[Federal Register Volume 59, Number 190 (Monday, October 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24311]
[[Page Unknown]]
[Federal Register: October 3, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20575; 812-8842]
Colonial Trust I, et al.; Notice of Application
September 26, 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: Colonial Trust II, Colonial Trust II, Colonial Trust III,
Colonial Trust IV, Colonial Investment Grade Municipal Trust, Colonial
Municipal Income Trust (collectively, the ``Closed-End Trusts''), and
any subsequently registered investment companies advised by Colonial
Management Associates, Inc. (collectively, with the Open-End Trusts and
Closed-End Trusts, the ``Trusts''); and Colonial Management Associates,
Inc. (the ``Adviser'').
RELEVANT ACT SECTIONS: Order requested (a) under section 6(c) of the
Act granting an exemption from sections 13(a)(2), 18(a), 18(c),
18(f)(1), 22(f), 22(g), and 23(a), and rule 2a-7 thereunder, (b) under
sections 6(c) and 17(b) of the Act granting an exemption from section
17(a)(1), and (c) pursuant to section 18(d) of the Act and rule 17d-1
thereunder.
SUMMARY OF APPLICATION: Applicants seek an order permitting each
applicant investment company to establish deferred compensation plans
for its trustees who are not affiliated persons of the company's
investment adviser or principal underwriter.
FILING DATES: The application was filed on February 16, 1994, and
amended on April 29, 1994, August 12, 1994, and September 16, 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 October 24,
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, N.W., Washington, D.C.
20549. Applicants, One Financial Center, Boston, Massachusetts 02111.
FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or C. David Messman,
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
SEC's Public Reference Branch.
Applicants' Representations
1. Each existing Trust is organized as a Massachusetts business
trust and advised by the Adviser. The Open-End Trusts are registered
open-end management investment companies, and the Closed-End Trusts are
registered closed-end management investment companies. The Colonial
Investment Services division (the ``Distributor'') of the Adviser
serves as the principal underwriter of the Open-End Trusts. Certain of
the existing Trusts offer multiple series of shares. The term ``Fund''
refers to any series of a Trust, if the Trust offers shares in multiple
series, or to a Trust that offers shares only in one series.
2. The board of trustees\1\ of each Fund currently consists of nine
persons, eight of whom are not ``affiliated persons'' of the Adviser or
the Distributor within the meaning of section 2(a)(3) of the Act. Only
the trustees who are not affiliated persons of the Adviser or the
Distributor (the ``Eligible Trustees'') are entitled to receive annual
fees for their services. The aggregate annual fees are, and are
expected to remain, insignificant in comparison to applicants' total
net assets.\2\
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\1\The term ``trustee,'' as used herein, also refers to
directors of a Fund that is organized as a corporation.
\2\It is expected that the aggregate amount payable to all
trustees of the Trusts who receive remuneration from the Trusts for
their services in 1994 will be $791,000, which would represent
.0053% of the Trusts' aggregate net assets as of December 31, 1993.
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3. Applicants request relief to permit the Eligible Trustees to
elect to defer receipt of all or part of their trustees' fees pursuant
to a deferred fee agreement (the ``Agreement'') entered into between
each Eligible Trustee and appropriate Fund. Under the Agreement, the
Eligible Trustees could defer payment of trustees' fees to defer
payment of income taxes or for other reasons.
4. Under the Agreement, the deferred fees payable by a Fund to a
particular Eligible Trustee will be credited to a book reserve account
established by the Fund (the ``Deferred Fee Account''), as of the date
such fees would have been paid to the Eligible Trustee. Trustees' fees
payable for attending board meetings or board committee meetings will
be credited to the Deferred Fee Account on the following business day.
The value of a Deferred Fee Account shall equal the value such account
would have had if the amounts credited to such account had been
invested and reinvested in certain designated securities (``Underlying
Securities'') as of the date credited. Each Deferred Fee Account shall
be credited or charged with book adjustments reflecting all dividends,
including interest income and capital gains, and all unrealized gains
and losses that would have been earned had the account been investing
in such Underlying Securities.
5. The Underlying Securities will be shares of Funds as agreed to
between the applicable board of trustees and the participating trustee.
Although a Fund's own shares may serve as an Underlying Security,
applicants do not anticipate that a Fund will purchase its own shares.
Rather, monies equal to the amount credited to the Deferred Fee Account
will be invested along with and in the same securities and proportions
as the rest of the Fund's assets. Under existing deferral agreements,
certain trustees have deferred receipt of their compensation under an
arrangement where the trustee is entitled to receive an amount equal to
the value such deferred compensation would have had if it had been
invested in U.S. Treasury Bills on the date upon which such
compensation otherwise would have been paid to such trustee.\3\
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\3\The staff of the Division of Investment Management has stated
that it would not recommend that the Commission take any enforcement
action under the Act if registered investment companies establish
deferred compensation plans where the rate of return on the deferred
compensation is based on the return on U.S. Treasury Bills. See,
e.g., The North Carolina Cash Management Trust (pub. avail. Jan. 23,
1992).
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6. The obligations of a Fund to make payments to the Deferred Fee
Accounts will be general unsecured obligations of the Fund, and
payments made pursuant to the Agreement will be made from the Fund's
general assets and property. As a matter of risk management, each Fund
intends and, with respect to any money market Fund that values its
assets by the amortized cost method, undertakes, to purchase and
maintain the Underlying Securities in amounts equal to the deemed
investment of the Deferred Fee Accounts of its trustees. If a Fund
chooses to purchase Underlying Securities to cover its obligations
under the Agreement, any and all such Underlying Securities will
continue to be a part of the general assets and property of the Fund.
Any purchase of Underlying Securities will be made for the benefit of
shareholders generally and not for the Eligible Trustees.
7. Under the Agreement, an Eligible Trustee may elect to defer
payment of all or part of his or her trustee's fees until (a) The
trustee ceases to be a trustee of the Fund, (b) the trustee dies, (c)
the dissolution, liquidation, or winding up of the Fund, or the
disposition of all of or substantially all of the Fund's assets (unless
the Fund's obligations under the Agreement have been assumed by a
financially responsible party purchasing such assets), or (d) the
merger or consolidation of the Fund (unless, prior to such merger or
consolidation, the board of trustees determines that the Agreement
shall survive the merger or consolidation).\4\ Payments shall be made
in a lump sum or in a number of annual installments, not to exceed ten,
elected by the trustee at the time of entering into the Agreement. Each
annual payment will be made as of January 31. The trustee's right to
receive payments will be nontransferable, except that, in the event of
a trustee's death, amounts payable to him or her thereafter will be
payable to his or her designated beneficiary.
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\4\Applicants acknowledge that the requested order would not
permit a party acquiring a Fund's assets to assume a Fund's
obligations under the Agreement if such assumption of obligations
would violate the Act. Accordingly, such assumption would be
permitted only if the assuming party is (1) Another Fund, (2)
another registered investment company that has received exemptive
relief similar to that sought by the application, or (3) not a
registered investment company.
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8. The Agreement will not obligate a Fund to retain the services of
a trustee, nor will it obligate a Fund to pay any particular level of
fees to any trustee. The proposed arrangements will not affect the
voting rights of any of the Funds' shareholders. If a Fund purchases
Underlying Securities issued by another Fund, the purchasing Fund will
vote such shares in proportion to the votes of all other holders of
shares of such affiliated Fund.
Applicants' Legal Analysis
1. Applicants believe that the deferred fee arrangements are in the
best interests of each Fund and its shareholders, and that the
arrangements will enhance the ability of the Funds to attract and
retain high caliber trustees.
2. Sections 18(a) and 18(c) restrict the ability of a registered
closed-end investment company to issue senior securities. Similarly,
section 18(f)(1) generally prohibits a registered open-end investment
company from issuing senior securities. Section 13(a)(2) requires that
any registered investment company obtain shareholder authorization
before issuing any senior securities not contemplated by the recitals
of policy in its registration statement. Applicants contend that the
Agreement possesses none of the characteristics of senior securities
that led Congress to enact these sections. The Agreement would not: (a)
Induce speculative investments or provide opportunities for
manipulative allocation of the expenses and profits of a Fund; (b)
affect control of a Fund; (c) confuse investors or convey a false
impression of safety; or (d) be inconsistent with the theory of
mutuality of risk. All liabilities for deferred fees are expected to be
offset by essentially equal amounts of assets that would not otherwise
exist if the fees were paid on a current basis.
3. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by
open-end investment companies. Applicants contend that any restrictions
created under the Agreement clearly would be set forth in the
Agreement, are included primarily to benefit the Eligible Trustees, and
would not adversely affect the interests of any shareholder of any
Fund.
4. Sections 22(g) and 23(a) generally prohibit a registered open-
end and closed-end investment company, respectively, from issuing any
of their securities for services or for property other than cash or
securities. Applicants assert that, while a trustee would receive fees
for services, such fees would be payable independent of the Agreement.
The Agreement would merely provide for deferral of payment of such fees
and thus should be viewed as being issued not in return for services
but in return for a Trust not being required to pay such fees on a
current basis. Applicant further assert that these sections primarily
are concerned with the dilutive effect on the equity and voting power
than can result when securities are issued for consideration that is
not readily valued. Applicants submit that the Agreement would not have
such effect.
5. Rule 2a-7 imposes certain restrictions on the investments of
``money market funds,'' as defined under the rule, that would prohibit
a Fund that is a money market fund from investing in the shares of any
other Fund. Applicants submit that the requested exemption would permit
the Funds in question to achieve an exact matching of Underlying
Securities with the deemed investments of the Deferred Fee Accounts,
thereby ensuring that the deferred fees would not affect net asset
value. Applicants further assert that the amounts involved in all cases
would be de minimis in relation to the total net assets of each Fund,
and would have no effect on the per share net asset value of the Funds.
6. Section 6(c) provides that the SEC may exempt any person,
security, or transaction from any provision of the Act, 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.
Applicants believe that the proposed arrangements satisfy the standards
for an exemption from the provisions discussed above.
7. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company from selling any security to such
registered investment company. Each Fund may be an affiliated person of
each other Fund under section 2(a)(3) of the Act. Applicants assert
that section 17(a)(1) was designed to prevent sponsors of investment
companies from using investment company assets as capital for
enterprises with which they were associated or to acquire controlling
interests in such enterprises. Applicants submit that the sale of
securities issued by the Funds pursuant to the Agreement does not
implicate the concerns of Congress in enacting this section, but merely
would facilitate the matching of each Fund's liability for deferred
fees with the Underlying Securities that would determine the amount of
such liability. Section 17(b) authorizes the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the transaction, including the consideration to be paid or received,
are reasonable and fair and do not involve overreaching on the part of
any person concerned, the transaction is consistent with the policies
of the registered investment company, and the transaction is consistent
with the general purposes of the Act. Applicants assert that the
proposed transaction satisfies the criteria of section 17(b).
8. Section 17(d) and rule 17d-1 generally prevent a registered
investment company's joint or joint and several participation with an
affiliated person in a transaction in connection with any joint
enterprise or other joint arrangement or profit-sharing plan on a basis
different from or less advantageous than that of the affiliated person.
Applicants assert that any adjustments made to the Deferred Fee
Accounts to reflect the income, gain, or loss on investments of the
assets of a Fund would be identical in amount to income, gain, and loss
by other shareholders in the Fund. An Eligible Trustee would neither
directly or indirectly receive a benefit that otherwise would inure to
the Funds or their shareholders. Deferral of an Eligible Trustee's fees
in accordance with the Agreement essentially would maintain the
parties, viewed both separately and in their relationship to one
another, in the same position as if the fees were paid on a current
basis. When all payments have been made to an Eligible Trustee, such
Eligible Trustee will be, relative to the Funds, no better off than if
such Eligible Trustee had received deferred fees on a current basis and
invested them in shares of the Underlying Securities.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. With respect to the requested relief from rule 2a-7, any money
market Fund that values its assets by the amortized cost method or
penny-rounding method will buy and hold Underlying Securities that
determine the performance of Deferred Fee Accounts to achieve an exact
match between such Fund's liability to pay deferred fees and the assets
that offset that liability.
2. If a Fund purchases Underlying Securities issued by an
affiliated Fund, the purchasing Fund will vote such shares in
proportion to the votes of all other holders of shares of such
affiliated Fund.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24311 Filed 9-30-94; 8:45 am]
BILLING CODE 8010-01-M
