[Federal Register Volume 62, Number 35 (Friday, February 21, 1997)]
[Notices]
[Pages 8063-8065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4244]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22512; 812-10132]
Sierra Prime Income Fund, et al.; Notice of Application
February 14, 1997.
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: Sierra Prime Income Fund (the ``Trust''), Sierra Investment
Advisors Corporation (the ``Adviser''), and Sierra Investment Services
Corporation (the ``Distributor'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from sections 18(c) and 18(i) of the Act, and under
section 17(d) of the Act and rule 17d-1 thereunder permitting certain
joint transactions.
SUMMARY OF APPLICATION: Applicants request an order that would permit
certain closed-end investment companies to issue multiple classes of
shares in the same portfolio of securities and impose distribution fees
on one or more classes of shares.
FILING DATES: The application was filed on May 7, 1996 and amended on
August 14, 1996, and on November 26, 1996. Applicants have agreed to
file an amendment during the notice period, the substance of which is
incorporated herein.
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 March 11, 1997
and should be accompanied by proof of service on the 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 5th Street, N.W., Washington, D.C.
20549. Applicants, 9301 Corbin Avenue, Suite 333, Northridge,
California 91324.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, or Elizabeth G.
Osterman, Assistant Director, 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. The Trust is a registered closed-end management investment
company organized as a Massachusetts business trust. The Trust has
entered into an investment advisory agreement with the Adviser, a
wholly-owned subsidiary of Sierra Capital Management Corporation. The
Adviser has delegated the management of the Trust's investment
portfolio to Van Kampen American Capital Management Inc. The Trust has
entered into a distribution agreement with the Distribution pursuant to
which the Distributor acts as principal underwriter or distributor for
the Trust. Applicants request that relief extend to all future series
of the Trust and all other registered closed-end investment companies
with substantially the same investment policies and manner of operation
as the Trust for which the Adviser, the Distributor, or any entity
controlling, controlled by, or under common control with the Adviser or
Distributor acts as adviser or distributor now or in the future.
2. The Trust's investment objective is to provide as high a level
of income as is consistent with the preservation of capital primarily
through investment in senior collateralized corporate loans (``Senior
Loans'') in the form of participation interests in Senior Loans made by
banks or other financial institutions. The Trust and funds with similar
investment policies and manners of operation are commonly known as
``prime rate'' funds. While the Trust's investment policies require it
to be organized as a closed-end investment company, the Trust has
characteristics largely associated with an open-end investment company.
Similar to open-end funds, shares of the Trust are not listed on an
exchange and are not traded over-the-counter on the National
Association of Securities Dealers, Inc.'s (``NASD's'') Automated
Quotation National Market System. Also similar to open-end funds, the
Trust engages in a continuous offering of its shares, and updates its
registration statement annually. The Trust currently offers one class
of shares to investors with a front-end sales load, as described below.
3. Because the Trust does not currently anticipate that a secondary
market will develop for its shares, the Trust considers the shares to
be illiquid. Therefore, consistent with section 23(c)(2) of the Act,
the Trust intends to consider making tender offers each quarter to
purchase its shares from shareholders at the then current net asset
value (``NAV'') per share. Section 23(c)(2) provides that a registered
closed-end investment company may
[[Page 8064]]
purchase securities of which it is the issuer pursuant to tenders,
after reasonable opportunity to submit tenders given to all holders of
securities of the class to be purchased.\1\
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\1\ Each tender offer will be made in accordance with section
13(e) of the Securities Exchange Act of 1934 (the ``Exchange Act'')
and rule 13e-4 thereunder. Applicants received an exemption from
rule 10b-6 under the Exchange Act from the SEC's Division of Market
Regulation to permit the Trust to make tender offers for its shares
while simultaneously engaging in a continuous offering of its
shares. Applicants also received an exemption from rule 13e-
4(f)(8)(ii) under the Exchange Act to permit the Trust to allow
shareholders to exchange shares of the Trust for either cash or the
cash-equivalent amount of the same class of shares of certain open-
end investment companies advised by the Adviser. See Sierra Prime
Income Fund (pub. avail. June 5, 1996).
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4. Applicants propose to continue to operate as a ``prime rate''
fund, with the addition of a multiclass pricing system (the
``System''). On April 24, 1996, the board of trustees of the Trust
approved the establishment of the System, subject to the receipt of the
order requested in the application. Under the System, the Trust could
provide investors with the option of purchasing shares: (a) Subject to
a conventional front-end sales load and, under certain circumstances,
an Early Withdrawal Charge (``EWC'') (``Class A Shares''); (b) subject
to an EWC, an asset-based distribution fee (``Distribution Fee''), and
a service fee (``Service Fee'') (``Class B Shares''); and (c) subject
to an EWC, a Distribution Fee, and a Service Fee offered in connection
with the Sierra Asset Management Program (``SAM Program'') (``Class S
Shares''). All fees charged by applicants under the System will comply
with Rule 2830 of the NASD Conduct Rules, although such rule does not
technically apply to the Trust. If applicants receive the relief
requested, sales loads, Distribution Fees, EWCs, and exchange
procedures for the Trust will be structurally similar to those in open-
end investment companies. In addition, the only differences between the
Trust's current and future operations would be the offering of multiple
classes of shares, and the imposition of Distribution Fees and Service
Fees, as described below.
5. Currently, Class A Shares of the Trust are offered to investors
at NAV plus a front-end sales load (``Class A Sales Load''). The Class
A Sales Load is graduated from 4.5% of the offering price per share for
purchases of less than $50,000 to 0% for purchases of $1,000,000 or
more. Applicants will waive the Class A Sales Load for certain
purchases described in the application. The Trust may impose an EWC on
certain Class A Shares redeemed within one or two years of purchase.
The Class A Shares subject to an EWC include those purchased at NAV
without a sales charge, acquired through certain exchanges of shares,
and purchased through certain employee benefit plans. The EWC for Class
A Shares is waived for certain repurchases or tenders outlined in the
application. The EWC for Class A Shares is calculated based on the
lower of the shares' cost or current NAV. In determining whether the
EWC is payable, the Trust will first redeem shares not subject to an
EWC. Class A Shares are not subject to a Distribution Fee.
6. Applicants propose to offer Class B Shares of the Trust at NAV
without the imposition of a sales load at the time of purchase.
Applicants would impose a Distribution Fee on Class B Shares of up to
.75% of the value of Class B's average daily net assets. The
Distribution Fee, similar to a fee charged under a rule 12b-1 plan for
open-end investment companies, would compensate the Distributor for its
services and expenses in distributing Class B Shares, including
payments made to broker-dealers and certain financial institutions as
commissions. Class B Shares also may be subject to a Service Fee (as
defined in NASD Conduct Rule 2830) of up to .25% of Class B's average
daily net assets. The Service Fee would compensate certain broker-
dealers, financial institutions, and others that provide personal
services or maintain shareholder accounts.
7. An investor's proceeds from a redemption of Class B Shares made
within a certain period after the purchase of the shares may be subject
to an EWC that is paid to the Distributor. The amount of the EWC would
be calculated by multiplying the applicable percentage charge by the
lesser of: (a) The NAV of the shares at the time of purchase; or (b)
the NAV of the shares at the time of redemption. Applicants currently
expect that the EWC would be graduated from 4% to 0% over five years.
8. Class S Shares would be sold in connection with the SAM
Program.\2\ Class S Shares have the same characteristics as Class B
Shares except for the SAM requirement and a modification to the EWC.
The EWC for Class S Shares graduates from 5% to 0% over seven years.
Shares purchased through the reinvestment of dividends and other
distributions paid in Class S Shares will be Class S Shares, but will
not be subject to an EWC. A shareholder's termination of participation
in the SAM Program will not affect the shareholder's continued ability
to hold Class S Shares, but the shareholder would be precluded from
purchasing additional Class S Shares.
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\2\ The SAM Program is an asset allocation program that provides
two levels of professional management and diversification to
clients. The Distributor determines an asset allocation strategy and
investment policy for each SAM Program strategy.
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9. All expenses incurred by the Trust will be allocated to each
class of shares based upon the net assets of the Trust attributable to
each class. Distribution Fees, Service Fees, and other incremental
expenses that may be attributable to a particular class of shares will
be charged directly to the net assets of the particular class.
Incremental expenses include transfer agent fees, printing and postage
expenses, state and federal registration fees, and other incremental
expenses that should be allocated to a particular class of shares.
Because of the higher fees or expenses paid by the holders of certain
classes, the net income attributable to and the dividends payable on
shares of one class may differ from the net income attributable to and
the dividends payable on shares of other classes in the Trust. As a
result, the NAV per share of the classes will differ at times. Expenses
of the Trust allocated to a particular class of shares will be borne on
a pro rata basis by each outstanding share of that class.
10. The Trust may create additional classes of shares or series
that may differ from Class A, Class B, or Class S Shares in the
following respects: (a) The amount of Distribution Fees; (b) voting
rights with respect to each class' expenses; (c) the designation of
each class; (d) the impact of any class expenses directly attributable
to a particular class of shares; (e) the dividends and NAV resulting
from differences in fees under a plan of distribution or class
expenses; (f) the EWC structure; (g) the sales load structure; and (h)
exchange privileges or conversion features.
Currently, Class A Shares of the Trust may be exchanged during a
tender offer period for Class A shares of equal value of any portfolio
of any open-end investment company advised by Sierra Advisors (``Sierra
Funds''). In addition, Class A shares of Sierra Funds may be exchanged
for Class A Shares of the Trust. Under the proposal, the Trust will
permit shareholders at the time of a tender offer to exchange Trust
shares for the same class of shares of the Sierra Funds (except for The
Sierra Variable Trust) equal in value to the tendered Trust shares in
lieu of cash. All exchanges of Trust shares will comply with rule 13e-4
under the Exchange
[[Page 8065]]
Act.\3\ In addition, shareholders of any portfolio of Sierra Funds
could exchange their shares for shares of the Trust of equal value in
lieu of cash. The exchanges of shares from the Sierra Funds into shares
of the Trust will comply with rule 11a-3 under the Act, except to the
extent that the Trust operates as a closed-end fund. Although
applicants currently do not intend to do so, the Trust may in the
future offer a class of shares that will convert into shares of another
class of the Trust. Except to the extent that the Trust operates as a
closed-end fund, it would comply with rule 18f-3 under the Act with
respect to such conversions.
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\3\ See, supra, note 1.
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Applicant's Legal Analysis
1. Applicants request an exemption under section 6(c) of the Act
from sections 18(c) and 18(i) of the Act to the extent that the
proposed issuance and sale of multiple classes of shares might be
deemed to result in the issuance of a ``senior security'' within the
meaning of section 18(g) of the Act and thus be prohibited by section
18(c), and violate the equal voting provisions of section 18(i) of the
Act.
2. Section 18(c) provides, in relevant part, that a closed-end
investment company may not issue or sell any senior security that is
stock if, immediately thereafter, the company has more than one class
of senior security that is a stock. An exception to this prohibition is
that any such class of stock may be issued in one or more series
provided no series has a preference or priority over any other series
upon the distribution of the company's assets or in respect of payment
of interest or dividends. The creation of multiple classes of shares
may result in shares of a class having priority over another class as
to the payment of dividends because shareholders of different classes
would pay different Distribution Fees, Service Fees, and other
incremental expenses that should be allocated to a particular class of
shares.
3. Section 18(i) provides that each share of stock issued by a
registered management company shall be a voting stock and have equal
voting rights with every other outstanding voting stock. The System may
violate section 18(i) because each class would be entitled to exclusive
voting rights with respect to matters solely related to such class.
4. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions from any provision of the Act if the 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.
5. Applicants believe that the proposed allocation of expenses and
voting rights in the manner described above is equitable and would not
discriminate against any group of shareholders. According to
applicants, the proposed arrangements would permit the Trust to
facilitate the distribution of its securities and provide investors
with a broader choice of shareholder services without the Trust
assuming excessive costs or unnecessary investment risks.
6. Applicants represent that if the Trust was required to organize
separate investment portfolios for each class of shares, it could face
liquidity and diversification problems that could prevent the Trust
from producing a favorable return. Under the proposal, investors would
be able to benefit, according to applicants, by investing in an
established, sizable fund. In addition, shareholders may be relieved of
a portion of the fixed costs of the Trust because such costs,
potentially, would be spread over a greater number of shares than they
would be otherwise.
7. Applicants believe that their proposal does not raise the
concerns that section 18 was designed to ameliorate to any greater
degree than open-end investment companies' multiple class systems.
Under rule 18f-3, open-end investment companies may offer multiple
classes of shares without seeking individual exemptive orders from the
SEC. Applicants further believe that their arrangement does not involve
borrowings and it would not adversely affect the assets of the Trust.
8. Section 17(d) and rule 17d-1 prohibit an affiliated person of an
investment company, acting as principal, from participating in or
effecting any transaction in connection with any joint enterprise or
joint arrangement in which the investment company participates.
Applicants request an order pursuant to section 17(d) and rule 17d-1 to
permit the Trust to impose Distribution Fees in a manner similar to
rule 12b-1 fees imposed by open-end investment companies. While rule
12b-1 does not apply to closed-end investment companies, there is some
question as to whether section 17(d) and rule 17d-1 apply to such fees.
9. In passing upon applications submitted pursuant to section 17(d)
and rule 17d-1, the SEC considers whether the participation of such
registered or controlled company in such joint enterprise, joint
arrangement, or profit-sharing plan on the basis proposed is consistent
with the provisions, policies, and purposes of the Act, and the extent
to which such participation is on a basis different from or less
advantageous than that of other participants.
10. Applicants have agreed to comply with rule 12b-1 as if the
Trust is an open-end investment company. Applicants believe that any
section 17(d) concerns in connection with the Trust financing the
distribution of its shares should be resolved by this undertaking. By
complying with rule 12b-1, applicants believe that the Trust would
participate in substantially the same way and under substantially the
same conditions as would be the case with an open-end investment
company imposing distribution fees under rule 12b-1.
Applicants' Condition
Applicants expressly consent, in connection with this request for
exemptive relief, to be subject to conditions applicable to open-end
investment companies as set forth in rules 18f-3, 6c-10, and 12b-1
under the Investment Company Act, as amended from time to time, as if
the rules applied to them.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4244 Filed 2-20-97; 8:45 am]
BILLING CODE 8010-01-M
