[Federal Register Volume 61, Number 61 (Thursday, March 28, 1996)]
[Notices]
[Pages 13903-13906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7543]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21851; 812-9924]
U.S. Trust Corporation, et al.; Notice of Application
March 22, 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: U.S. Trust Corporation, United States Trust Company of New
York (``U.S. Trust''), the Excelsior Institutional Trust (``Excelsior
Trust''), the Excelsior Funds, Inc. (``Excelsior Funds, Inc.
(``Excelsior Funds''),\1\ and any registered open-end management
investment company that may be advised by U.S. Trust or any entity
controlling, controlled by, or under common control with U.S. Trust
(together, with Excelsior Trust and Excelsior Funds, the ``Funds''),
the United States Trust Company of New York Pooled Pension and Profit
Sharing Trust (``CIF''), and other collective investment funds that may
be sponsored by U.S. Trust which U.S. Trust in the future may decide to
convert into registered open-end investment companies in the manner
described below, and in which, at that time, pension plans established
and maintained for the benefit of employees of U.S. Trust and its
subsidiaries have invested assets.
\1\ The Excelsior Funds formerly were known as the UST Master
Funds, Inc. The name was changed, effective January 2, 1996,
primarily for marketing purposes.
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RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) of
the Act exempting applicants from section 17(a)
[[Page 13904]]
of the Act and pursuant to section 17(d) of the Act and rule 17d-1
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thereunder.
SUMMARY OF APPLICATION: The requested order would permit the CIF to
transfer securities to certain portfolios of the Funds in exchange for
portfolio shares.
FILING DATES: The application was filed on December 29, 1995.
Applicant's counsel has stated in a letter dated March 18, 1996 that an
amendment, the substance of which is incorporated herein, will be filed
during the notice period.
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 16, 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, NW., Washington, DC 20549.
Applicants: c/o U.S. Trust Corporation, 114 West 47th Street, New York,
New York 10043.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Alison E. Baur,
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. U.S. Trust is a state-chartered bank and trust company and
wholly-owned subsidiary of U.S. Trust Corporation. U.S. Trust serves as
trustee, investment manager, and custodian for numerous pension plan
clients. The assets of some of those pension plans are invested in the
CIF, which was established by U.S. Trust as an investment vehicle for
employee retirement plans qualified under section 401 of the Internal
Revenue Code or similar governmental plans. The CIF includes assets of
pension plans for the benefit of employees of entities unaffiliated
with U.S. Trust (``Other Plans'') as well as assets of pension plans
for the benefit of employees of U.S. Trust and its affiliates
(``Affiliated Plans'') (Other Plans and Affiliated Plans collectively
referred to as ``Plans''). Each of the Affiliated Plans has a five
percent or greater beneficial interest in the CIF. The assets of the
CIF are invested in one or more investment funds (``CIF Portfolios'')
with varying investment objectives.
2. The Excelsior Trust is a Delaware business trust registered
under the Act as an open-end management investment company. The
Excelsior Trust currently consists of 10 portfolios. The Excelsior
Trust is establishing two new portfolios, the Excelsior Trust
Institutional Optimum Growth Fund and the Excelsior Trust Institutional
Equity Value Fund, which will be the only portfolios of the Excelsior
Trust to which Affiliated Plan assets in the CIF will be transferred.
Excelsior Funds is a Maryland corporation registered under the Act as
an open-end management investment company. Excelsior Funds is currently
divided into 20 portfolios. The following portfolios are the only
portfolios of Excelsior Funds to which Affiliated Plan assets in the
CIF will be transferred: Excelsior Funds Equity Fund, Excelsior Funds
International Fund, Excelsior Funds Short-Term Government Securities
Fund, Excelsior Funds Managed Income Fund, Excelsior Funds Early Life
Cycle Fund, and Excelsior Funds Money Fund (together with the Excelsior
Trust Institutional Optimum Growth Fund and the Excelsior Trust
Institutional Equity Value Fund, the ``Portfolios''). U.S. Trust serves
as investment adviser to the Portfolios.
3. U.S. Trust is terminating the CIF and proposes to transfer the
Affiliated Plans' assets of the CIF in-kind to the Portfolios. Under
this proposal, each Portfolio will accept a transfer of securities from
a corresponding CIF Portfolio with substantially similar investment
objectives, in exchange for Portfolio shares. The conversion may occur
in stages, with certain transfers occurring before others.
4. The assets of the CIF representing Other Plans may be converted
into Funds in accordance with a series of no-action letters in which
the SEC staff has permitted similar conversions of collective trust
funds into mutual funds.\2\ The Affiliated Plans are unable to rely on
the no-action letters, however, because each Affiliated plan has a five
percent or greater beneficial interest in CIF.\3\ As a result,
applicants are seeking exemptive relief for the transfer of CIF assets
into the Funds on behalf of the Affiliated Plans.
\2\ See, e.g., The DFA Investment Trust Company (pub. avail.
Oct. 17, 1995); Federated Investors (pub. avail. Apr. 21, 1994); and
Lincoln National Investment Management Company (pub. avail. Apr. 25,
1976).
\3\ See The DFA Investment Trust Company (pub. avail. Mar. 21,
1996) (clarifying the staff's position that a less than five percent
beneficial interest in a collective trust fund conversion by an
affiliated person of a fund, or an affiliated person of such
affiliated person, is not, in and of itself, a disqualifying
affiliation for purposes of rule 17a-7).
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5. Affiliated Plan assets of the CIF will be transferred as
follows: the Short-Term Fixed Income CIF Portfolio into the Excelsior
Funds Money Fund, the Fixed Income CIF Portfolio into the Excelsior
Funds Managed Income Fund, the U.S. Government Short/Intermediate Term
CIF Portfolio into the Excelsior Funds Short-Term Government Securities
Fund, the International CIF Portfolio into the Excelsior Funds
International Fund, the Equity CIF Portfolio into the Excelsior Funds
Equity Fund, the Early Life Cycle CIF Portfolio into the Excelsior
Funds Early Life Cycle Fund, the Optimum Growth CIF Portfolio into the
Excelsior Trust Institutional Optimum Growth Fund, and the Equity Value
CIF Portfolio into the Excelsior Trust Institutional Equity Value Fund.
6. Applicants will institute the following procedures to ensure the
protection of Plan participants in the proposed transactions. Each
Affiliated Plan will have an employee benefit review committee (the
``Committee'') that serves as fiduciary for the Plan. Also, each
Affiliated Plan and Other Plan will have a fiduciary, independent of
U.S. Trust and its affiliates, that will supervise the investment of
that Plan's assets. This independent fiduciary generally will be the
Plan's named fiduciary, trustee or sponsoring employee (in the case of
the Other Plans), and will be subject, as will the Committee, to
fiduciary responsibilities under the Employee Retirement Income
Security Act of 1974 (``ERISA''). Under section 404(a) of ERISA, such
fiduciaries must ensure that the investment of the Affiliated Plans'
assets is prudent and operates exclusively for the benefit of
participating employees of U.S. Trust and/or its affiliates and of
their beneficiaries.
7. Before transferring the Affiliated Plans' CIF assets to the
Portfolios, U.S. Trust will seek and obtain the approval of the
Committee and each Affiliated Plan's independent fiduciary. U.S. Trust
will provide the Committee and the independent fiduciaries with a
current prospectus for the relevant Portfolios and a written statement
giving full disclosure of the fees to be received by U.S. Trust and/or
its affiliates and the
[[Page 13905]]
terms of the proposed transactions. The disclosure will explain why
U.S. Trust believes that the investment of assets of the Affiliated
Plans in the Portfolios is appropriate.
8. On the basis of such information, the Committee and the
independent fiduciary will decide whether to authorize U.S. Trust to
invest the relevant Affiliated Plan's assets in the Fund and to receive
fees from the Fund. U.S. Trust does not charge Plan level fees to
Affiliated Plans and, therefore, will not collect fees at both the Plan
level and the Fund level for managing the same assets. However, the
fees charged to the Affiliated Plans may increase as a result of the
greater costs of Fund administration as compared to the administration
of the CIF. Because U.S. Trust does charge Plan level fees to the Other
Plans, it will credit all Fund level fees back to those Plans.
9. Because of the need to obtain approval from various fiduciaries,
and the need to obtain effectiveness of the registration statement
describing the two new equity Portfolios of the Excelsior Trust, the
proposed transactions may occur in more than one stage. Only those
Plans that have received the required approval from the Committee and
the independent fiduciary will participate at any stage. As of the date
of each transfer, U.S. Trust, on behalf of the CIF Portfolios, will
deliver to the corresponding Portfolio securities equal in value to the
interest of each participating Plan, in exchange for Fund shares with
total net asset value equal to the market value of the transferred
assets as of the date of the transfer. All securities transferred to a
Portfolio in any stage will be securities capable of being priced
pursuant to rule 17a-7(b) (1) through (4) under the Act, and will be
consistent with the investment objectives and fundamental policies of
the corresponding Portfolio. The Fund shares received by the CIF
Portfolios then will be distributed, pro rata, to all Plans whose
interests were converted as of that date.
10. U.S. Trust is terminating the CIF and transferring its assets
into the Funds because it believes investment of those assets in mutual
fund will better serve the interests of its employee retirement benefit
plan clients. Investment of Plan assets in mutual funds will allow the
sponsors of and participants in the Plans to monitor more easily the
performance of their investments on a daily basis, as information
concerning the investment performance of the Portfolios generally will
be available in daily newspapers. Additionally, the mutual fund vehicle
will provide other advantages, such as daily pricing, and will afford
U.S. Trust a better opportunity to market its investment management
services. Assuming those marketing efforts result in greater assets
under management, this investment also will allow for greater
diversification. Also, Plan participants will have the benefit of the
heightened disclosure applicable to mutual funds under the federal
securities laws.
Applicants' Legal Analysis
1. Section 17(a) of the Act, in relevant part, prohibits an
affiliated person of a registered investment company, or an affiliated
person of such person, acting as principal, from selling to or
purchasing from such investment company any security or other property.
Section 2(a)(3) of the Act, in relevant part, defines ``affiliated
person'' to include: (a) any person directly or indirectly owning,
controlling, or holding with the power to vote, 5% or more of the
outstanding voting securities of such other person; (b) any person
directly or indirectly controlling, controlled by, or under common
control with, such other person; and (c) if such other person is an
investment company, any investment adviser thereof.
2. Section 6(c) provides that the SEC may exempt any person or
transaction from any provision of the Act or any rule thereunder to the
extent that 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.
3. Section 17(b) 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.
4. Section 17(d) prohibits an affiliated person of a registered
investment company, or an affiliated person of such person, acting as
principal, from effecting any transaction in which such investment
company is a joint, or joint and several, participant with such person
in contravention of SEC rules and regulations. Rule 17d-1 under the Act
provides that no joint transaction covered by the rule may be
consummated unless the SEC issues an order upon application. In passing
upon such applications, the SEC considers whether participation by a
registered investment company is consistent with the provisions,
policies, and purposes of the Act, and is not on a basis less
advantageous than that of other participants.
5. Because the CIF may be viewed as acting as principal in the
proposed transactions and because the CIF and the Funds may be viewed
as being under the common control of U.S. Trust within the meaning of
section 2(a)(3)(C) of the Act, the proposed transactions may be subject
to the prohibitions contained in section 17(a). For the same reasons,
the proposed transactions might be deemed to be a joint enterprise or
other joint arrangement prohibited by section 17(d) and rule 17d-1.
6. Applicants request an order under sections 6(c) and 17(b)
granting an exemption from section 17(a), and pursuant to section 17(d)
and rule 17d-1. Applicants submit that the terms of the proposed
transactions, as set forth above, satisfy the standards for an
exemption set forth in sections 6(c) and 17(b) and rule 17d-1.
7. Applicants believe that the proposed transactions will be on
terms that are reasonable and fair, and do not involve overreaching on
the part of any person. The proposed transactions will comply with rule
17a-7 (b)-(f) under the Act, and also will comply with the policy
behind the conditions set forth in rule 17a-8. Applicants assert that
the fact that the proposed transactions are designed as in-kind
transfers does not negatively affect their fairness. Indeed, if the
proposed transactions were effected in cash, the Plans would have to
sell their securities, thereby incurring brokerage commissions or the
adverse effects of mark-downs. Similarly, following the Plans'
investment in the Fund, the Fund would purchase similar securities in
the market, causing a second round of brokerage commissions and the
adverse effects of mark-ups. In addition, because time could elapse
between the sale of Plan securities and the repurchase of similar
securities, no assurance could be given that the Funds would be able to
purchase those securities at the price for which Plan securities had
been sold. In contrast, the proposed transactions would not expose the
Plans' assets to transaction costs or timing risk.
8. Applicants contend that the requested exemptive relief also
would be consistent with the purposes intended by the policies and
provisions of the Act. Applicants believe that the proposed
transactions do not give rise to the abuses that sections 17 (a) and
(d) and rule 17d-1 were designed to prevent. A primary purpose
underlying sections 17 (a) and (d) and rule 17d-1 is to prevent a
person with a pecuniary interest in a transaction from using his or her
position with a registered
[[Page 13906]]
investment company to benefit himself or herself to the detriment of
the company's shareholders. After the proposed transactions, each
Affiliated Plan will be a shareholder in a Portfolio with substantially
similar investment objectives to the CIF Portfolio from which their
assets were transferred. In this sense, the proposed transactions can
be viewed as a change in the form in which assets are held, rather than
as a disposition giving rise to section 17 concerns. Moreover, any
transfer will be subject to extensive review and evaluation by
independent fiduciaries whose actions are governed by ERISA and by the
disinterested members of the board of directors (trustees) of the
Funds. For these reasons, the participation will not be on a basis
different from or less advantageous than that of other participants for
purposes of rule 17d-1.
9. Applicants submit that the proposed transactions meet the
section 6(c) standards for relief as necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policies and provisions of the Act.
Shares of the Funds issued as part of the proposed transactions will be
issued at prices equal to their net asset values. In addition, the
assets of the Affiliated Plans will be valued pursuant to objective
standards and are the type that the Portfolios otherwise would purchase
through market transactions. Furthermore, the proposed transactions are
subject to independent fiduciary approval. Therefore, the transfers
will afford no opportunity for affiliated persons of the Funds to
effect a transaction detrimental to the Affiliated Plans or to the
other shareholders of the Funds.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The purchase transactions will comply with the provisions of
rules 17a-7(b)-(f).
2. The purchase transactions will not occur unless and until: (a)
the boards of directors (trustees) of the Funds (including a majority
of their disinterested members) and the Committee and the Affiliated
Plans' independent fiduciaries find that the proposed transactions are
in the best interest of the Funds and the Affiliated Plans,
respectively; and (b) the boards of directors (trustees) of the Funds
(including a majority of their disinterested members) find that the
interests of the existing shareholders of the Funds will not be diluted
as a result of the proposed transactions. These determinations and the
basis on which they are made will be recorded fully in the records of
the Funds and the Plans, respectively.
3. In order to comply with the policies underlying rule 17a-8, any
conversion will have to be approved by the board of directors
(trustees) of the Funds and any Affiliated Plan's independent
fiduciaries who would be required to find that the interests of
beneficial owners would not be diluted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-7543 Filed 3-27-96; 8:45 am]
BILLING CODE 8010-01-M
