[Federal Register Volume 60, Number 218 (Monday, November 13, 1995)]
[Notices]
[Pages 57037-57040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27886]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21471; 812-9690]
SEI Financial Management Corporation, et al.; Notice of
Application
November 3, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANTS: SEI Financial Management Corporation and SEI Financial
Services Company (collectively, ``SEI'').
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) of
the Act exempting SEI from section 17(a) of the Act, and under section
17(d) of the Act and rule 17d-1 thereunder permitting certain
transactions.
SUMMARY OF APPLICATION: SEI seeks an order amending a prior order that
facilitates the conversion of bank-sponsored collective funds into
mutual funds by permitting registered open-end management investment
companies administered or distributed by SEI, and
[[Page 57038]]
any registered open-end management investment company as may in the
future be distributed or administered by SEI or any entity controlling,
controlled by, or under common control with SEI (together with any
portfolio thereof, the ``Funds'') to accept in-kind transfers of
marketable securities from bank-sponsored collective investment funds
in exchange for shares of Funds advised by the bank. As amended, the
order also would permit the Funds to accept in-kind transfers of
marketable securities from bank-sponsored accounts consisting solely of
the assets of a single retirement plan for employees of the bank or
bank affiliates, in exchange for Fund shares.
FILING DATES: The application was filed on July 25, 1995, and amended
on November 2, 1995.
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 SEI
with a copy of the request, personally or by mail. Hearing requests
should be received by the SEC by 5:30 p.m. on November 28, 1995, and
should be accompanied by proof of service on SEI, 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 reasons for the
request, and the issues contested. Persons who wish to be notified of a
hearing may request such notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
SEI, c/o SEI Financial Services Company, 680 East Swedesford Road,
Wayne, Pennsylvania 19087, Attention: Kathryn L. Stanton, Esq.
FOR FURTHER INFORMATION CONTACT:
H.R. Hallock, Jr., Special Counsel, at (202) 942-0564 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. SEI, on behalf of the Funds, seeks an order amending a prior
order of exemption (the ``Prior Order'').\1\ The Prior Order was issued
under sections 6(c) and 17(b) of the Act, and under section 17(d) of
the Act and rule 17d-1 thereunder, granting an exemption from the
provisions of section 17(a) of the Act and allowing the Funds to
participate in the conversion of assets from bank-sponsored collective
investment funds (``CIFs'') into shares of the Funds.
\1\ Investment Company Act Release Nos. 21128 (June 9, 1995)
(notice) and 21194 (July 7, 1995) (order).
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2. Some or all of the assets in a converting CIF may belong to
employee retirement plans established for employees of the bank that
sponsors the converting CIF (the ``Bank'') or employees of entities
that are affiliated persons of the Bank (the ``Affiliated Plans'').
From time to time, however, a Bank also may maintain assets of an
Affiliated Plan in an account consisting solely of the assets of that
Plan (an ``Affiliated Plan Account''), rather than in a CIF. Because
the Prior Order does not contemplate expressly Affiliated Plan Account
conversions, SEI seeks to amend the Prior Order to allow the conversion
of Affiliated Plan Account assets, as well as CIF assets, into shares
of a Fund. Any order granted on the current application will supersede
the Prior Order.
3. SEI provides or procures administrative and other services
necessary for the operation of the Funds and their portfolios. The
precise services provided by SEI to a Fund may vary depending on the
contract with the particular Fund. SEI will, however, always provide
certain core services specified in the application (including the
provision of individuals reasonably acceptable to the Fund's board of
directors for nomination, appointment, or election as officer of the
Fund) that will enable SEI to help assure and monitor compliance with
the terms of any order that may be granted on the application. By
virtue of its role as administrator, SEI plays an integral and active
role in the conversion of CIFs, and will play such a role in the
conversion of Affiliated Plan Accounts, into Funds.
4. The Funds are or will be registered as open-end management
investment companies under the Act. Such Funds' shares are or will be
offered and sold pursuant to an effective registration statement under
the Securities Act of 1933 (the ``Securities Act''). The overall
management of each Fund, including the negotiation of investment
advisory and other service contracts, rests with the members of the
Board of Directors or Trustees (the ``Board of Directors'') of the
Fund, at least 40% of whom are not ``interested persons'' (as defined
by the Act) of the Fund.
5. The CIFs and Affiliated Plan Accounts are sponsored by Banks as
investment vehicles for employee retirement plans. The CIFs and
Affiliated Plan Accounts are excluded from the definition of investment
company under section 3(c)(11) of the Act, which excepts certain
individual and collective investment vehicles that consist solely of
the assets of employee retirement plans qualified under Section 401 of
the Internal Revenue Code or similar governmental plans described in
section 3(a)(2)(C) of the Securities Act (each, a ``Plan''). In
addition to sponsoring a CIF and/or maintaining an Affiliated Plan
Account, a Bank or an affiliate of the Bank also may serve as the
investment adviser to a Fund, within the meaning of section 2(a)(20) of
the Act. In some instances, the Bank may provide additional services
such as custody and transfer agency to a Fund and be compensated by the
Fund for those services.
6. Banks frequently determine that Plan holders would be better
served if sponsored CIFs and/or Affiliated Plan Accounts were converted
into Funds with substantially similar investment objectives so that the
Plan holders may be afforded the enhanced disclosure and other
protections of the Securities Act and the Act. Banks that seek
conversion of CIF and/or Affiliated Plan Accounts assets will cause the
CIFs and Affiliated Plan Accounts to transfer their assets to
corresponding portfolios of Funds with substantially similar investment
objectives in exchange for Fund shares (the ``Proposed Transfers'').
7. Each Affiliated Plan participating in a Proposed Transfer will
have an employee benefit review committee or equivalent body that
serves as a fiduciary for the Plan (the ``Committee''). Each
unaffiliated Plan participating in a Proposed Transfer will have an
independent or ``second'' fiduciary, in addition to and independent of
the Bank or its affiliates, that supervises the investment of that
Plan's assets. This second fiduciary generally will be the unaffiliated
Plan's named fiduciary, trustee, or sponsoring employer and will be
subject to fiduciary responsibilities under the Employee Retirement
Income Security Act of 1974 (``ERISA''). Under section 404(a) of ERISA,
such fiduciaries must ensure that the investment of the Plans' assets
is prudent and operates exclusively for the benefit of participating
employees of the particular corporation and its subsidiaries and of the
participating employees' beneficiaries.
8. Before transferring a CIF's or Affiliated Plan Account's assets
to a Fund, a Bank will be required to obtain the approval of the
Committee, the
[[Page 57039]]
Plan's second fiduciary, or both, as the case may be. The Bank will
provide the Committee and the second fiduciaries with a current
prospectus for the relevant portfolio(s) of the Fund and a written
statement giving full disclosure of the fee structure and the terms of
the Proposed Transfer. Such disclosure will explain why the Bank
believes that the investment of Plan assets in the Fund is appropriate.
9. On the basis of such information, the Committee, the second
fiduciary, or both, as the case may be, will decide whether to
authorize the Bank to invest the relevant Plan's assets in the Fund and
to receive fees from the Fund (subject to the Bank's agreement to
waive, credit, or rebate relevant fees). A Bank will not collect fees
at both the Plan level and the Fund level for managing the same assets.
Depending on the Plan, the Bank either will charge a fee only to the
Fund or will rebate or credit its management fees at the Plan level.
10. Subject to obtaining the fiduciary approvals discussed above
and the requested exemptive order, SEI will assist a Bank, in SEI's
capacity as administrator, to effect the acquisition of Fund shares by
a Plan currently invested in a CIF or Affiliated Plan Account. On the
date of each transfer, the converting CIF or Affiliated Plan Account
will deliver to the corresponding Fund securities equal in value to the
interest of each participating Plan, in exchange for Fund shares, using
market values as of the time that the Fund calculates its net asset
value at the close of business on that day. The Fund share received by
a CIF then will be distributed, pro rata, to all Plans whose interests
were converted as of that date. No such additional distribution will be
required in the case of an Affiliated Plan Account, as it will hold
Fund shares already. All securities transferred to a Fund will be
securities for which market quotations are readily available, as that
term is used in rule 17a-7(a) under the Act, and will be consistent
with the investment objectives and fundamental policies of the
corresponding Fund.
Applicants' Legal Analysis
1. Section 17(a) of the Act, in pertinent part, prohibits an
affiliated person of a registered investment company, or an affiliated
person of such person, acting as principal, from selling to or
purchasing from such investment company any security or other property.
Section 2(a)(3) of the Act, in pertinent part, defines an ``affiliated
person'' to include: (a) any person directly or indirectly owning,
controlling, or holding with the power to vote, 5% or more of the
outstanding voting securities of such other person; (b) any person
directly or indirectly controlling, controlled by or under common
control with such other person; and (c) if such other person is an
investment company, any investment adviser thereof.
2. Section 17(d) of the Act prohibits any affiliated person of a
registered investment company, or an affiliated person of such person,
acting as principal, from effecting any transaction in which such
investment company is a joint, or joint and several, participant with
such person in contravention of such rules and regulations as the SEC
may prescribe. Rule 17d-1 under the Act provides that no joint
transaction covered by the rule may be consummated unless the SEC
issues an order upon application.
3. Because a Bank that sponsors a CIF and/or Affiliated Plan
Account Plan Account may have legal title to the assets of the CIF or
Affiliated Plan Account and therefore may be viewed as acting as a
principal in the Proposed Transfers, and because a CIF or Affiliated
Plan Account and a Fund may be viewed as being under the common control
of that Bank within the meaning of section 2(a)(3)(C), the Proposed
Transfers may be prohibited by section 17(a). For the same reasons, the
Proposed Transfers might be deemed to be a prohibited enterprise or
other joint arrangement within the meaning of rule 17d-1.
4. Rather than requiring an exemption for all CIF conversions, the
SEC's Division of Investment Management has issued a series of no-
action letters permitting conversions if the changes comply with
subparagraphs (b)-(f) of rule 17a-7 under the Act.\2\ See e.g.,
Federated Investors (pub. avail. Apr. 21, 1994). The letters require,
however, that no first or second-tier affiliated person of the
registered open-end fund have a beneficial interest in the exchange
(except for the bank acting in its fiduciary capacity). Because some or
all of the assets in a converting CIF may belong to Affiliated Plans,
and the converting Affiliated Plan Accounts will consist entirely of
such assets, SEI is unable to rely on the no-action letters.
\2\ Rule 17a-7 conditionally exempts from the prohibitions of
section 17(a) certain purchases and sales of securities between
registered investment companies and certain affiliated persons,
where the affiliation arises solely by reason of having a common
investment adviser, directors and/or officers. Since the Banks may
be deemed to have a direct or indirect beneficial interest in the
performance of the CIFs and/or Affiliated Plan Accounts and the
Funds, the limited affiliation required to make rule 17a-7 available
does not exist.
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5. Section 17(b) of the Act provides that any person may file an
application for an order exempting a proposed transaction from section
17(a) if evidence establishes that the terms of the proposed
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, and that the proposed transaction is consistent with
the policy of each registered investment company concerned and the
general policies and purposes of the Act.
6. Under section 6(c) of the Act, the SEC may exempt any person or
transaction from any provision of the Act, or any rule thereunder, 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.
7. In passing upon applications under rule 17d-1, the SEC considers
whether participation by a registered investment company is consistent
with the provisions, policies, and purposes of the Act, and is not on a
basis less advantageous than that of other participants.
8. SEI requests an order under sections 6(c) and 17(b) granting an
exemption from section 17(a), and pursuant to section 17(d) and rule
17f-1, to amend the Prior Order to allow the Proposed Transfers of
Affiliated Plan Account as well as CIF assets. SEI submits that the
terms of the Proposed Transfers, as set forth above, satisfy the
standards for an exemption set forth in sections 6(c) and 17(b) and
rule 17d-1.
9. The terms of the Proposed Transfers will be reasonable and fair
to the Plans and to the shareholders of the Funds. The fact that the
Proposed Transfers are designed as in-kind transfers does not affect
their fairness. If the Proposed Transfers instead were effected in
cash, the Plans would have to sell their securities, thereby incurring
brokerage commissions or the adverse effects of mark-downs. Similarly,
following the Plans' investment in the Fund, the Fund would purchase
similar securities in the market, causing a second round of brokerage
commissions and the adverse effects of mark-ups. In addition, since
some time could elapse between the two transactions, the Fund would not
necessarily be able to purchase the same quantity of securities at the
same price. In contrast, the Proposed Transfers would not expose the
Plans' assets to transaction costs or timing risk. Moreover, the
Proposed
[[Page 57040]]
Transfers will result in no gain or loss being recognized by the
individual participants of the Plans.
10. The terms of the Proposed Transfers also will not involve
overreaching. Although each Bank may have an indirect beneficial
interest in the performance of the Funds, the Proposed Transfers will
be subject to ERISA, must be approved by a Committee or second
fiduciary and, as required by Condition 1 below, will be conducted in
accordance with the valuation standards set forth in rule 17a-7. In
addition, as required by Condition 2 below, the conversions will be
made subject to the requirement of rule 17a-8 under the Act that the
Fund Directors and Plan fiduciaries find that the Proposed Transfers
are in the best interests of the Fund and the Plans.\3\ SEI's
administrative role and its significant compliance responsibilities
places it in an ideal position to monitor each conversion and implement
procedures designed to ensure that the terms and conditions of any
application are strictly adhered to. Thus, the Proposed Transfers may
be expected to occur in a manner that is in the best interests of both
the Plans and the Funds.
\3\ Rule 17a-8 conditionally exempts from the prohibitions of
section 17(a) the merger or consolidation of affiliated registered
investment companies where the affiliation arises solely by reason
of having a common investment adviser, common directors and/or
common officers. Because the CIFs and Affiliated Plan Accounts are
not registered investment companies, and the affiliation of the CIFs
and/or Affiliated Plan Accounts and the Funds would not exist
``solely by reason of'' the commonality of their management, SEI
cannot rely on rule 17a-8 for the Proposed Transfers.
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11. The investment objectives and policies of the Funds and the
CIFs and/or Affiliated Plan Accounts will be substantially similar.
Therefore, it will be consistent with the policies of the Funds to
acquire securities that the Bank has previously purchased for the CIFs
and/or Affiliated Plan Accounts on the basis of substantially similar
objectives and policies.
12. The request exemptive relief also would be consistent with the
purposes intended by the policy and provisions of the Act, since the
Proposed Transfers do not give rise to the abuses that sections 17 (a)
and (d) and rule 17d-1 were designed to prevent. A primary purpose
underlying sections 17 (a) and (d) and rule 17d-1 is to prevent a
person with a pecuniary interest in a transaction from using his or her
position with a registered investment company to benefit himself or
herself to the detriment of the company's shareholders. After the
Proposed Transfers, each Plan will be a shareholder in a Fund with
substantially similar investment objectives. In this sense, the
Proposed Transfers can be viewed as a change in the form in which
assets are held, rather than as a disposition giving rise to section 17
concerns. In addition, the participation in the Proposed Transfers by
each Fund will not be on a basis less advantageous than that of other
participants for purposes of rule 17d-1.
13. The effectuation of the Proposed Transfers in the manner
described also is fully consistent with the policies underlying the
adoption of rules 17a-7 and 17a-8 under the Act. Even though Fund
shares would be exchanged for securities, rather than ``solely'' for
cash as required by subparagraph (a) of rule 17a-7, the terms of rule
17a-7 otherwise will be fully met, as required by Condition 1 below. In
addition, as set forth in Conditions 2 and 3, below, the Plan
fiduciaries and Directors of the Fund will be required to make the
fairness and dilution findings required by rule 17a-8.
Applicants' Conditions
SEI agrees that any order of the SEC granting the requested relief
shall be subject to the following conditions:
1. The Proposed Transfers will comply with the terms of rule 17a-
7(b)-(f).
2. The Proposed Transfers will not occur unless and until: (a) the
Board of Directors of the Fund (including a majority of its directors
who are not interested persons of the Fund) and the Committee or the
Plans' second fiduciaries, as the case may be, find that the Proposed
Transfers are in the best interests of the Fund and the Plans,
respectively; and (b) the Board of Directors of the Fund (including a
majority of its directors who are not interested persons of the Fund)
finds that the interests of the existing shareholders of the Fund will
not be diluted as a result of the Proposed Transfers. These
determinations and the basis upon which they are made will be recorded
fully in the records of the Fund and the Plans, respectively.
3. In order to comply with the policies underlying rule 17a-8, any
conversion will be approved by a Fund's Board of Directors, and any
non-affiliated Plan's second fiduciaries who would be required to find
that the interests of beneficial owners would not be diluted.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27886 Filed 11-9-95; 8:45 am]
BILLING CODE 8010-01-M
