[Federal Register Volume 61, Number 24 (Monday, February 5, 1996)]
[Notices]
[Pages 4297-4299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2328]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21713; 812-9926]
Lexington Growth and Income Fund, Inc., et al.; Notice of
Application
January 30, 1996.
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: Lexington Crosby Small Cap Asia Growth Fund, Inc.,
Lexington Emerging Markets Fund, Inc., Lexington Global Fund, Inc.,
Lexington GNMA Income Fund, Inc., Lexington Goldfund, Inc., Lexington
Growth and Income Fund, Inc., Lexington International Fund, Inc.,
Lexington Money Market Trust, Lexington Natural Resources Trust,
Lexington Ramirez Global Income Fund, Lexington SmallCap Value Fund,
Inc., Lexington Strategic Investments Fund, Inc., Lexington Strategic
Silver Fund, Inc., Lexington Tax Free Money Fund, Inc., and Lexington
Worldwide Emerging Markets Fund, Inc., (collectively, the ``Investment
Companies''); and Lexington Management Corporation (the ``Adviser'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from sections 13(a)(2), 13(a)(3), 18(f)(1), 22(f), and
22(g) and rule 2a-7 thereunder, under sections 6(c) and 17(b) of the
Act for an exemption from section 17(a)(1), and pursuant to rule 17d-1
under the Act to permit certain joint arrangements in accordance with
section 17(d) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
certain investment companies to enter into deferred compensation
arrangements with their trustees.
FILING DATE: The application was filed on December 26, 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 February 26,
1996, 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 who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, c/o Lawrence Kantor, Park 80 West, Plaza Two, Saddle Brook,
New Jersey 07662.
FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Robert A.
Robertson, 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 at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Investment Companies are registered under the Act as open-
end management investment companies. The Adviser serves as the
investment adviser for the Investment Companies and Lexington Funds
Distributor, Inc. serves as their distributor.
2. Applicants request that relief granted pursuant to the
application also apply to any subsequently registered open-end
investment company, or series thereof, advised by the Adviser (together
with the Investment Companies, the ``Funds'').
3. Each Investment Company has a board of trustees, a majority of
the members of which are not ``interested persons'' of such Investment
Company within the meaning of section 2(a)(19) of the Act. Each of the
trustees who is not an employee of the Adviser, or of any of the
Investment Companies, or any of their affiliates (``Eligible
Trustees'') receives annual fees. Applicants request an order to permit
the Eligible Trustees to elect to defer receipt of all or a
[[Page 4298]]
portion of their fees pursuant to a deferred compensation plan (the
``Plan''). Under the Plan, the Eligible Trustees could defer payment of
trustees' fees (the ``Deferred Fees'') in order to defer payment of
income taxes or for other reasons.
4. Under the Plan, the deferred fees payable by a Fund to a
participating Eligible Trustee will be credited to a book reserve
account established by the Fund (a ``Deferred Account''), as of the
first business day following the date such fees would have been paid to
the Eligible Trustee. The trustee may select one or more Investment
Companies from a list of available Investment Companies that will be
used to measure the hypothetical investment performance of the
trustee's Deferred Account. The value of a Deferred Account will be
equal to the value such account would have had if the amount credited
to it had been invested and reinvested in shares of the investment
portfolios designated by the trustee (the ``Designated Shares'').
5. Each Investment Company generally intends to purchase and
maintain Designated Shares in an amount equal to the deemed investments
of the Deferred Accounts of its trustees. Any participating money
market series of a Fund that values its assets by the amortized cost
method will buy and hold the Designated Shares that determine the
performance of the Deferral Accounts in order to achieve an exact match
between such series' liability to pay deferred fees and the assets that
offset such liability.
6. The Funds' respective obligations to make payments of amounts
accrued under the Plan will be general unsecured obligations, payable
solely from their respective general assets and property. The Plan
provides that the Funds will be under no obligation to purchase, hold
or dispose of any investments under the Plan, but, if one or more of
the Funds choose to purchase investments to cover their obligations
under the Plan, then any and all such investments will continue to be a
part of the respective general assets and property of such Funds.
7. When the deferred fees are paid, payment will be made to
Eligible Trustees in a lump sum or in generally equal annual
installments over a period of no more than 10 years as selected by the
Eligible Trustee at the time of deferral. In the event of death,
amounts payable to the Eligible Trustee under the Plan will become
payable to a beneficiary designated by the Eligible Trustee. In all
other events, the Eligible Trustee's right to receive payments is non-
transferable.
8. The Plan was adopted prior to receipt of the requested relief.
Pending receipt of SEC approval, the Plan provides that the
compensation deferred by an Eligible Trustee will be credited to a
Deferral Account in the form of cash and credited with an amount equal
to the yield on 90-day U.S. Treasury Bills.\1\
\1\ See, e.g., American Balanced Fund, Inc. (pub. avail. Feb.
13, 1984) (no-action assurances given for deferred compensation plan
in which the value of the deferred amounts did not depend upon the
investment company's performance).
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Applicants' Legal Analysis
1. Applicants request an order which would exempt the Funds: (a)
under section 6(c) of the Act from sections 13(a)(2), 13(a)(3),
18(f)(1), 22(f), and 22(g) and rule 2a-7 thereunder, to the extent
necessary to permit the Funds to adopt and implement the Plan; (b)
under sections 6(c) and 17(b) of the Act from section 17(a)(1) to
permit the Funds to sell securities for which they are the issuer to
participating Funds in connection with the Plan; and (c) under section
17(d) of the Act and rule 17d-1 thereunder to permit the Funds to
effect certain joint transactions incident to the Plan.
2. Section 18(f)(1) generally prohibits a registered open end
investment company from issuing senior securities. Section 13(a)(2)
requires that a registered investment company obtain shareholder
authorization before issuing any senior security not contemplated by
the recitals of policy in its registration statement. Applicants state
that the Plan possesses none of the characteristics of senior
securities that led Congress to enact section 18(f)(1). The Plan would
not: (a) Induce speculative investments or provide opportunities for
manipulative allocation of any Fund's expenses or profits; (b) affect
control of any Fund; or (c) confuse investors or convey a false
impression as to the safety of their investments. All liabilities
created under the Plan generally would be offset by equal amounts of
assets that would not otherwise exist if the fees were paid on a
current basis.
3. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by
open-end investment companies. Applicants state that such restrictions
are set forth in the Plan, which would be included primarily to benefit
the Eligible Trustees and would not adversely affect the interests of
the trustees or of any shareholder.
4. Section 22(g) prohibits registered open-end investment companies
from issuing any of their securities for services or for property other
than cash or securities. This provision prevents the dilution of equity
and voting power that may result when securities are issued for
consideration that is not readily valued. Applicants believe that the
Plan would merely provide for deferral of payment of such fees and thus
should be viewed as being issued not in return for services but in
return for a Fund not being required to pay such fees on a current
basis.
5. 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. The relief requested
from section 13(a)(3) would extend only to existing Investment
Companies. Applicants believe that relief from the section is
appropriate to enable the affected Investment Companies to invest in
Designated Shares without a shareholder vote. Applicants will provide
notice to shareholders in the prospectus of each affected Investment
Company of the Deferred Fees under the Plan. The value of the
Designated Shares will be de minimis in relation to the total net
assets of the respective Investment Company, and will at all times
equal the value of the Investment Company's obligations to pay deferred
fees.
6. Rule 2a-7 imposes certain restrictions on the investments of
``money market funds,'' as defined under the rule, that would prohibit
a Fund that is a money market Fund from investing in the shares of any
other Fund. Applicants believe that the requested exemption would
permit the Funds to achieve an exact matching of Designated Shares with
the deemed investments of the Deferral Accounts, thereby ensuring that
the deferred fees would not affect net asset value.
7. Section 6(c) provides, in relevant part, that the SEC may, by
order, exempt any person or class of persons from any provision of the
Act or from any rule thereunder, if such exemption is necessary or
appropriate in the public interest, consistent with the protection of
investors, and consistent with the purposes fairly intended by the
policy and provisions of the Act. Applicants believe that the relief
requested from the above provisions satisfies this standard.
8. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company from selling any security to such
registered investment company. Each portfolio may be an affiliated
person of each other portfolio by reason of being under the common
[[Page 4299]]
control of the Adviser.\2\ The sale by a portfolio of any security to
any other portfolio of any Fund would therefore be subject to the
prohibitions of section 17(a)(1). Applicants assert that section
17(a)(1) was designed to prevent, among other things, sponsors of
investment companies from using investment company assets as capital
for enterprises with which they were associated or to acquire
controlling interest in such enterprises. Applicants submit that the
sale of securities issued by the Funds pursuant to the Plan does not
implicate the concerns of Congress in enacting this section, but merely
would facilitate the matching of each Fund's liability for deferred
trustees' fees with the Designated Shares that would determine the
amount of such Fund's liability.
\2\ Section 2(a)(3)(C) of the Act defines the term ``affiliated
person'' of another person to include any person directly or
indirectly controlling, controlled by, or under common control with
such other person.
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9. Section 17(b) authorizes the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the 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, the transaction is consistent with the policies
of the registered investment company, and the general purposes of the
Act. Applicants assert that the proposed transaction satisfies the
criteria of section 17(b). The finding that the terms of the
transaction are consistent with the policies of the registered
investment company is predicated on the assumption that relief is
granted from section 13(a)(3). Applicants also request relief from
section 17(a)(1) under section 6(c) to the extent necessary to
implement the Deferred Fees under the Plan on an ongoing basis.\3\
\3\ Section 17(b) may permit only a single transaction, rather
than a series of on-going transactions, to be exempted from section
17(a). See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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10. Section 17(d) and rule 17d-1 generally prohibit a registered
investment company's joint or joint and several participation with an
affiliated person in a transaction in connection with any joint
enterprise or other joint arrangement without SEC approval. Eligible
Trustees will not receive a benefit that would otherwise inure to a
Fund or its shareholders. Eligible Trustees will receive tax deferral
but the Plan otherwise will maintain the parties, viewed both
separately and in their relationship to one another, in the same
position as if the deferred fees were paid on a current basis.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. With respect to the requested relief from rule 2a-7, any money
market Fund that values its assets by the amortized cost method will
buy and hold Designated Shares that determine the performance of
Deferral Accounts to achieve an exact match between the liability of
any such Fund to pay compensation deferrals and the assets that offset
that liability.
2. If a Fund purchases Designated Shares issued by an affiliated
Fund, the Fund will vote such shares in proportion to the votes of all
other shareholders of such affiliated Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2328 Filed 2-2-96; 8:45 am]
BILLING CODE 8010-01-M
