[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56274-56276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28166]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23488; 812-11312]
The Victory Portfolios and Key Asset Management, Inc.; Notice of
Application
October 15, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 12(d)(1)(J) of the
Investment Company Act of 19940 (the ``Act'') for an exemption from
section 12(d)(1) 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 OF APPLICATION: Applicants request an order that would
supersede a prior order and permit applicants to implement a ``fund of
funds'' arrangement. In addition to the fund and funds investing in
other funds in the same group of investment companies, the order would
permit the fund of funds to invest a portion of its assets in funds
that are not part of the same group of investment companies in reliance
on section 12(d)(1)(F) of the Act. The order would also allow the funds
of funds to offer its shares to the public with a sales load that
exceeds the 1.5% limit of section 12(d)(1)(F)(ii).
APPLICANTS: The Victory Portfolios (``VP'') and Key Asset Management,
Inc. (``KAM'').
FLING DATE: The application was filed on September 18, 1998.
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 applicant with a copy of the request, personally or by
mail, Hearing requests should be received by the Commission by 5:30
p.m. on November 9, 1998 and should be accompanied by proof of service
on applicant, 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
[[Page 56275]]
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 5th Street N.W., Washington, DC
20549. Applicant, 3435 Stelzer Road, Columbus, Ohio 43219.
FOR FURTHER INFORMATION CONTACT: Lawrence W. Pisto, Senior Counsel, at
(202) 942-0527, or Nadya B. Roytblat, Assistant Director at (202) 942-
0564, Office of Investment Company Regulation, Division of Investment
Management.
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 5th Street N.W., Washington,
D.C. 20549 (tel 202-942-8090).
Applicants' Representations
1. VP is a Delaware business trust registered under the Act as an
open-end management investment company currently consisting of 30
portfolios. KAM, registered under the Investment Advisers Act of 1940,
serves as investment adviser to VP.
2. Applicants request relief to permit certain series of VP (the
``Direct Funds'') to invest in certain other series of VP that are in
the same group of investment companies as the Direct Funds (the
``Underlying Portfolios'').\1\ The Direct Funds also would invest in
other registered open-end management investment companies that are not
part of the same group of investment companies as VP (the ``Other
Portfolios'') in reliance on section 12(d)(1)(F) of the Act discussed
below. With respect to a Direct Fund's investment in Other Portfolios,
applicants also seek an exemption from the sales load limitation in
section 12(d)(1)(F) of the Act. Applicants believe that the proposed
structure of the Direct Funds will provide a consolidated and efficient
means through which investors can have access to a comprehensive
investment vehicle.\2\
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\1\ The requested order would supersede a prior order, Key
Mutual Funds, et al., Investment Company Act Rel. 22486 (January 30,
1997 (notice) and 22526 (February 25, 1997) (order).
\2\ Applicants also request relief for each registered open-end
management investment company that currently, or in the future, is
part of the same ``group of investment companies'' as the Direct
Funds as defined in section 12(d)(1)(G)(ii) of the Act. All
registered open-end management investment companies which currently
intend to rely on the order are named as applicants. Any registered
open-end management investment company that relies on the order in
the future will do so only in accordance with the terms and
conditions of the application.
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Applicants' Legal Analysis
Section 12(d)(1) of the Act
1. Section 12(d)(1)(D) of the Act provides that no registered
investment company may acquire securities of another investment company
if such securities represent more than 3% of the acquired company's
outstanding voting stock, more than 5% of the acquiring company's total
assets, or if such securities, together with the securities of any
other acquired investment companies, represent more than 10% of the
acquiring company's total assets. Section 12(d)(1)(B) of the Act
provides that no registered open-end investment company may sell its
securities 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.
2. Section 12(d)(1)(G) of the Act provides that section 12(d)(1)
shall not apply to the securities of an acquired company purchased by
an acquiring company if: (i) The acquiring company and the acquired
company are part of the same group of investment companies; (ii) the
acquiring company holds only securities of acquired companies that are
part of the same group of investment companies, government securities,
and short-term paper; (iii) the aggregate sales loads and distribution-
related fees of the acquiring company and the acquired company are not
excessive under rules adopted pursuant to section 22(b) or section
22(c) by a securities association registered under section 15A of the
Securities Exchange Act of 1934, or the Commission; and (iv) the
acquired company has a policy that prohibits it from acquiring
securities of registered open-end investment companies or registered
unit investment trust in reliance on section 12(d)(1)(F) or (G).
Section 12(d)(1)(G)(ii) defines the term ``group of investment
companies'' to mean any two or more registered investment companies
that hold themselves out to investors as related companies for purposes
of investment and investor services. Because the Direct Funds will
invest in shares of the Other Portfolios, they cannot rely on the
exemption from sections 12(d)(1)(A) and (B) afforded by section
12(d)(1)(G).
3. Section 12(d)(1)(F) of the Act provides that section 12(d)(1)
shall not apply to an acquiring company if the company and its
affiliates own no more than 3% of an acquired company's securities,
provided that the acquiring company does not impose a sales load of
more than 1.5% of its shares. In addition, the section provides that no
acquired company is obligated to honor any acquiring company redemption
request in excess of 1% of the acquired company's securities during any
period of less than 30 days, and the acquiring company must vote its
acquired company shares either in accordance with instructions from its
shareholders or in the same proportion as all other shareholders of the
acquired company. The Direct Funds will invest in Other Portfolios in
reliance on section 12(d)(1)(F). If the requested relief is granted,
shares of the Direct Funds will be sold with a sales load that exceeds
1.5%.
4. Section 12(d)(1)(J) provides that the Commission may exempt
persons or transactions from any provision of section 12(d)(1) if and
to the extent such exemption is consistent with the public interest and
the protection of investors.
5. Applicants request relief under section 12(d)(1)(J) of the Act
from the limitations of sections 12(d)(1) (A) and (B) to permit the
Direct Funds to invest in the Underlying Portfolios and from section
12(d)(1)(F) to permit the Direct Funds to sell shares to the public
with a sales load that exceeds 1.5%.
6. Applicants state that the Direct Funds' investments in the
Underlying Portfolios do not raise the concerns about undue influence
that sections 12(d)(1) (A) and (B) were designed to address. Applicants
further state that the proposed conditions would appropriately address
any concerns about the layering of sales charges or other fees.
7. The Direct Funds will invest in Other Portfolios only within the
limits of section 12(d)(1)(F). Applicants believe that an exemption
from the sales load limitation in that section is consistent with the
protection of investors because applicants' proposed sales load limit
would cap the aggregate sales charges of the Direct Fund and the Other
Portfolio in which it invests. Applicants have agreed, as a condition
to the relief, that any sales charges, asset-based distribution and
service fees relating to the Direct Fund's shares, when aggregated with
any sales charges, asset-based distribution and service fees paid by
the Direct Fund relating to its acquisition, holding, or disposition of
shares of the Underlying Portfolios and Other Portfolios, will not
exceed the limits set forth in Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers (``NASD Conduct Rules'').
[[Page 56276]]
Section 17(a) of the Act
8. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company from selling securities to,
or purchasing securities from, the company. Section 2(a)(3) of the Act
defines an ``affiliated person'' of another person to include: (a) Any
person that directly or indirectly owns, controls, or holds with power
to vote 5% or more of the outstanding voting securities of the other
person; (b) any person 5% or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with
power to vote by the other person; (c) any person directly or
indirectly controlling, controlled by, or under common control with the
other person; and (d) if the other person is an investment company, any
investment adviser of that company. Applicants submit that the Direct
Funds and Underlying Portfolios may be deemed to be affiliated persons
of one another by virtue of being under common control of KAM, or
because the Direct Funds own 5% or more of the shares of an Underlying
Portfolio. Applicants state that purchases and redemptions of shares of
the Underlying Portfolios by the Direct Funds could be deemed to be
principal transactions between affiliated persons under section 17(a).
9. Section 17(b) provides that the Commission shall exempt a
proposed transaction from section 17(a) if evidence establishes that
(a) the terms of the proposed transaction, including the consideration
to be paid or received, 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 purposes of the
Act.
10. Section 6(c) of the Act provides that the Commission may exempt
persons or transactions from any provision 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. Applicants request an exemption under
sections 6(c) and 17(b) to permit the Direct Funds to purchase and
redeem shares to the Underlying Portfolios.
11. Applicants state that the terms of the proposed transactions
will be reasonable and fair and will not involve overreaching because
shares of Underlying Portfolios will be sold and redeemed at their net
asset values. Applicants also state that the investment by the Direct
Funds in the Underlying Portfolios will be effected in accordance with
the investment restrictions of the Direct Funds and will be consistent
with the policies as set forth in the registration statement of the
Direct Funds.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. All Underlying Portfolios will be part of the same ``group of
investment companies,'' as defined in section 12(d)(1)(G)(ii) of the
Act, as the Direct Funds.
2. No Underlying Portfolio or Other Portfolio 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 Portfolio or Other Portfolio (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
Portfolio or Other Portfolio to (i) acquire securities of one or more
affiliated investment companies for short-term cash management
purposes; or (ii) engaged in interfund borrowing and lending
transactions.
3. Any sales charges, distribution-related fees, and service fees
relating to the shares of the Direct Funds, when aggregated with any
sales charges, distribution-related fees, and service fees paid by the
Direct Funds relating to their acquisition, holding, or disposition of
shares of the Underlying Portfolios and Other Portfolios, will not
exceed the limits set forth in rule 2830 of the NASD Conduct Rules.
4. Before approving any advisory contract under section 15 of the
Act, the boards of directors/trustees of the Direct Funds, including a
majority of the directors/trustees who are not ``interested persons,''
as defined in section (2)(a)(19), will find that the advisory fees
charged under the contract are based on services provided that are in
addition to, rather than duplicative of, services provided under any
Underlying Portfolio or Other Portfolio advisory contract. This
finding, and the basis upon which the finding was made, will be
recorded fully in the minute books of the Direct Funds.
5. Each Direct Fund will comply with section 12(d)(1)(F) in all
respects except for the sales load limitation of section
12(d)(1)(F)(ii).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28166 Filed 10-20 -98; 8:45 am]
BILLING CODE 8010-01-M
