[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27634-27636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13100]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22660; 812-10440]
The Kent Funds; Notice of Application
May 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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applicant: The Kent Funds.
relevant act sections: Order requested: (a) Under section 6(c) of the
Act granting exemptions from sections 13(a)(2), 18(f)(1), 22(f), and
22(g) of the Act and rule 2a-7 thereunder; (b) under sections 6(c) and
17(b) granting exemption from section 17(a)(1) of the Act; and (c)
under section 17(d) and rule 17(d)(1) thereunder to permit certain
joint transactions.
summary of application: Applicant requests an order that would permit
it and each of its existing and future series to enter into deferred
fee arrangements with its trustees and to effect certain transactions
incidental thereto.
filing dates: The application was filed on November 20, 1996 and
amended on April 21, 1997.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 9, 1997 and
should be accompanied by proof of service on the applicant, 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, N.W., Washington, D.C.
20549. Applicant, 3435 Stelzer Road, Columbus, Ohio 43219.
for further information contact: Kathleen L. Knisely, Staff Attorney,
at (202) 942-0517, or H. R. Hallock, Jr., Special Counsel, 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.
Applicant's Representations
1. Applicant is registered under the Act as an open-end management
investment company and organized as a Massachusetts business trust.
Applicant currently consists of fourteen investment portfolios (the
``Funds''). Old Kent Bank, a Michigan banking association (the
``Adviser''), serves as investment adviser for each portfolio.
2. Applicant's board of trustees currently consists of five
persons, four of whom are not ``interested persons'' of applicant
within the meaning of section 2(a)(19) of the Act. Each trustee, except
the trustee who is an ``interested person'' of applicant, receives an
annual retainer, plus an additional fee for each board meeting
attended. The fees paid to the trustees are allocated among the Funds
based on their relative net assets.
3. The deferred fee arrangement which has been adopted by applicant
is implemented through a Deferred Compensation Plan (the ``Plan''). The
purpose of the Plan is to permit individual trustees to defer receipt
of their fees to enable them to defer payment of income taxes on such
fees, an arrangement which should help applicant attract and retain
qualified trustees. The Plan may be amended from time to time, but such
amendments will not be inconsistent with the relief granted to the
applicant pursuant to the application. In addition, such amendments
will be limited to immaterial amendments or supplements, or will be
amendments or supplements made to conform the Plan to applicable law.
4. Under the Plan, the amount of a trustee's compensation deferred
under the Plan (the ``Compensation Deferrals'') is credited to a book
reserve account (each a ``Deferral Account'') each calendar quarter in
which such fees would have otherwise been paid. The liability
represented by the Deferral Account for each trustee is allocated among
the Funds based on their relative net assets and recorded on the books
of each Fund. Each Deferral Account will be credited or charged with
book adjustments so that the value of the Deferral Account, as of any
date, will be equal to the value such account would have had if the
amount credited to it had been invested and reinvested in the
investment alternative(s) designated by the trustee (the ``Designated
Investment(s)'').
5. Currently, the only available Designated Investment under the
Plan is 91-day U.S. Treasury Bills. Upon receipt of an order by the
SEC, applicant intends to make certain of the Funds available as
Designated Investments. The trustees may elect to change the Designated
Investments for future or past Compensation Deferrals by delivering
written notice to applicant's treasurer.
6. With respect to the obligations created under the Plan, each
trustee will be a general unsecured creditor of each Fund. A Fund's
obligation to make
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payments with respect to a Deferral Account will be a general
obligation of the Fund to be made pro rata from its general assets. The
Plan does not create an obligation of the Trust or any Fund to
purchase, hold, or dispose of any investments. If a Fund should choose
to purchase investments in order to exactly ``match'' its obligations
to credit or charge the Deferral Account with the earnings and gains or
losses attributable to the Designated Investment(s), all such
investments will be part of the general assets of such Fund. While
matching would ensure that the Plan would have no effect on the net
assets of any Fund, applicant believes that, even without matching, any
such effect will be negligible since the amounts subject to the Plan
are expected to be insignificant in comparison to the total assets of
each Fund.
7. Any money market fund that values its assets by the amortized
cost method will buy and hold the Desginated Investments 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. Except in the case of money market
Funds, applicant expects to effect matching transactions only if
circumstances warrant, based upon a consideration of a Fund's total
assets and the amount of deferred compensation subject to the Plan. In
no event do the Funds anticipate purchasing or selling shares of other
investment companies that may be Designated Investments to a greater
extent than is permitted by section 12(d)(1) of the Act. Each Fund will
vote shares of any affiliated Fund held pursuant to the Plan in
proportion to the votes of all other holders of shares of such Fund.
8. Under the Plan, distribution from the trustee's Deferral Account
may be made in a lump sum or in installments as elected by the trustee.
The distribution would commence as of January 31st of the year
following the year in which the trustee dies, retires, or otherwise
ceases to be a member of applicant's board of trustees. In the event of
death, amounts payable to the trustee under the Plan will become
payable to a beneficiary designated by the trustee; in all other
events, the trustee's right to receive payments is non-transferable. In
addition, applicant may at any time make a single sum payment to a
trustee equal to all or part of the balance in the trustee's Deferral
Account. Such payment would be made upon a showing of an unforeseeable
financial emergency caused by an event beyond the control of the
trustee, which would result in a severe financial hardship to the
trustee if such payment were not made.
9. The Plan does not, and will not obligate applicant to retain the
services of a trustee, nor will it obligate applicant to pay any (or
any particular level of) fees to any trustee. Rather, it will merely
permit a trustee to elect to defer receipt of fees that would otherwise
be payable from applicant.
Applicant's Legal Analysis
1. Applicant requests an order under section 6(c) of the Act
granting relief from sections 13(a)(2), 18(f)(1), 22(f), and 22(g) of
the Act and rule 2a-7 thereunder to the extent necessary to permit
applicant to enter into deferred fee arrangements with its trustees;
under section 6(c) and 17(b) of the Act granting relief from section
17(a)(1) to the extent necessary to permit the Funds to sell securities
issued by them to other Funds in connection with such deferred fee
arrangements; and pursuant to section 17(d) of the Act and rule 17d-1
thereunder to the extent necessary to permit applicant and the Funds to
engage in certain joint transactions incident to such deferred fee
arrangements.\1\
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\1\ Applicant acknowledges that the requested order would not
permit a party acquiring its assets to assume its obligations under
the Plan if such assumption of obligations would violate the Act.
Accordingly, such assumption would be permitted only if the assuming
party is (1) another Fund, (2) another registered investment company
that has received exemptive relief similar to that sought by the
application, or (3) not a registered investment company.
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2. Section 6(c) of the Act provides, in part, that the SEC may, by
order upon application, conditionally or unconditionally exempt any
person, security or transaction from any provision of the Act, if and
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 18(f)(1) of the Act generally prohibits a registered
open-end investment company from issuing senior securities. Section
13(a)(2) of the Act 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.
Section 18(g) of the Act defines ``senior security'' to include ``any
bond, debenture, note or similar obligation or instrument constituting
a security and evidencing indebtness.'' Applicant states that the Plan
does not and will not give rise to any of the ``evils'' that led to
Congress' concerns in this area. Neither applicant nor any Fund will be
``borrowing'' from the trustees. The Plan will not induce speculative
investments by any Fund or provide an opportunity for manipulative
allocation of a Fund's expenses and profits, affect the control of any
Fund, confuse investors or convey a false impression as to the safety
of their investments, or be inconsistent with the theory of mutuality
of risk.
4. Section 22(f) prohibits undisclosed restrictions on the
transferability or negotiability of redeemable securities issued by
open-end investment companies. The Plan would set forth such
restrictions, and such restrictions are included primarily to benefit
the participating trustee and would not adversely affect the interests
of any trustee or any shareholder of the Funds.
5. Section 22(g) generally prohibits registered open-end investment
companies from issuing any of their securities for services or for
property other than cash or securities. Applicant states that the
legislative history of the Act suggests that Congress was concerned
with the dilutive effect on the equity and voting power of common stock
of, or units of beneficial interest in, an open-end company if the
company's securities were issued for consideration not readily valued.
Applicants asserts that the Plan would not have this effect for the
trustee's right to receive payments under the Plan is not granted in
return for services or property other than cash already owed to the
trustee. Applicant submits that the Plan would merely provide for
deferral of the payment of such fees, and thus any rights under the
Plan should be viewed as being ``issued'' not for services but in
consideration of the Fund's not being required to pay such fees on a
current basis.
6. Rule 2a-7 imposes certain restrictions on the investments of
``money market funds,'' as defined under the rule, that generally would
prohibit a Fund that is a money market fund from investing in the
shares of other Funds. Applicant requests relief from the rule to
permit the money market funds to invest in Designated Investments. This
would enable such Funds to achieve an exact matching of the Designated
Investment with the deemed investments of the Deferral Accounts,
thereby ensuring that the deferred fee arrangements will not affect net
asset value.
7. Section 17(a)(1) of the Act generally prohibits an affiliated
person of a registered investment company, or any affiliated person of
such person, from selling any security to such registered
[[Page 27636]]
investment company. Applicant submits that the Funds may be affiliated
persons of each other pursuant to section 2(a)(3) of the Act by reason
of being under common control of the Adviser. Applicant asserts that
section 17(a)(1) was designed to prevent sponsors of investment
companies from using investment company assets as capital for
enterprises with which they are associated or acquire controlling
interests in such enterprises. Applicant submits that the sale of
securities issued by the various Funds pursuant to the Plan does not
implicate Congress' concerns in enacting this section, but merely
facilitates the matching of the liabilities for Compensation Deferrals
with the Designated Investments, the value of which determines the
amount of such liabilities.
8. Section 17(b) authorizes the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that: (a) The
terms of the transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching; (b)
the transaction is consistent with the policy of each registered
investment company concerned; and (c) the transaction is consistent
with the general purposes of the Act. Applicant submits that all Funds
meet the standards for relief under section 17(b) of the Act. Applicant
further submits that the requested relief from various provisions of
the Act meets the standards for an exemption set forth in section 6(c)
of the Act.
9. Section 17(d) and rule 17d-1 are designed to limit or prevent 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 or profit-sharing
plan ``on a basis different from or less advantageous than that of''
the affiliated person. Applicant asserts that any adjustments made to
the Deferral Accounts to reflect the income, gain, or loss with respect
to the Designated Investments would be identical to the changes in
share value experienced by any investor in the same investments during
the same period, but whose securities were not held in a Deferral
Account. The participating trustee would neither directly nor
indirectly receive a benefit that would otherwise inure to the Funds or
to any of their shareholders, and thus the Plan would not constitute a
joint or joint and several participation by any Fund with an affiliated
person on a basis different from or less advantageous than that of the
affiliated person. Applicant asserts that the deferral of a trustee's
fees in accordance with the Plan would maintain the parties, viewed
both separately and in their relationship to one another, in the same
position (apart from tax effects) as would occur if the trustees' fees
were paid on a current basis and then invested by the trustee directly
in the Designated Investments.
Applicant's Conditions
Applicant agrees that the order of the SEC 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 the Designated Investments 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 Investments issued by an
affiliated Fund, the Fund will vote such shares in proportion to the
votes of all other holders of shares of such affiliated Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13100 Filed 5-19-97; 8:45 am]
BILLING CODE 8010-01-M
