[Federal Register Volume 61, Number 25 (Tuesday, February 6, 1996)]
[Notices]
[Pages 4498-4500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2462]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21726; 812-9888]
Schwab Capital Trust, et al.; Notice of Application
January 31, 1996.
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: Schwab Capital Trust (the ``Trust''); Schwab Investments;
The Charles Schwab Family of Funds; Charles Schwab Investment
Management, Inc. (``CSIM''); and Charles Schwab & Co., Inc.
(``Schwab'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
from section 12(d)(1) of the Act, under sections 6(c) and 17(b) of the
Act from section 17(a) of the Act, and pursuant to section 17(d) of the
Act and rule 17d-1 thereunder.
SUMMARY OF APPLICATION: Applicants request an order that would permit
the Trust to operate as a ``fund of funds'' and to acquire up to 100%
of the voting shares of any acquired fund.
FILING DATE: The application was filed on December 14, 1995. Applicants
have agreed to file an amendment during the notice period, the
substance of which is included in this notice.
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 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, 101 Montgomery Street, San Francisco, California
94104.
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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Trust is registered as an open-end management investment
company under the Act. Currently, the Trust consists of five separate
investment portfolios: Asset Director-High Growth Fund, Asset
Director-Balanced Growth Fund, and Asset Director-
Conservative Growth Fund (collectively, the ``Asset Director
Funds''); Schwab International Index FundTM; and Schwab Small-Cap
Index FundTM.
2. Each Asset Director Fund seeks to provide
diversification among major asset categories (e.g., stocks, bonds, and
cash equivalents) and stock sub-categories (e.g., large company stocks,
small company stocks, and international stocks). All three Asset
Director Funds are designed to provide exposure to the growth
potential of the stock market in varying degrees. A target mix and a
defined range have been established for each asset category in each of
the Asset Director Funds. A target mix, but not a defined
range, has been established for each stock sub-category.
3. CSIM is registered as an investment adviser under the Investment
Advisers Act of 1940. CSIM is responsible for the overall management of
the Asset Director Funds' business affairs, subject to the
authority of the Trust's board of trustees and officers. CSIM makes all
portfolio securities selections, places all orders for the Asset
Director Funds' securities transactions, and has primary
responsibility for the management of the Asset Director
Funds' investment portfolios. CSIM is a wholly-owned subsidiary of the
Charles Schwab Corporation (``Schwab Corporation'') and is the
investment adviser and administrator for the mutual funds in the
SchwabFunds family of mutual funds.
4. Schwab is registered as a broker-dealer and transfer agent under
the Securities Exchange Act of 1934. Schwab also is a member of the
National Association of Securities Dealers, Inc. (``NASD''). Schwab
serves as the Asset Director Funds' principal underwriter and
transfer and shareholder servicing agent. Schwab is a wholly-owned
subsidiary of Schwab Corporation.
5. Applicants propose a fund of funds arrangement whereby each
Asset Director Fund will invest in shares of portfolios of
the following investment companies (the ``Underlying Portfolios''):
Schwab Investments; The Charles Schwab Family of Funds; and the Trust.
In the Trust's case, the Underlying Portfolios currently are proposed
to consist of Schwab International Index FundTM and Schwab Small-
Cap Index FundTM. Investments also may be made in money market
instruments for temporary defensive purposes and to maintain liquidity.
In addition, any assets that are not invested in Underlying Portfolios
shares will be invested directly in stocks, bonds, and other types of
instruments, including money-market instruments. Applicants request
that any relief granted pursuant to the application also apply to any
open-end management investment company that currently or in the future
is part of the same ``group of investment companies,'' as defined in
rule 11a-3 under the Act, as the Trust (collectively, the `'Schwab
Funds'').\1\
\1\ Rule 11a-3 under the Act defines ``group of investment
companies'' as two or more companies that: (a) hold themselves out
to investors as related companies for purposes of investment and
investor services; and (b) that have a common investment adviser or
principal underwriter. Although certain existing registered
investment companies, or portfolios thereof, that are Schwab Funds
do not presently intend to rely on the requested order, any such
registered investment company, or portfolios thereof, would be
covered by the order if they later proposed to enter into a fund of
funds arrangement in accordance with the terms described in the
application.
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Applicants' Legal Analysis
1. Section 12(d)91)(A) of the Act 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
[[Page 4499]]
company's voting stock, or if the sale will cause more than 10% of the
acquired company's voting stock to be owned by investment companies.
2. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions 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. Applicants request an order permitting the
Asset Director Funds to acquire shares of the Underlying
Portfolios beyond the section 12(d)(1) limits.
3. The restrictions in section 12(d)(1) were intended to prevent
certain abuses perceived to be associated with the pyramiding of
investment companies, including: (a) unnecessary duplication of costs,
e.g. sales loads, advisory fees, and administrative costs; (b) a lack
of appropriate diversification; (c) undue influence by the fund holding
company over its underlying funds; (d) the threat of large scale
redemptions of the securities of the underlying investment companies;
and (e) unnecessary complexity. For the following reasons, applicants
believe that the proposed arrangement will not create these dangers
and, therefore, that the requested relief is appropriate.
4. The proposed arrangement will not raise the fee layering
concerns contemplated by section 12(d)(1). The proposed arrangement
will not involve the layering of advisory fees since, before approving
any advisory contract under section 15(a) of the Act, the board of
trustees of the Trust, including a majority of the trustees who are not
``interested persons,'' as defined in section 2(a)(19) of the Act, will
find that the advisory fees charged under the contract are based on
services provided that are in addition to, rather than duplicative of,
services provided under any Underlying Portfolio advisory contract. In
addition, the proposed structure will not involve layering of sales
charges. Any sales charges or service fees relating to the shares of an
Asset Director Fund will not exceed the limits set forth in
Article III, section 26 of the Rules of Fair Practice of the NASD when
aggregated with any sales charges or service fees that the Asset
Director Fund pays relating to Underlying Portfolio shares.
The aggregate sales charges at both levels, therefore, will not exceed
the limit that otherwise lawfully could be charged at any single level.
Furthermore, the proposed arrangement will not involve the unnecessary
duplication of administrative and other fees. Applicants expect that
these expenses will be reduced at both levels under the proposed
arrangement.
5. In addition, the proposed arrangement will provide true
diversification benefits. Each Asset Director Fund will
pursue a different investment strategy by investing in Underlying
Portfolios that also pursue distinct investment strategies. The
proposed arrangement will be structured to minimize undue influence
concerns. The Asset Director Funds only will acquire shares
of Underlying Portfolios that are Schwab Funds. Because CSIM is
investment adviser to the Underlying Portfolios as well as to the
Trust, a redemption from one Underlying Portfolio will simply lead to
the investment of the proceeds in another Underlying Portfolio.
6. The proposed arrangement, furthermore, will be structured to
minimize large scale redemption concerns. The Asset Director
Funds will be designed for intermediate and long-term investors. This
will reduce the possibility of the Asset Director Funds from
being used as short-term investment vehicles and further protect the
Asset Director Funds and the Underlying Portfolios from
unexpected large redemptions. The proposed arrangement will not be
unnecessarily complex. No Underlying Portfolio will acquire securities
of any other investment company in excess of the limits contained in
section 12(d)(1)(A) of the Act.
7. Section 17(a) of the Act makes it unlawful for an affiliated
person of a registered investment company to sell securities to, or
purchase securities from, the company. The Trust and the Underlying
Portfolios may be considered affiliated persons because they share
common officers and/or directors/trustees. An Underlying Portfolio's
issuance of its shares to the Trust may be considered a sale prohibited
by section 17(a).
8. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that:
(a) the terms of the proposed transaction are reasonable and fair and
do not involve overreaching; (b) the proposed transaction 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 allow the above transactions.
9. Applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b). The consideration paid for the
sale and redemption of shares of Underlying Portfolios will be based on
the net asset value of the Underlying Portfolios, subject to applicable
sales charges. The Trust's purchase and sale of shares of the
Underlying Portfolios is consistent with the Trust's policy, as set
forth in the Trust's registration statements. Applicants also believe
that the proposed transactions are consistent with the general purposes
of the Act.
10. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an
affiliated person of a registered investment company, acting as
principal, from effecting any transaction in which such investment
company is a joint, or joint and several, participant with such person
unless the SEC has issued an order approving the arrangement.
Applicants understand that the proposed arrangement may provide
benefits for both the Asset Director Funds and the Underlying
Portfolios, including increased diversification, more efficient
portfolios management, a larger asset base, and reduced expenses.
Therefore, for the reasons discussed above, applicants believe that the
proposed arrangement is consistent with the provisions, policies, and
purposes of the Act. Furthermore, the Asset Director Funds
and the Underlying Portfolios will not participate in the proposed
arrangement on a basis that is different from or less advantageous than
the participants that are not investment companies.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each Asset Director Fund and each Underlying Portfolio
will be part of the same ``group of investment companies,'' as defined
in rule 11a-3 under the Act.
2. No Underlying Portfolio will acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act.
3. A majority of the trustees of the Trust will not be ``interested
persons,'' as defined in section 2(a)(19) of the Act.
4. Any sales charges or service fees charged to the shares of an
Asset Director Fund, when aggregated with any sales charges
or service fees paid by the Asset Director Fund relating to
the securities of the respective Underlying Portfolio, shall not exceed
the limits set forth in Article III, section 26, of the NASD's Rules of
Fair Practice.
5. Before approving any advisory contract under section 15 of the
Act, the board of trustees of the Trust, including
[[Page 4500]]
a majority of the trustees or directors who are not ``interested
persons,'' as defined in section 2(a)(19), will find that advisory fees
charged under the contract are based on services provided that are in
addition to, rather than duplicative of, services provided under any
Underlying Portfolio advisory contract. The finding, and the basis upon
which the finding was made, will be recorded fully in the minute books
of the Asset Director Fund.
6. Applicants agree to provide the following information, in
electronic format, to the Chief Financial Analyst of the SEC's Division
of Investment Management: monthly average total assets of each Asset
Director Fund and each underlying Portfolio; monthly
purchases and redemptions (other than by exchange) for each Asset
Director Fund and each Underlying Portfolio; monthly
exchanges into and out of each Asset Director Fund and each
Underlying Portfolio; month-end allocations of each Asset
Director Fund's assets among the Underlying Portfolios;
annual expense ratios for each Asset Director Fund and each
Underlying Portfolio; and a description of any vote taken by the
shareholders of any Underlying Portfolio, including a statement of the
percentage of votes cast for and against the proposal by each Asset
Director Fund and by the other shareholders of the Underlying
Portfolio. Such information will be provided as soon as reasonably
practicable following each fiscal year-end of the Asset Director
Fund (unless the Chief Financial Analyst shall notify
applicants in writing that such information need no longer be
submitted).
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2462 Filed 2-5-96; 8:45 am]
BILLING CODE 8010-01-M
