[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30622]
[[Page Unknown]]
[Federal Register: December 14, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20758; 812-9214]
Alex. Brown Cash Reserve Fund, Inc., et al.; Notice of
Application
December 7, 1994.
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: Alex. Brown Cash Reserve Fund, Inc.; Flag Investors
Telephone Income Fund, Inc.; Flag Investors International Fund, Inc.;
Total Return U.S. Treasury Fund, Inc.; Flag Investors Emerging Growth
Fund, Inc.; Flag Investors Quality Growth Fund, Inc.; Managed Municipal
Fund, Inc.; Flag Investors Intermediate-Term Income Fund, Inc.; Flag
Investors Value Builder Fund, Inc.; Flag Investors Maryland
Intermediate Tax Free Income Fund, Inc.; Flag Investors Real Estate
Securities Fund, Inc. (collectively, the ``Funds''); Alex. Brown & Sons
Incorporated (``Alex. Brown''); and Armata Financial Corp.
(``Armata''); on behalf of themselves and all investment companies (and
portfolios thereof) that (a) are advised or distributed in the future
by Alex. Brown or Armata, or entities controlling, controlled by, or
under common control (as defined in section 2(a)(9) of the Act) with
Alex. Brown or Armata, or (b) become a part of the same ``group of
investment companies'' as that term is defined in rule 11a-3 under the
Act.
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from the
provisions of section 2(a)(32), (2(a)(35), 18(f), 18(g), 18(i), 22(c),
and 22(d), and rule 22c-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek a conditional order to amend
prior orders under section 6(c) of the Act. The prior orders permit
applicants to issue multiple classes of shares representing interests
in the same investment portfolio, assess a contingent deferred sales
load (``CDSL'') on certain redemptions of shares, and waive or reduce
the CDSL in certain instances. As amended, the order would permit
applicants to assess a CDSL on certain additional redemptions of
shares, waive or reduce the CDSL in certain instances, and offer a
class of shares that converts into another class of shares.
FILING DATE: The application was filed on September 8, 1994, and
amended on December 2, 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 December 29,
1994, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of services.
Hearing requests would 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, N.W., Washington, D.C.
20549. Applicants, 135 East Baltimore Street, Baltimore, Maryland
21202.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Attorney,
at (202) 942-0583, or Barry D. Miller, Senior Special Counsel, 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 and Legal Analysis
1. The Funds are open-end management investment companies,
organized as Maryland corporations. Investment Company Capital Corp.
(``ICC'') and International Strategy and Investment Inc. (``ISI''),
pursuant to separate advisory agreements, serve as investment advisers
to the Funds, and supervise and manage the operations of the Funds. ICC
is a wholly-owned subsidiary of Alex. Brown and an affiliate of Armata.
2. Alex. Brown Armata are each registered broker-dealers. Alex.
Brown services as a distributor for all classes and series of the
Funds, except for the ISI Total Return U.S. Treasury Fund Shares class
of Total Return U.S. Treasury Fund, Inc. and the ISI Managed Municipal
Fund Shares class of Managed Municipal Fund, Inc. (the ``ISI
Classes''), for which classes Armata serves as distributor.
3. Applicants have two prior orders (the ``Multi-Class Orders''),
which permit them to issue multiple classes of shares in the same
portfolio (the ``Multiple Distribution System'').1 Under the
Multi-Class Orders, the Funds may offer classes of shares which differ
in that certain classes would be offered in connection with (a) a 12b-1
plan adopted by the Fund involved pursuant to rule 12b-1 under the Act;
(b) a shareholder services plan adopted by the Fund involved pursuant
to all requirements of rule 12b-1 except those relating to shareholder
voting rights and automatic termination of the plan upon its
assignment; or (c) no plan.
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\1\Investment Company Act Release Nos. 14656 (Aug. 2, 1985)
(notice) and 14695 (Aug. 27, 1985); as amended by Investment Company
Act Release Nos. 15570 (Feb. 6, 1987) (notice) and 15592 (Feb. 27,
1987).
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4. Each Fund has a class of shares designated as its Flag Investors
class of shares (the ``Flag Investors Classes''), which are offered
with a front-end sales charge and bear a rule 12b-1 fee of .25%.2
No front-end sales charge is imposed on sales of $1 million or more.
Four of the Funds have issued additional classes of shares, the Flag
Investors Class D Shares (``Class D Shares''), which are offered with a
lower front-end sales charge on all sales of less than $1 million and
have a rule 12b-1 fee of .60%.3 Class D shares impose no sales
charge or CDSL on purchases of $1 million or more. In addition to the
Flag Investors Classes, Class D, and ISI classes described above, the
Alex. Brown Cash Reserve Fund, Inc. offers Alex. Brown Cash Reserve
Shares, Institutional Shares (which are offered only to institutional
entities), and Quality Cash Reserve Prime Shares (which are offered
only as a sweep vehicle for customers of broker-dealers who use Alex.
Brown for clearance of securities transactions). Alex, Brown Cash
Reserve Shares bear a rule 12b-1 fee of .25%, and Quality Cash Reserve
Prime Shares bear a rule 12b-1 fee of .60%; Institutional Shares bear
no rule 12b-1 fee.4
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\2\The ISI Classes differ from the Flag Investors Classes in
that they are distributed by Armata and impose a lower initial sales
load.
\3\In the prior applications, this class was called Class B, but
will be redesignated as Class D.
\4\The Institutional Shares and the Quality Cash Reserve Prime
Shares together are referred to herein as the ``Institutional
Classes.''
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5. The Funds also have two prior orders that permit them to assess
a CDSL on certain redemptions of shares.5 Pursuant to the 1991
Order, the Funds impose a CDSL on purchases of $1 million or more of
Flag Investors Classes in the event of redemption of such shares within
24 months of purchase. Pursuant to the 1993 Order, three of the Funds
are permitted to assess a CDSL of 1% on the redemption of Class D
shares for a period of four years. Both the 1991 Order and the 1993
Order permit the Funds to waive the CDSL in certain instances, as set
forth in the prospectus of each Fund at the time of purchase.
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\5\Investment Company Act Release No. 18228 (July 8, 1991)
(notice) and 18261 (Aug. 7, 1991) (the ``1991 Order''); as amended
by Investment Company Act Release No. 19707 (Sept. 13, 1993)
(notice) and 19776 (Oct. 12, 1993) (order) (the ``1993 Order'').
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6. Applicants proposed to create an additional class of shares
(``Class B shares''), which at first would be offered by only three of
the Funds: Flag Investors Value Builder Fund, Inc., Flag Investors
Telephone Income Fund, Inc., and Flag Investors Real Estate Securities
Fund, Inc.6 Class B shares would be offered at net asset value
without the imposition of a sales load at the time of purchase,
although they would be subject to an asset-based sales charge (not to
exceed .75%) pursuant to rule 12b-1, based upon the average daily net
asset value of the Class B shares. Class B shareholders also would pay
a service fee, as defined in Article III, Section 26, of the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
(``NASD''), that will not exceed .25% of the average daily net asset
value of the Class B shares.7 In addition, an investor's proceeds
from a redemption of Class B shares made within a specified period of
the purchase of such shares may be subject to a CDSL. The amount of any
applicable CDSL will be calculated by multiplying the applicable
percentage charge (currently expected to be 4% for redemptions made
during the first year after initial purchase, although such percentages
may vary) by the lesser of the relative net asset value of the shares
redeemed or the total cost of such shares. The amount of the CDSL to be
imposed would depend on the number of years since the purchase of the
shares being redeemed.
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\6\Although the Funds initially propose to offer only Class B
shares, they may issue other classes of shares with different CDSL
arrangements in the future.
\7\All payments made in connection with the rule 12b-1 and non-
rule 12b-1 plans will comply with the applicable provisions of
Article III, Section 26 of the Rules of Fair Practice.
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7. No CDSL would be imposed on redemptions of: (a) Class B shares
representing amounts attributable to increases in the value of an
account above the net cost of the shares due to increases in the net
asset value per share; (b) Class B shares acquired through reinvestment
of income dividends or capital gain distributions; or (c) Class B
shares held beyond the time when the CDSL is no longer charged (``CDSL
Period''). In determining whether a CDSL were payable, it would be
assumed that shares, or amounts representing shares, that were not
subject to a CDSL were redeemed first, and that other shares or amounts
were then redeemed in the order purchased.
8. Under the proposed arrangement, the CDSL may be waived in
certain instances, as described in each Fund's prospectus at the time
of purchase. All CDSL waivers will comply with the conditions set forth
in paragraphs (a) through (d) of rule 22d-1 of the Act.
9. All exchanges of shares of any class would be effected in
compliance with Rule 11a-3 under the Act.
10. Under the proposed CDSL arrangement, Class B shares
automatically would convert after the end of the CDSL Period to Flag
Investors Class shares, as set forth in the prospectus of the Fund at
the time of purchase. All such conversions would be effected in
accordance with condition 15 below. Class B shares purchased through
the reinvestment of dividends and other distributions paid in respect
of Class B shares would be issued as Class B shares, but would be
considered to be held in a separate sub-account. Each time any Class B
shares in the shareholder's Fund account convert to Flag Investors
Class shares, a pro rata portion of the Class B shares then in the sub-
account also would convert to Flag Investors Class shares. The portion
would be determined by the ratio that the shareholder's shares
converting to Flag Investors Class shares bears to the shareholder's
total Class B shares not acquired through dividends and distributions.
11. The conversion of one class of shares to another class of
shares is subject to the availability of a ruling of the Internal
Revenue Service or an opinion of counsel that payment of different
dividends on different classes of shares does not result in the
dividends or distributions of the Fund constituting ``preferential
dividends'' under the Internal Revenue Code of 1986, as amended, and
the continuing availability of an opinion of counsel to the effect that
the conversion of shares does not constitute a taxable event under
Federal income tax law. The conversion of one class of shares to
another class of shares would be suspended if such an opinion or ruling
were no longer available.
12. For the foregoing reasons, applicants request an exemption from
sections 2(a)(32), 2(a)(35), 22(c), and 22(d) of the Act, and rule 22c-
1 thereunder to the extent necessary to permit them to implement the
proposed CDSL arrangement described above and corresponding waiver
categories. Applicants also request an exemption from the provisions of
sections 18(f), 18(g), and 18(i) to the extent necessary to amend the
Multi-Class Orders and permit the Funds to implement a conversion
feature.
Applicants' Conditions
If the requested order is granted, applicants expressly agree that
they will comply with the following conditions:\8\
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\8\Applicants have agreed that, in the event the order requested
herein is granted, the conditions upon which the order is granted
will supersede the conditions under which the Funds are currently
operating, as set forth in the Multi-Class Orders.
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1. Each class of shares of a Fund will represent interests in the
same portfolio of investments of that Fund, and will be identical in
all respects, except as set forth below. The only differences among the
classes of shares of the fund will relate solely to: (a) The amount of
fees permitted by different rule 12b-1 plans; (b) the shareholder
servicing expenses permitted by non-rule 12b-1 shareholder services
plans; (c) voting rights with respect to a class's rule 12b-1 plan; (d)
different designations; (e) Class Expenses, which shall be limited to
any or all of the following: (i) transfer agent fees identified as
being attributable to a specific class of shares; (ii) stationery,
printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and
proxy statements to current shareholders of a specific class; (iii)
Blue Sky registration fees incurred by a class of shares; (iv) SEC
registration fees incurred by a class of shares; (v) expenses of
administrative personnel and services as required to support the
shareholders of a specific class; (vi) directors' fees or expenses
incurred as a result of issues relating to one class of shares; (vii)
account expenses relating solely to one class of shares; (viii)
auditors' fees, litigation expenses, and legal fees and expenses
relating to a class of shares, and (ix) expenses incurred in connection
with shareholder meetings as a result of issues relating to one class
of shares; and (f) different exchange privileges among Funds or
conversion features. Any other incremental expenses not specifically
identified above that are subsequently identified and determined to be
properly allocated to one class of shares shall not be so allocated
unless and until approved by the SEC pursuant to an amended order.
2. The board of directors of each Fund, including a majority of the
independent directors, will approve the Multiple Distribution System.
The minutes of the meetings of the directors regarding the
deliberations with respect to the approvals necessary to implement the
Multiple Distribution System will reflect in detail the reasons for the
directors' determination that the proposed Multiple Distribution System
is in the best interests of both the Fund and its shareholders.
3. On an ongoing basis, the boards of directors of the Funds,
pursuant to their fiduciary responsibilities under the Act and
otherwise, will monitor each Fund for the existence of any material
conflicts among the interests of the various classes of shares. The
directors, including a majority of the independent directors, shall
take such action as is reasonably necessary to eliminate any such
conflicts that may develop. The adviser and the distributor of the
Funds will be responsible for reporting any potential or existing
conflicts to the directors. If a conflict arises, the adviser and the
distributor, at their own costs, will take steps to remedy such
conflict, up to and including establishing a new registered management
investment company.
4. The initial determination of the Class Expenses that will be
allocated to a particular class of a Fund and any subsequent changes
thereto will be reviewed and approved by a vote of the board of
directors of the Funds, including a majority of the directors who are
not interested persons of the Funds. Any person authorized to direct
the allocation and disposition of monies paid or payable by the Funds
to meet Class Expenses shall provide to the board of directors, and the
directors shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were
made.
5. Any shareholder services plan will be adopted and operated in
accordance with the procedures set forth in rule 12b-1, except that
shareholders need not enjoy the voting rights specified in rule 12b-1.
6. The directors of the Funds will receive quarterly and annual
statements concerning distribution and shareholder servicing
expenditures complying with paragraph (b)(3)(ii) of rule 12b-1, as it
may be amended from time to time. In the statements, only expenditures
properly attributable to the sale or servicing of a particular class of
shares will be used to justify any distribution or servicing fee
charged to that class. Expenditures not related to the sale or
servicing of a particular class will not be presented to the directors
to justify any fee attributable to that class. The statements,
including the allocations upon which they are based, will be subject to
the review and approval of the independent directors in the exercise of
their fiduciary duties.
7. Dividends paid by a Fund with respect to each class of its
shares, to the extent any dividends are paid, will be calculated in the
same manner, at the same time, on the same day, and will be in the same
amount, except that (i) distribution and shareholder servicing payments
associated with any plans relating to each respective class of shares
(including any costs relating to implementing such plans or any
amendment thereto) will be borne exclusively by that class; and (ii)
Class Expenses relating to a particular class will be borne exclusively
by that class.
8. The methodology and procedures for calculating the net asset
value and dividends and distributions of the various classes and the
proper allocation of expenses among the various classes have been
reviewed by an expert (the ``Expert''), who has rendered a report to
the applicants, a copy of which is attached as Exhibit D to the
application, stating that such methodology and procedures are adequate
to ensure that such calculations and allocations will be made in an
appropriate manner. On an ongoing basis, the Expert, or an appropriate
substitute Expert, will monitor the manner in which the calculations
and allocations are being made and, based upon such review, will render
at least annually a report to the Funds that the calculations and
allocations are being made properly. The reports of the Expert shall be
filed as part of the periodic reports filed with the SEC pursuant to
sections 30(a) and 30(b)(1) of the Act. The workpapers of the Expert
with respect to such reports, following a request by the Funds (which
the Funds agree to provide) will be available for inspection by the SEC
staff upon the written request to the Funds for such workpapers by a
senior member of the Division of Investment Management, or of a
regional office of the SEC, limited to the Director, and Associate
Director, the Chief Accountant, the Chief Financial Analyst, an
Assistant Director, and any regional Administrators, or Associate and
Assistant Administrators. The initial report of the Expert is a
``report on policies and procedures placed in operation'' and the
ongoing reports will be ``reports on policies and procedures placed in
operation and tests of operating effectiveness,'' as defined and
described in SAS No. 70 of the American Institute of Certified Public
Accountants (the ``AICPA''), as it may be amended from time to time, or
in similar auditing standards as may be adopted by the AICPA from time
to time.
9. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends and distributions of the various classes
of shares and the proper allocation of expenses among the various
classes of shares, and this representation will be concurred with by
the Expert in the initial report referred to in condition (8) above,
and will be concurred with by the Expert, or an appropriate substitute
Expert, on an ongoing basis at least annually in the ongoing reports
referred to in condition (8) above. Applicants will take immediate
corrective measures if the Expert, or appropriate substitute Expert,
does not concur in the ongoing reports.
10. The prospectuses of the Funds will contain a statement to the
effect that a salesperson and any other person entitled to receive any
compensation for selling or servicing Fund shares may receive different
compensation with respect to one particular class of shares over
another in the Fund.
11. The distributors will adopt compliance standards as to when
each class of shares may appropriately be sold to particular investors.
The distributors will require all persons selling shares of the Funds
to agree to conform to such standards.
12. The conditions pursuant to which the exemptive relief is
granted and the duties and responsibilities of the directors of the
Funds with respect to the Multiple Distribution System will be set
forth in guidelines that will be furnished to the directors as part of
the materials setting forth the duties and responsibilities of the
directors.
13. Each Fund will disclose the respective expenses, performance
data, distribution arrangements, services, fees, sales loads,
contingent deferred sales loads, and exchange privileges applicable to
each class of shares, other than the Institutional Classes, in every
prospectus, regardless of whether all classes of shares are offered
through each prospectus. The Institutional Classes will be offered
solely pursuant to separate prospectuses. The prospectuses for the
Institutional Classes will disclose the existence of the Fund's other
classes, and the prospectus for the Fund's other classes will disclose
the existence of the Institutional Classes and will identify the
persons eligible to purchase shares of such classes. Each Fund will
disclose the respective expenses and performance data applicable to all
classes of shares in every shareholder report. The shareholder reports
will contain, in the statement of assets and liabilities and statement
of operations, information related to the Fund as a whole generally and
not on a per class basis. Each Fund's per share data, however, will be
prepared on a per class basis with respect to the classes of shares of
such Fund. To the extent any advertisement or sales literature
describes the expenses or performance data applicable to any class of
shares, it will also disclose the respective expenses and/or
performance data applicable to all classes of shares except the
Institutional Classes. Advertising materials reflecting the expenses or
performance data for the Institutional Classes will be available only
to those persons eligible to purchase shares of the Institutional
Classes. The information provided by applicants for publication in any
newspaper or similar listing of the Fund's net asset value and public
offering price will present each class of shares, except the
Institutional Classes, separately.
14. Applicants acknowledge that the grant of the exemptive order
requested by the application will not imply SEC approval,
authorization, or acquiescence in any particular level of payments that
each Fund may make pursuant to its rule 12b-1 plan or shareholder
servicing plan in reliance on the exemptive order.
15. Any class of shares with a conversion feature (``Purchase
Class'') will convert into another class of shares (``Target Class'')
on the basis of the relative net asset values of the two classes,
without the imposition of any sales load, fee, or other charge. After
conversion, the converted shares will be subject to an asset-based
sales charge and/or service fee (as those terms are defined in Article
III, Section 26 or the NASD's Rules of Fair Practice), if any, that in
the aggregate are lower than the asset-based sales charge and service
fee to which they were subject prior to the conversion.
16. If a Fund implements any amendment to its rule 12b-1 plan (or,
if presented to shareholders, adopts or implements any amendment of a
non-rule 12b-1 shareholder services plan) that would increase
materially the amount that may be borne by the Target Class shares
under the plan, existing Purchase Class shares will stop converting
into the Target Class unless the Purchase Class shareholders, voting
separately as a class, approve the proposal. The directors shall take
such action as is necessary to ensure that existing Purchase Class
shares are exchanged or converted into a new class of shares (``New
Target Class''), indentical in all material respects to the Target
Class as it existed prior to implementation of the proposal, no later
than the date such shares previously were scheduled to convert into the
Tartget Class. If deemed advisable by the directors to implement the
foregoing, such action may include the exchange of all existing
Purchase Class shares for a new class (``New Purchase Class''),
identical to existing Purchase Class shares in all material respects
except that the New Purchase Class will convert into the New Target
Class. The New Target Class or the New Purchase Class may be formed
without further exemptive relief. Exchanges or conversions described in
this condition shall be effected in a manner that the directors
reasonably believe will not be subject to federal taxation. In
accordance with condition 3, any additional cost associated with the
creation, exchange, or conversdion of the New Target Class or the New
Purchase Class shall be borne solely by the adviser and the distributor
of the Fund. Purchase Class shares sold after the implementation of the
proposal may convert into Target Class shares subject to the higher
maximum payment, provided that the material features of the Target
Class plan and the relationship of such plan to the Purchase Class
shares are disclosed in an effective registration statement.
17. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act, Investment Company Act Release No. 16619 (Nov. 2,
1988), as such rule is currently proposed, and as it may be reproposed,
adopted, or amended.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30622 Filed 12-13-94, 8:45 am]
BILLING CODE 8010-01-M
