate to ensure that such calculations and
allocations will be made in an appropriate manner. On an ongoing basis,
the Expert, or an appropriate substitute Expert, 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 Expert will 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 Expert with respect to such reports, following
request by the Funds (which the Funds agrees to provide), will be
available for inspection by the SEC staff upon written request by a
senior member of the Division of Investment Management or a regional
office of the SEC. Authorized staff members will be limited to the
director, an associate director, the chief accountant, the chief
financial analyst, an assistant director, and any regional
administrators or associate and assistant administrators. The initial
report of the Expert is a ``Special Purpose'' report on the ``Design of
a System'' as defined and described in Statement of Auditing Standards
(``SAS'') No. 44 of the American Institute of Certified Public
Accountants (``AICPA'') and the ongoing reports will be ``reports on
policies and procedures placed in operation and tests of
effectiveness'' as defined and described in SAS No. 70 of the 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.
10. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends/distributions of 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 Expert in
the initial report referred to in Condition 9 above and will be
concurred with by the Expert, or an appropriate substitute Expert, on
an ongoing basis at least annually in the ongoing report referred to in
that condition. Applicants will take immediate corrective action if the
Expert, or appropriate substitute Expert, does not so concur in the
ongoing reports.
11. The prospectuses of each class of a Portfolio will include a
statement to the effect that a salesperson and any other person
entitled to receive compensation for selling or servicing shares may
receive different compensation with respect to one particular class of
shares over another in the Portfolio.
12. The conditions pursuant to which the exemptive order is
granted, and the duties and responsibilities of the directors with
respect to the Multi-Class System will be set forth in guidelines to be
furnished to the directors.
13. A Portfolio will disclose the respective expenses, performance
data, distribution arrangements, services, fees, and exchange
privileges (if any) applicable to each class of shares in every
prospectus, regardless of whether all classes of shares are offered
through each prospectus. Any shareholder report to a class of shares
which contains expense and performance data will disclose the
respective expenses and performance data applicable to all classes of
shares of that Portfolio. The shareholder reports will contain, in the
statement of assets and liabilities and statement of operations,
information related to the Portfolio as a whole generally and not on a
per class basis. Each Portfolio's per share data, however, will be
prepared on a per class basis with respect to all classes of shares of
such Portfolio. To the extent that any advertisement or sales
literature describes the expenses or performance data applicable to any
class of shares of a Portfolio, it also will disclose the respective
expenses and/or performance data applicable to all classes of shares of
a Portfolio. The information provided by applicants for publication in
any newspaper or similar listing of a Portfolio's net asset value or
public offering price will present each class of shares separately.
14. Applicants acknowledge that the grant of the requested
exemptive order does not imply SEC approval, authorization of, or
acquiescence in any particular level of payments that a Portfolio may
make to Organizations pursuant to any Plan in reliance on the exemptive
order.
15. Applicants will comply with proposed rule 6c-10 under the Act,
(Investment Company Act Release No. 16619 (November 2, 1988)), as such
rule is currently proposed and as it may be reproposed, adopted, or
amended.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1710 Filed 1-26-94; 8:45 am]
BILLING CODE 8010-01-M
