[Federal Register Volume 59, Number 53 (Friday, March 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6326]
[[Page Unknown]]
[Federal Register: March 18, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20131; 812-8740]
State Bond Equity Funds, Inc., et al.; Notice of Application
March 11, 1994.
agency: Securities and Exchange Commission (``SEC'').
action: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
-----------------------------------------------------------------------
applicants: State Bond Equity Funds, Inc., State Bond Income Funds,
Inc., State Bond Investment Funds, Inc., State Bond Money Funds, Inc.,
State Bond Municipal Funds, Inc., State Bond Securities Funds, Inc.,
and State Bond Tax-Free Income Funds, Inc., on behalf of themselves and
future registered, open-end investment companies for which the Adviser
(as defined below), or any person controlled by or under common control
with the Adviser, may serve as investment adviser, or for which the
Distributor (as defined below), or any person controlled by or under
common control with the Distributor, may serve as distributor, and
which offer shares on a basis which is identical in all material
respects to the arrangement described in the application (the
``Funds''); SBM Company (the ``Adviser''); and SBM Financial Services,
Inc. (the ``Distributor'').
relevant act sections: Order requested pursuant to section 6(c) for
exemptions from sections 2(a)(32), 2(a)(35), 18(f)(1), 18(g), 18(i),
22(c), and 22(d) of the Act and rule 22c-1 thereunder.
summary of application: Applicants seek an order to permit the Funds to
issue and sell multiple classes of shares representing interests in the
same portfolios of securities, assess a contingent deferred sales
charge (``CDSC'') on certain redemptions, and waive the CDSC in certain
instances.
filing date: The application was filed on December 27, 1993, and
amended on February 18, 1994. In a letter dated March 10, 1994,
applicants' counsel stated that an additional amendment will be filed,
the substance of which is reflected 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 April 5, 1994,
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 the date 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 Stewart D. Gregg, General Counsel, SBM Company, 8400
Normandale Lake Boulevard, suite 1150, Minneapolis, Minnesota 55437.
for further information contact: Joseph G. Mari, at (202) 272-3030, or
Barry D. Miller, at (202) 272-3018 (Division of Investment Management,
Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
SEC's Public Reference Branch.
Applicants' Representations
1. The Funds are open-end diversified management investment
companies. Each Fund is organized as a Maryland corporation and as a
series fund that is authorized to issue its shares of common stock in
more than one series representing a separate portfolio of assets and
liabilities. Each Fund has outstanding one series of shares. Adviser
serves as the investment adviser of each Fund. Distributor, a wholly-
owned subsidiary of Adviser, serves as the distributor of the common
shares of each Fund.
2. The Funds, other than State Bond Money Funds, Inc., currently
offer one class of shares at net asset value plus a front-end sales
charge.\1\ The shares are sold subject to an annual rule 12b-1 fee of
.25% of average net assets.
---------------------------------------------------------------------------
\1\Currently, the shares of State Bond Money Funds, Inc. are
offered without a front-end sales charge and are subject to a rule
12b-1 fee of .20% of average net assets.
---------------------------------------------------------------------------
3. Under applicants' proposal, the Funds could offer shares either:
(a) Subject to a front-end sales charge and a rule 12b-1 plan initially
providing for a service and a distribution fee at an annual rate of up
to .25% of the average daily net assets (``Class A shares''); (b)
without a front-end sales charge but subject to a CDSC (which
applicants expect will range from 4% on redemptions made during the
first two years following purchase to 1% on redemptions made during the
sixth year since purchase), a rule 12b-1 service fee initially at an
annual rate of up to .25%, and a rule 12b-1 distribution fee at an
annual rate of up to .75%, of average daily net assets (``Class B
shares''), and automatically convertible into Class A shares after a
certain period of time; (c) without a front-end sales charge but
subject to a CDSC (which applicants expect will be 1% on redemptions
made during the first two years following purchases), a rule 12b-1
service fee initially at an annual rate of up to .25%, and a rule 12b-1
distribution fee at an annual rate of up to .75%, of average daily net
assets (``Class C shares''); (d) without a CDSC but subject to a front-
end sales charge (which applicants expect will be 1% or less of the
amount invested), a rule 12b-1 service fee initially at an annual rate
of up to .25%, and a rule 12b-1 distribution fee at an annual rate of
up to .75%, of average daily net assets (``Class D shares''); (e)
without a front-end sales charge or CDSC, but subject to a rule 12b-1
service fee at an annual rate of up to .25% of average daily net
assets, for purchase exclusively by investors meeting such minimum
investment and/or other eligibility criteria established by the Funds
and the Distributor (``Class Y shares''); and (f) without any sales or
rule 12b-1 plan charges for purchase exclusively by Adviser,
Distributor, certain agents and affiliates of Adviser and Distributor,
and officers, directors, and employees of such entities and employee
benefit plans established for the benefit of such persons, as may be
approved for purchase of this class of shares by the Funds and
Distributor and disclosed in the applicable Funds' registration
statements (``Class Z shares'').\2\ Applicants also seek authority for
the Funds to establish one or more additional classes to be sold with
different sales load and service and distribution fee structures, as
described below. The Funds will not impose front-end sales charges,
CDSCs, rule 12b-1 service fees, or distribution fees (or any
combination thereof) in excess of amounts permitted by article III,
section 26 of the NASD's Rules of Fair Practice.
---------------------------------------------------------------------------
\2\Applicants intend that upon the initial public offering of
Class Y and/or Class Z shares of a Fund, shareholders of any
existing classes of such Fund who would qualify for investment in
Class Y or Class Z shares, as applicable, would have such existing
classes automatically convert into Class Y or Class Z shares, as
applicable, on the basis of the relative net asset values of such
classes of shares at the time of conversion.
---------------------------------------------------------------------------
4. Daily expenses of a Fund will be allocated to each share class
depending on the nature of the expense item. Operating expenses which
are attributable to all classes will be allocated daily to each share
class based on the percentage of net assets at the beginning of the
day. Class-specific expenses (including rule 12b-1 fees, if any) will
be calculated and charged to the respective class.
5. The CDSC will be calculated on the lesser of the net asset value
at the time of the issuance of the shares or the net asset value at the
time of the redemption. No CDSC will be imposed on (a) an amount that
represents an increase in the value of the shares due to capital
appreciation, (b) shares, or amounts representing shares, purchased
through the reinvestment of dividends or capital gains distributions,
or (c) shares held for longer than the applicable period of time
following the issuance of shares that the CDSC applies (the ``CDSC
Period''). Upon any request for redemption of shares subject to a CDSC,
it will be assumed that shares subject to no CDSC will be redeemed
first in the order purchased (however, if a shareholder owns Class B
and Class C shares, then, absent a shareholder choice to the contrary,
Class C shares not subject to a CDSC will be redeemed in full prior to
any redemption of Class B shares not subject to a CDSC), and all
remaining shares that are subject to a CDSC will be redeemed in the
order purchased. It is expected that the CDSCs and the CDSC Periods of
the Funds will vary depending in part on the front-end sales load (if
any) and 12b-1 fees (if any) that are imposed by any Fund regarding its
Class B or Class C shares, and on the distribution arrangements entered
into by the Distributor regarding any such class of shares. Any
variation in the CDSCs or DCSC Periods will be set forth in the
applicable prospectus. No DCSC will be imposed on shares issued prior
to the effective date of the requested order.
6. Applicants request the ability to waive the CDSC regarding
involuntary redemptions effected pursuant to a Fund's right to
liquidate shareholder accounts having an aggregate net asset value of
less than the minimum account balance set forth in the Fund's then-
current prospectus.
7. Applicants intend to provide a one time credit for any CDSC paid
upon redemption of any shares, the proceeds of which are reinvested in
the same class of shares of a Fund within 90 days of redemption. The
Distributor will provide this credit from its own assets.
8. Class B shares of a Fund held for a specified number of years
(including any Class B shares issued upon the reinvestment of dividends
and other distributions paid in respect of Class B shares of such Fund)
will convert automatically to Class A shares of such Fund at the
relative net asset values of each of the classes. For purposes of
calculating the holding period, Class B shares will be deemed to have
been issued on the sooner of: (a) The date on which the issuance of
Class B shares occurred; or (b) for Class B shares obtained through an
exchange, or a series of exchanges, the date on which the issuance of
the original Class B shares occurred.
9. A given class of shares will be exchangeable only for shares of
the corresponding class of other Funds. The exchange privilege will be
subject to the eligibility criteria applicable to the class of shares
of the Fund into which the shareholder wishes to exchange. Applicants
will permit exchanges into shares of money market funds managed by
Adviser, and the CDSC will not be imposed at the time of any exchange
of shares into the money market fund. Applicants will comply with rule
11a-3 as to all exchanges.
10. Additional classes of shares created in the future will differ
from Class A, Class B, Class C, Class D, Class Y, and Class Z shares
only in the following respects: (a) Each class of shares would have a
different designation; (b) each class of shares might be sold under
different sales arrangements (e.g., subject to a front-end sales load,
a CDSC, or a combination of a front-end sales load and a CDSC, or at
net asset value); (c) each class may bear any rule 12b-1 plan payments
related to that class (and any other costs related to obtaining
shareholder approval of the rule 12b-1 plan for that class or an
amendment to its rule 12b-1 plan; (d) each class of shares may bear
expenses determined by the board of directors to be allocated to that
class (``Class Expenses''), as described in condition 1 below; (e) only
shareholders of the affected classes would be entitled to vote on
matters pertaining to the rule 12b-1 plan relating to their respective
class of shares in accordance with the procedures set forth in rule
12b-1; (f) each class of shares would have different exchange
privileges; and (g) classes that impose a rule 12b-1 fee may convert
into another class.
Applicants' Legal Analysis
1. Applicants request an order exempting them from the provisions
of sections 18(f)(1), 18(g), and 18(i) of the Act to the extent that
the proposed issuance and sale of various classes of shares
representing interests in the same Fund might be deemed: (a) To result
in a ``senior security'' within the meaning of section 18(g); (b) to be
prohibited by section 18(f)(1); and (c) to violate the equal voting
provisions of section 18(i).
2. Applicants believe that the proposed multi-class arrangement
will better enable the Funds to meet the competitive demands of today's
financial services industry. Under the multi-class arrangement, an
investor will be able to choose the method of purchasing shares that is
most beneficial given the amount of his or her purchase, the length of
time the investor expects to hold his or her shares, and other relevant
circumstances. The proposed arrangement would permit the Funds to
facilitate both the distribution of their securities and provide
investors with a broader choice as to the method of purchasing shares
without assuming excessive accounting and bookkeeping costs or
unnecessary investment risks.
3. The proposed allocation of expenses and voting rights relating
to the rule 12b-1 plans in the manner described is equitable and would
not discriminate against any group of shareholders. In addition, such
arrangements should not give rise to any conflicts of interest because
the rights and privileges of each class of shares are substantially
identical.
4. Applicants believe that the proposed multi-class arrangement
does not present the concerns that section 18 of the Act was designed
to address. The multi-class arrangement will not increase the
speculative character of the shares of the Fund. The multi-class
arrangement does not involve borrowing, nor will it affect the Funds'
existing assets or reserves, and does not involve a complex capital
structure.
5. Applicants also request an order exempting them 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 the Funds to assess a CDSC
on certain redemptions, and to waive the CDSC in certain instances. The
proposed CDSC arrangements will provide shareholders the option of
having their full payment invested for them at the time of their
purchase of shares of the Funds with no deduction of an initial sales
charge.
Applicants' Conditions
Applicants agree that any order granting the requested relief shall
be subject to the following conditions:
1. Each class of shares will represent interests in the same
portfolio of investments of a Fund and be identical in all respects,
except as set forth below. The only differences among various classes
of shares of the same Fund will relate solely to: (a) the designation
of each class of shares of the Fund; (b) the impact of the respective
sales charges, if any, for each class of shares (e.g., Class A shares
generally would be subject to a front-end sales charge or CDSC
depending on the amount of investment, Class B and Class C shares would
be subject to a CDSC, Class D shares would be subject to a front-end
sales charge, and Class Y and Class Z shares would not be subject to a
front-end sales charge or a CDSC); (c) expenses assessed to a class as
a result of a rule 12b-plan providing for a service and/or distribution
fee (e.g., Class A and Class Y shares would pay a service fee, Class B,
Class C, and Class D shares would pay a service fee and a distribution
fee, and Class Z shares would not pay a service fee or a distribution
fee); (d) different expenses which the board of directors of a Fund may
in the future determine to allocate to a specific class, which will be
limited to: (i) Transfer agency fees as identified by the transfer
agent as being attributable to a specific class; (ii) printing and
postage expenses related to preparing and distributing materials such
as shareholder reports, prospectuses and proxies to current
shareholders; (iii) Blue Sky registration fees incurred by a class of
shares; (iv) SEC registration fees incurred by a class of shares; (v)
the expenses of administrative personnel and services as required to
support the shareholders of a specific class; (vi) litigation or other
legal expenses relating solely to one class of shares; and (vii)
directors' fees incurred as a result of issues relating to one class of
shares; (e) voting rights on matters exclusively affecting one class of
shares (e.g., the adoption, amendment, or termination of a rule 12b-1
plan in accordance with the procedures set forth in rule 12b-1), except
as provided in condition 15 below; (f) the different exchange
privileges of the various classes of shares as described in the
prospectuses (and as more fully described in the statements of
additional information) of the Funds; and (g) classes that impose a
12b-1 fee may convert to another class. Any additional 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 until approved by the SEC pursuant to
an amended order.
2. The directors of each of the Funds, including a majority of the
independent directors, shall have approved the multi-class arrangement,
prior to the implementation thereof by a particular Fund. The minutes
of the meetings of the directors of each of the Funds regarding the
deliberations of the directors with respect to the approvals necessary
to implement the multi-class arrangement will reflect in detail the
reasons for determining that the proposed system is in the best
interest of the Fund and its shareholders.
3. The initial determination of the class-specific expenses, if
any, 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 directors of the affected Fund, including a majority of the
independent directors. Any person authorized to direct the allocation
and disposition of monies paid or payable by a Fund to meet class-
specific expenses shall provide to the directors, and the directors
shall review, at least quarterly, a written report of the amounts so
expended and the purpose for which the expenditures were made.
4. On an ongoing basis, the 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 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 cost will remedy such
conflict up to and including establishing a new registered management
investment company.
5. 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 and 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.
6. Dividends paid by a Fund with respect to each class of 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 fee payments made under the rule 12b-1 plan
relating to a particular class will be borne by each such class and
except that any Class Expenses will be borne by the applicable class of
shares.
7. The methodology and procedures for calculating the net asset
value and dividends/distributions of the various classes and the proper
allocation of income and expenses among the classes has been reviewed
by the Independent Examiner (the ``Independent Examiner''). The
Independent Examiner has rendered a report, which has been provided to
the staff of the SEC, 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 Independent
Examiner, or an appropriate substitute Independent Examiner, 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 Independent Examiner 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 work papers of the Independent
Examiner with respect to such reports, following request by the Funds
which the Funds agree to make, will be available for inspection by the
SEC staff upon the written request for such work papers by a senior
member of the SEC's Division of Investment Management or of a Regional
Office of the SEC, limited to the Director, an Associate Director, the
Chief Accountant, the Chief Financial Analyst, an Assistant Director,
and any Regional Administrators or Associate or Assistant
Administrators. The initial report of the Independent Examiner 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 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.
8. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value dividends/distributions among the various classes of
shares and the proper allocation of income and expenses among such
classes of shares and this representation has been concurred with by
the Independent Examiner in its initial report referred to in condition
7 above and will be concurred with by the Independent Examiner, or
appropriate substitute Independent Examiner, on an ongoing basis at
least annually in the ongoing reports referred to in condition 7 above.
The applicants agree to take immediate corrective action if the
Independent Examiner, or appropriate substitute Independent Examiner,
does not so concur in the ongoing reports.
9. The prospectuses of the Funds will include a statement to the
effect that a salesperson and any other person entitled to receive
compensation for selling or servicing Fund shares may receive different
levels of compensation for selling one particular class of shares over
another in a Fund.
10. The Distributor will adopt compliance standards as to when
shares of a particular class may appropriately be sold to particular
investors. Applicants will require all persons selling shares of the
Funds to agree to conform to these standards.
11. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the directors of the Funds with
respect to the multi-class arrangement will be set forth in guidelines
which will be furnished to the directors.
12. Each Fund prospectus (regardless of whether all classes of
shares of such Fund are offered through such prospectus) will disclose
the respective expenses, performance data, distribution arrangements,
service and distribution fees, front-end sales charges, CDSCs, exchange
privileges, and conversion features applicable to each class of shares.
The shareholder reports of each Fund 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 all 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 disclose the expenses
and/or performance data applicable to all classes. The information
provided by applicants for publication in any newspaper or similar
listing of the Fund's net asset values and public offering prices will
separately present each class of shares.
13. Applicants acknowledge that the grant of the exemptive order
requested by this application will not imply SEC approval,
authorization, or acquiescence in any particular level of payments that
the Funds may make pursuant to rule 12b-1 plans in reliance on the
exemptive order.
14. Any class of shares with a conversion feature (``Purchase
Class'') will convert into another class (``Target Class'') of shares
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 of 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.
15. If a Fund implements any amendment to its rule 12b-1 plan (or,
if presented to shareholders, adopts or implements any amendment of
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 Target Class shares 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''), identical in all material respects to the Target Class
as it existed prior to implementation of the proposal, no later than
such shares previously were scheduled to convert into Target Class
shares. 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 New Purchase Class shares will convert into New Target
Class shares. New Target Class or New Purchase Class may be formed
without further exemptive relief. Exchanges or conversions described in
this condition shall be effected in any manner that the directors
reasonably believe will not be subject to federal taxation. In
accordance with condition 4, any additional cost associated with the
creation, exchange, or conversion of New Target Class or New Purchase
Class shall be borne solely by the Adviser and the Distributor.
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.
16. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act, Investment Company Act Release No. 16169 (Nov 2,
1988), as 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. 94-6326 Filed 3-17-94; 8:45 am]
BILLING CODE 8010-01-M
