[Federal Register Volume 59, Number 216 (Wednesday, November 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27698]
[[Page Unknown]]
[Federal Register: November 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20681; 812-8942]
The Woodward Funds; Notice of Application
November 2, 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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APPLICANT: The Woodward Funds (the ``Trust'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) for an
exemption from sections 13(a)(2), 13(a)(3), 17(a)(1), 18(f)(1), 22(f),
and 22(g) of the Act and rule 2a-7 thereunder and under section 17(d)
of the Act and rule 17d-1 thereunder permitting certain joint
transactions.
SUMMARY OF APPLICATION: Applicant requests an order to permit it to
offer new account allocation options under its deferred compensation
plan for its trustees.
FILING DATE: The application was filed on April 14, 1994 and amended on
July 25, 1994 and October 14, 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
applicant 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,
1994, 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 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.
Applicant, c/o NBD Bank, N.A., P.O. Box 7058, Troy, Michigan 48007.
FOR FURTHER INFORMATION CONTACT:
Fran Pollack-Matz, Senior Attorney, (202) 942-0570, or Robert A.
Robertson, Branch Chief, (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.
Applicant's Representations
1. The Trust is an open-end management investment company organized
as a Massachusetts business trust that currently offers eighteen
investment portfolio series. NBD Bank, N.A., a national banking
association, serves as investment adviser, transfer agent and custodian
for each of the Trust's series.
2. The Trust has seven trustees, a majority of whom are not
``interested persons'' of the Trust within the meaning of section
2(a)(19) of the Act. Each of the trustees, including the interested
trustees, currently receives an annual fee of $6,000 plus an additional
$1,000 for each board meeting attended. The amounts paid to the
trustees are expected to continue to be insignificant in comparison to
the total net assets of the Trust. Liability for payment of the
trustee's fees is allocated equally among each of the Trust's series.
3. Under the Deferred Compensation Plan (the ``Plan'') now in
effect, a trustee may defer all or a portion of the trustee's fees
until a specified later date. All deferred amounts are credited with
interest at the end of each month at the ``average rate'' earned on 90-
day United States Treasury Bills.\1\
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\1\The SEC's 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 compensations 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 Management Trust (pub. avail. Jan. 23,
1992).
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4. Under the proposed Plan, the trustees could allocate their
deferred trustee's fees among all or some of the Trust's series,
including any series created in the future, pursuant to a deferred
compensation agreement (the ``Agreement'') executed by the trustee.
Under the Agreement, the trustees may elect to defer receipt of their
fees, to defer payment of income taxes on such fees, or for other
reasons. Shares of the series selected by a trustee are hereinafter
called ``Underlying Securities.''
5. Under each Agreement, deferred trustee's fees payable by the
Trust are credited to an account on the books of the Trust at the time
the trustee's fees would otherwise have been payable. A trustee's
account will be credited or charged with book adjustments representing
interest, dividends, and other earnings, gains, and losses that would
have been realized if an amount equal to the account balance had been
invested in accordance with the trustee's instructions. The value of a
trustee's account on any day will be equal to the value it would have
had, if the deferred fees credited to it had actually been invested,
and all dividends and distributions reinvested, in the Underlying
Securities as of the date the fees, dividends and distributions were
credited.
6. The Trust's obligation to make payments of amounts accrued in
the trustee's account will be a general unsecured obligation payable
solely from the Trust's general assets and property. As a matter of
prudent risk management, the Trust intends, and with respect to each of
the money market series of the Trust that values its assets using the
amortized cost method, undertakes to set aside amounts to cover its
obligations under the proposed Plan by purchasing and maintaining the
Underlying Securities selected by the trustees. The Trust is under no
obligation to purchase, hold, or dispose of any investment, and if the
Trust chooses to purchase investments to cover its obligations under
the Plan, any and all such investments will remain part of the general
assets and property of the Trust.
7. At the option of the trustees, deferred payments of fees may be
made either in a lump sum or as annual payments over a period of 2-15
years. A trustee's election regarding the time and manner of
distributions must be made when an Agreement is executed and may not be
changed with respect to any year covered by that Agreement. If the
services of a trustee are terminated, commencement of his/her annual
payments may be triggered by the provisions of his/her Agreement, but
the Trust does not have the right under the Plan to accelerate payment
of deferred trustees fees into an immediate lump-sum distribution
payable upon the trustee's termination. The trustee's benefits are not
transferable or assignable except in the event of death.
8. The amounts paid to the trustees under the Plan are expected to
be insignificant in comparison to the total net assets of the Trust. In
addition, the proposed Plan will not obligate the Trust to retain a
trustee in such capacity, nor will it obligate the Trust to pay any, or
any particular level of, trustee's fees to any trustee.
Applicant's Legal Analysis
1. In connection with the adoption and implementation of the Plan,
applicant requests an order under section 6(c) of the Act exempting the
Trust from sections 13(a)(2), 13(a)(3), 17(a)(1), 18(f)(1), 22(f), and
22(g) of the Act and rule 2a-7 thereunder and under section 17(d) of
the Act and rule 17d-1 thereunder to permit certain joint transactions.
The order would permit the Trust to enter into deferred fee
arrangements with certain of its trustees, and to effect transactions
incident to those arrangements. Section 6(c) authorizes the SEC to
exempt any person, security, or transaction 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.
Applicant believes that its proposal meets the section 6(c)
standards.
2. Section 18(f)(1) prohibits a registered open-end investment
company from issuing senior securities, except in connection with a
bank borrowing. Section 13(a)(2) requires each registered investment
company to obtain authorization by a vote of a majority of its
outstanding voting securities before issuing any senior securities not
contemplated by the recitals of policy contained in its registration
statement.
3. Applicant contends that the Plan does not possess any of the
characteristics of senior securities that led Congress to enact
sections 18(f)(1) and 13(a)(2). The Trust will not be borrowing from
its trustees in the sense that concerned Congress. All liabilities
created by accruals under the Plan would be offset by essentially equal
amounts of assets of the Trust that would not otherwise exist if the
fees were paid on a current basis. The Plan would not induce
speculative investments by the Trust or provide opportunity for
manipulative allocation of the Trust's expenses and profits of any
series; control of each Trust will not be affected; and the Plan will
not confuse stockholders or convey a false impression of safety.
4. Section 13(a)(3) provides that no registered investment company
shall, unless authorized by the vote of a majority of its outstanding
voting securities, deviate from any investment policy that is
changeable only if authorized by shareholder vote. Three of the series
have limitations on their ability to purchase securities issued by
other investment companies. Applicant believes it is appropriate to
exempt these three series from section 13(a)(3) to allow them to invest
in affiliated investment companies without a shareholder vote. The
value of the Underlying Securities will be de minimis compared to the
total net assets of the respective series and will at all times equal
the value of such series' obligation to pay deferred fees. Changes in
the value of the Underlying Securities will not affect the value of
shareholders' investments. Thus, permitting the series to invest in
Underlying Securities without obtaining the shareholder approval
required by section 13(a)(3) would result in no harm to shareholders.
5. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company, or any affiliated person of such person,
from selling any security to such registered investment company.
Applicant submits that the sale of securities issued by the Trust's
series under the Plan does not implicate Congress' concerns in enacting
section 17, but merely facilitates the matching of the Trust's
liability (and each series' derivative liability) for the deferred
trustee's fees with the securities that determine the amount of that
liability (and such derivative ability).
6. Section 17(d) and rule 17d-1 thereunder prohibit an affiliated
person of a registered investment company, acting as principal, from
participating in, or effecting any transactions in connection with, any
joint enterprise or other joint arrangement or profit-sharing plan in
which such registered company is a participant, without prior receipt
of an order of the SEC. The effect of the Plan is to defer the payment
of fees that the Trust otherwise would be obligated to pay on a current
basis as services are performed by the trustees. Liabilities created by
the accruals under the agreement will be offset by essentially equal
amounts of assets consisting of Trust shares.
7. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by
open-end investment companies. The restrictions under the Plan are
clearly set forth in the Plan and do not adversely affect the interests
of the trustees or of any Trust shareholders.
8. Section 22(g) generally prohibits an open-end investment company
from issuing any of its securities for services or for property other
than cash or securities. The Plan provides for deferred payment of fees
and thus, the Agreement should not be viewed as being issued in return
for services, but in return for the Trust not being required to pay
such fees on a current basis.
9. Rule 2a-7 requires a registered investment company to limit its
portfolio to securities meeting certain standards of maturity, quality,
and diversification. The rule also contains a number of conditions
designed to reduce the likelihood that the net asset value of a money
market fund as determined by the amortized cost method will deviate
materially from its net asset value as determined by the mark-to-market
method. Any money market series that values its assets using the
amortized cost method will buy and hold Underlying Securities to
achieve an exact match between such series' liability to pay deferred
fees and the assets that liability. This would ensure that the deferred
fee arrangements will not affect the net asset value of the money
market series.
Applicant's Conditions
1. With respect to the requested relief from rule 2a-7, for any
money market series that values its assets using the amortized cost
method, the Trust will (a) buy and hold the securities that determine
performance of the deferred compensation plan to achieve an exact match
between such series' liability to pay deferred fees and the assets that
offset that liability and (b) allocate such securities to each money
market series.
2. If the Trust purchases Underlying Securities issued by an
affiliated series, the Trust will vote such shares in proportion to the
votes of all other holders of shares of such affiliated series.
For the SEC, by the Division of Investment Management, under
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27698 Filed 11-8-94; 8:45 am]
BILLING CODE 8010-01-M
