[Federal Register Volume 60, Number 229 (Wednesday, November 29, 1995)]
[Notices]
[Pages 61284-61287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29110]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21537; 812-9738]
Smith Barney Inc., et al.; Notice of Application
November 21, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act''.
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APPLICANTS: Smith Barney Inc. (``Smith Barney''); Smith Barney Mutual
Funds Management Inc. (``SBMFM''); Smith Barney Strategy Advisers Inc.
(``Strategy Advisers''); and Smith Barney Cardinal Investment Fund Inc.
(``Cardinal''), Smith Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund Inc., Smith Barney Equity Funds, Smith Barney
Fundamental Value Fund Inc., Smith Barney Funds, Inc., Smith Barney
Income Funds, Smith Barney Investment Funds, Inc., Smith Barney Managed
Governments Fund Inc., Smith Barney Money Funds, Inc., Smith Barney
World Funds, Inc., and each open-end management investment company, or
series thereof, that is or
[[Page 61285]]
will be part of a group of investment companies that holds itself out
to investors as related companies for purposes of investment and
investor services (a) for which Smith Barney or any entity controlling,
controlled by, or under common control with, Smith Barney now or in the
future acts as principal underwriter or (b) for which Smith Barney,
SBMFM, Strategy Advisers, or any entity controlling, controlled by, or
under common control with Smith Barney, SBMFM, or Strategy Advisers now
or in the future acts as investment adviser (the ``Smith Barney Funds''
or the ``Funds'').\1\
\1\Existing Smith Barney Funds that intend to rely on the
requested order have been named as applicants. Other Smith Barney
Funds do not presently intend to rely on the requested order, but
may do so in the future in accordance with the terms of the
requested order.
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RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
from section 12(d)(1) of the Act, and under sections 6(c) and 17(b) of
the Act from section 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would allow
Cardinal to acquire up to 100% of the voting shares of any other Smith
Barney Fund.
FILING DATES: The application was filed on August 28, 1995, and was
amended on November 15, 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
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 December 18,
1995, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 388 Greenwich Street, New York, New York 10013-2996.
FOR FURTHER INFORMATION CONTACT: Sarah A. Wagman, Staff Attorney, at
(202) 942-0654, 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. Cardinal will be registered under the Act as an open-end
management investment company. Cardinal initially will consist of five
funds organized as series or portfolios: (a) Aggressive Growth
Portfolio, (b) Growth Portfolio, (c) Growth and Income Portfolio, (d)
Balanced Portfolio, and (e) Income Portfolio. Cardinal will function as
a ``fund of funds,'' investing substantially all of its assets in
shares of other Smith Barney Funds (the ``Underlying Funds'').
Additional funds of funds that may be established in the future in
accordance with the terms and conditions of the requested order may be
organized as: (a) Series of Cardinal, (b) series of any other Smith
Barney Fund, or (c) any other Smith Barney Fund that does not offer its
securities in separate series (Aggressive Growth Portfolio, Growth
Portfolio, Growth and Income Portfolio, Balanced Portfolio, Income
Portfolio, and any future funds of funds are referred to herein as the
``Cardinal Funds''). The Cardinal Funds currently expect to issue
shares of each series in multiple classes, as permitted by rule 18f-3
under the Act or any applicable exemptive order.
2. Each Smith Barney Fund is organized either as a Maryland
corporation or a Massachusetts business trust. The Smith Barney Funds
are principally sold by Smith Barney financial consultants.
3. Smith Barney is a Delaware corporation and is registered as a
broker-dealer under the Securities Exchange Act of 1934, and as an
investment adviser under the Investment Advisers Act of 1940
(``Investment Advisers Act''). Smith Barney is an indirect wholly-owned
subsidiary of Travelers Group Inc. Smith Barney is the principal
underwriter of all of the Funds.
4. Strategy Advisers and SBMFM are both investment advisers
registered under the Investment Advisers Act, and are indirect wholly-
owned subsidiaries of Travelers Group Inc. Either Strategy Advisers or
SBMFM is the investment adviser to each Fund. SBMFM intends to provide
advisory services to the Cardinal Funds regarding each Cardinal Fund's
asset allocation, general economic conditions, and other advisory
services.
5. SBMFM is considering charging the Cardinal Funds an advisory
fee, presently expected to be approximately ten basis points (0.1%)
(which may be waived initially) for providing these services. Although
SBMFM would also earn advisory fees arising by virtue of its investment
advisory contracts with the Underlying Funds, these fees would not be
duplicative of any fee charged directly to the Cardinal Funds. Any
advisory fee charged at the level of the Cardinal Funds would
compensate SBMFM for services (e.g., asset allocation) that are unique
to the Cardinal Funds and would not be provided at the level of the
Underlying Funds because those Funds would have no need for such
services. If SBMFM determines to charge an advisory fee for such
allocation and other advisory services, or to increase any advisory fee
borne by a Cardinal Fund, it will do so only in conformity with the
requirements of the conditions to the requested order.
6. SBMFM is also the administrator for each Fund. As administrator,
SBMFM provides fund accounting services, calculates each Fund's daily
net asset value, maintains the Funds' required books and records, and
provides the Funds with corporate secretarial and clerical services,
corporate officers and office space.
7. Pursuant to its investment objectives and policies, each
Cardinal Fund will invest in shares of the Underlying Funds and,
possibly, short-term paper. Applicants expect that the Cardinal Funds
will not pay sales loads or a distribution and service fee charged
pursuant to a plan adopted in accordance with rule 12b-1 under the Act
in connection with the Cardinal Funds' investments in shares of the
Underlying Funds. If, in the future, a Cardinal Fund chooses to invest
in shares of an Underlying Fund that incurs sales charges, it will do
so only in accordance with the conditions to the requested order.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) 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) 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
[[Page 61286]]
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies.
2. Section 6(c) provides that the SEC may exempt persons or
transactions 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 request an order under section 6(c)
exempting them from section 12(d)(1) (A) and (B) to permit the Cardinal
Funds to invest in shares of the Underlying Funds in excess of the
percentage limitations of section 12(d)(1).
3. Applicants state that the Cardinal Funds have been created to
function as an asset allocation mechanism. Applicants believe that the
Cardinal Funds provide professional investment management for those
investors who wish to diversify their mutual fund investments, but
desire professional management to decide which mutual funds to select,
how much of their assets to commit to each Fund, and when to reallocate
their investments.
4. Section 12(d)(1) was intended to mitigate or eliminate actual or
potential abuses which might arise when one investment company acquires
shares of another investment company. These abuses include the
acquiring fund imposing undue influence over the management of the
acquired funds through the threat of large-scale redemptions, the
acquisition by the acquiring company of voting control of the acquired
company, the layering of sales charges, advisory fees, and
administrative costs, and the creation of a complex pyramidal structure
which may be confusing to investors.
5. Applicants believe that none of these potential or actual abuses
are present in their proposed fund of funds structure. Applicants
assert that the structure of the Cardinal Funds will not result in
excessive fees for Cardinal Fund shareholders. Although SBMFM is
considering charging an advisory fee to the Cardinal Funds, advisory
fees charged to the Cardinal Funds and the Underlying Funds would not
be duplicative. If SBMFM determines to charge an advisory fee for such
allocation services, or to increase any advisory fee charged to a
Cardinal Fund, such fees, in accordance with the conditions to the
requested order, would only be for services that augment, rather than
duplicate, advisory services provided to the Underlying Funds.
6. Applicants also assert that their proposed fund of funds
structure does not present any danger of excessive sales charges.
Although applicants have reserved the right to have different sales
charge structures in the future, which may include the payment of sales
charges or service fees at both the Cardinal Fund and Underlying Fund
level, applicants assert that such structures would not result in
excessive or duplicative sales charges. In the event that a Cardinal
Fund would invest in shares of an Underlying Fund that also bears sales
charges or service fees, it would do so only in accordance with the
conditions to the requested order, which require that any such sales
charges or service fees, in the aggregate, be within the limitations
set forth in section 26 of Article III of the National Association of
Securities Dealers (``NASD'') Rules of Fair Practice.\2\
\2\As multiple class funds, the Cardinal Funds will apply the
NASD restrictions on a class-by-class basis to ensure that no
investor would pay excessive sales charges.
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7. Applicants assert that the Cardinal Funds would pose no threat
of excessive control over the Underlying Funds. The shares of any
Underlying Fund held by a Cardinal Fund will be voted either in
proportion to the vote of all other holders of the securities of that
Underlying Fund, or by pass-through voting by the shareholders of the
Cardinal Funds. As well, applicants assert that redemption threats and
a concomitant risk of lost advisory fees are not a problem in the
context of a fund of funds structure in which all of the funds are
members of the same fund family. The Cardinal Funds will only acquire
shares of other Smith Barney Funds. Because Smith Barney affiliates are
the advisers to the Smith Barney Funds and SBMFM will be the adviser to
the Cardinal Funds, a redemption from one Smith Barney Fund will simply
lead to the placing of the proceeds into another Smith Barney Fund. For
these reasons, applicants submit that the requested order exempting
applicants from section 12(d)(1) to the extent described in the
application meets the standards of section 6(c).
B. Section 17(a)
1. Section 17(a) makes it unlawful for an affiliated person of a
registered investment company, or an affiliated person of such person,
to sell securities to, or purchase securities from, the company. The
Cardinal Funds and the Underlying Funds may be considered affiliated
persons because the funds may be deemed to be controlled by their
advisers, who are under the common control of Smith Barney. Thus, an
Underlying Fund's issuance of its shares to a Cardinal Fund may be
considered a sale prohibited by section 17(a).
2. Section 17(b) provides that the SEC shall exempt a proposed
transactions from section 17(a) if evidence establishes that: (a) the
terms of the proposed transactions are reasonable and fair and do not
involve overreaching; (b) the proposed transactions is consistent with
the policies of the registered investment company involved; and (c) the
proposed transaction is consistent with the general provisions of the
Act. Applicants request an exemption under sections 6(c) and 17(b) to
permit the Underlying Funds to sell their shares to the Cardinal
Funds.\3\ Applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b).
\3\Section 17(b) applies to specific proposed transactions,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c)
frequently is used to grant relief from section 17(a) to permit an
ongoing series of future transactions.
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Applicants' Conditions
Applicants agree that the order granting the required relief shall
be subject to the following conditions:
1. The Cardinal Funds and each Underlying Fund will be part of the
same ``group of investment companies'' as defined in paragraph (a)(5)
of rule 11a-3 under the Act.
2. The Cardinal Funds will not invest in an Underlying Fund unless
that Fund may not 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 permitted by section 12(d)(1)(D).
3. At least a majority of each Cardinal Fund's directors will not
be ``interested persons,'' as defined in section 2(a)(19) of the Act
(``Independent Directors''), and the selection of Independent Directors
necessary to fill any vacancies on the board of directors, as well as
the nomination of those persons to be recommended by the board of
directors in connection with any shareholder vote, will be committed to
the discretion of such Independent Directors.
4. Prior to approving any advisory contract under section 15 of the
Act, the directors of each Cardinal Fund, including a majority of the
Independent Directors, shall find that the advisory fees charged under
such contract, if any, are based on services provided that are in
addition to, rather than duplicative of, services provided under the
advisory contract of any Underlying Fund in which a Cardinal Fund may
invest. These findings and their basis will be recorded fully in the
minute books of the Cardinal Fund.
[[Page 61287]]
5. Any Sales Charges or Service Fees, as such terms are defined
under section 26(b) of Article II of the NASD Rules of Fair Practice,
as may be charged with respect to securities of a Cardinal Fund, when
aggregated with any such Sales Charges and/or Service Fees borne by the
Cardinal Fund with respect to the shares of an Underlying Fund, shall
not exceed the limits set forth in section 26(d) of Article III of the
NASD Rules of Fair Practice.
6. Applicants will provide the following information in electronic
format to the Chief Financial Analyst of the SEC's Division of
Investment Management as soon as reasonably practicable following each
fiscal year-end of each Cardinal Fund, unless the Chief Financial
Analyst notifies applicants that the information need no longer be
submitted: (a) monthly average total assets of each Cardinal Fund and
each Underlying Fund in which a Cardinal Fund invests; (b) monthly
purchases and redemptions (other than by exchange) for each Cardinal
Fund and each Underlying Fund in which a Cardinal Fund invests; (c)
monthly exchanges into and out of each Cardinal Fund and each
Underlying Fund in which a Cardinal Fund invests; (d) month-end
allocations of each Cardinal Fund's assets among the Underlying Funds
in which it invests; (e) annual expense ratios for each Cardinal Fund
and each Underlying Fund in which a Cardinal Fund invests; and (f) a
description of any vote taken by the shareholders of any Underlying
Fund in which a Cardinal Fund invests, including a statement of the
percentage of votes cast for and against the proposal by the Cardinal
Fund and by the other shareholders of that Underlying Fund.
7. Substantially all of the assets of each Cardinal Fund will be
invested in shares of Underlying Funds. Each Cardinal Fund will not
hold any investment securities other than shares of Underlying Funds
and short-term paper.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29110 Filed 11-28-95; 8:45 am]
BILLING CODE 8010-01-M
