[Federal Register Volume 59, Number 155 (Friday, August 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19679]
[[Page Unknown]]
[Federal Register: August 12, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20446; 812-9068]
First American Mutual Funds, et al.; Notice of Application
August 5, 1994.
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: First American Mutual Funds (``FAMF''), First American
Investment Funds, Inc. (``FAIF''), and First Bank National Association
(the ``Adviser'').
RELEVANT ACT SECTIONS: Order requested: (a) Under section 17(b)
granting an exemption from section 17(a); (b) permitting certain joint
transactions under section 17(d) and rule 17d-1, and (c) under 6(c)
granting an exemption from the provisions of section 15(f)(1)(A).
SUMMARY OF APPLICATION: Applicants seek an order under section 17(b)
for an exemption from section 17(a) and an order under section 17(d)
and rule 17d-1 to permit certain series of FAIF to acquire all of the
assets of certain series of FAMF in exchange for shares of FAIF.
Applicants also seek an order under section 6(c) granting an exemption
from section 15(f)(1)(A) to permit FAIF's board of directors to
continue with its present membership following completion of the
proposed transactions.
FILING DATE: The application was filed on June 24, 1994 and amended on
August 4, 1994.
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 August 30, 1994,
and should be accompanied by proof of service on the 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: FAMF and FAIF, 680 East Swedesford Road, Wayne,
Pennsylvania 19087. The Adviser, First Bank Place, 601 Second Avenue
South, Minneapolis, Minnesota 55480.
FOR FURTHER INFORMATION CONTACT:
John V. O'Hanlon, Senior Attorney, at (202) 942-0578 or C. David
Messman, Branch Chief, at (202) 942-0564 (Office of Investment Company
Regulation, Division of Investment Management).
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. FAMF is an open-end management investment company organized as a
Massachusetts business trust and registered under the Act.\1\ FAMF
currently offers four series of shares: Diversified Growth Fund,
Managed Income Fund, Limited Term Tax Free Income Fund, and Equity
Income Fund (collectively, the ``Acquired Funds''). As of June 13,
1994, FAMF had total net assets of approximately $129 million.
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\1\FAMF was organized in 1992 as ``The Boulevard Funds'' and
changed its name to FAMF on May 18, 1994.
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2. FAIF is an open-end management investment company organized as a
Maryland corporation and registered under the Act.\2\ FAIF currently
offers seventeen series of shares. One of these series is the Limited
Term Income Fund (together with three series to be created in
connection with the proposed transactions, the ``Acquiring Funds''). As
of June 13, 1994, FAIF had total net assets of approximately $979
million.
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\2\FAIF was incorporated in 1987 as ``SECURAL Mutual Funds,
Inc.'' and changed its name to FAIF in 1991.
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3. The Adviser acts as investment adviser to each series of FAMF
and FAIF. The Adviser is a wholly-owned subsidiary of First Bank
System, Inc. (``FBS'').
4. Boulevard Bank National Association (``Boulevard Bank'') is an
indirect wholly-owned subsidiary of FBS. Boulevard Bank and its
affiliates hold of record through a nominee more than 5% of the
outstanding shares of each Acquired Fund, and they hold or share voting
and/or investment discretion with respect to a portion of such shares.
All such shares are held for the benefit of others in a trust, agency,
custodial, or other fiduciary or representative capacity. Boulevard
Bank and its affiliates do not have an economic interest in any such
shares.
5. First Trust National Association (``First Trust'') also is a
wholly-owned subsidiary of FBS and acts as custodian for FAMF and FAIF.
First Trust and its affiliates hold of record in their own name and in
the name of a nominee more than 5% of the outstanding shares of one of
the Acquiring Funds, and they hold or share voting and/or investment
discretion with respect to a portion of such shares. All such shares
are held for the benefit of others in a trust, agency, custodial, or
other fiduciary or representative capacity. First Trust and its
affiliates do not have an economic interest in any such shares.
6. FBS acquired the holding company for Boulevard Bank on March 25,
1994, and thus became the indirect 100% owner of Boulevard Bank.
Boulevard Bank was the investment adviser to each series of FAMF until
March 28, 1994. Thus, FBS' acquisition of indirect ownership of
Boulevard Bank arguably constituted a sale of Boulevard Bank and an
assignment of its advisory contract with FAMF within the meaning of
section 15(f). On March 25, 1994, the shareholders of FAMF approved the
Adviser as successor investment adviser to each series of FAMF and
elected a new Board of Trustees of FAMF. The new members of the FAMF
Board are identical to the members of the FAIF Board of Directors,
except that one director of FAIF does not serve on FAMF's board. This
individual was not nominated to serve on FAMF's board in order to
ensure that at least 75% of FAMF's trustees would be ``disinterested,''
as required by the ``safe harbor'' provisions of section
15(f)(1)(A).\3\
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\3\The proxy statement provided to shareholders of FAMF in
connection with their March 25, 1994 meeting stated that the section
15(f)(1)(A) requirement that at least 75% of FAMF's directors be
disinterested may be disregarded in the future if the SEC grants an
exemptive order or no-action relief permitting such action.
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7. Applicants propose that the Acquired Funds be combined with and
into the Acquiring Funds in tax-free reorganizations (the
``Reorganizations''). In the Reorganizations, each Acquiring Fund will
acquire all of the assets and liabilities of the respective Acquired
Fund in exchange for shares of the Acquiring Fund, which then will be
distributed to former shareholders of the Acquired Fund. The number of
Limited Term Income Fund shares to be issued in exchange for each
Managed Income Fund share of each class will be determined by dividing
the net asset value of one Managed Income Fund share of such class as
of the effective time of the Reorganization (before giving effect
thereto) by the net asset value of one Limited Term Income Fund share
of the same class at such time. In the case of the three Acquired Funds
which are being acquired by newly created Acquiring Funds, the share
exchanges will take place on a share-for-share basis.
8. Each Acquired Fund and each Acquiring Fund offers or will offer
Retail Class, CDSC Class, and Institutional Class shares.\4\ Each such
class of each Acquired Fund is subject to front-end and deferred sales
charges and to rule 12b-1 and shareholder servicing fees that are
identical to those of its counterpart Acquiring Fund. In addition, each
Acquired Fund is subject to investment advisory fees which are
identical to those of its counterpart Acquiring Fund. In the
Reorganizations, former Acquired Fund shareholders will receive
Acquiring Fund shares of the class which corresponds to that of their
Acquired Fund shares and which have an aggregate net asset value equal,
at the effective time of the Reorganizations, to that of their Acquired
Fund shares. The investment objectives, policies, and restrictions of
each Acquired Fund are substantially similar to those of its respective
Acquiring Fund.
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\4\Each series of FAIF and FAMF is authorized to issue multiple
classes of shares in reliance on an exemptive order issued to the
distributor of their shares. Investment Company Act Released Nos.
19698 (Sept. 9, 1993) (notice) and 19757 (Oct. 4, 1993) (order).
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9. The Adviser has agreed to waive advisory fees and reimburse
expenses for each class of each Acquiring Fund to the extent that it is
currently doing so with respect to the counterpart classes of the
respective Acquired Funds, in each case through January 31, 1996. As a
result, through such date former Acquired Fund shareholders will retain
the benefit of the fee waivers currently applicable to them following
the Reorganization. The differential among classes in the total expense
cap agreed to by the Adviser is and will be equal to the differential
in rule 12b-1 fees applicable to the respective classes.
10. Former holders of Acquired Fund CDSC Class shares who receive
Acquiring Fund CDSC Class shares in the Reorganizations will receive
credit for the period they held Acquired Fund CDSC Class shares in
applying any contingent deferred sales charge on Acquiring Fund CDSC
Class shares and in applying any conversion feature. In addition, in
applying any deferred sales charge on purchases of Retail Class shares,
credit will be given for the period a former Acquired Fund shareholder
who is subject to such a deferred sales charge held his or her shares.
11. A registration statement on Form N-14 will be filed with
respect to the Reorganizations. A special meeting of shareholders of
FAMF will be held to consider and act upon the Reorganizations in
accordance with the Act and Massachusetts law. If the required
shareholder votes are obtained, the closing is expected to take place
shortly thereafter.
12. At meetings held June 8, 1994, the Board of Trustees of FAMF
and the Board of Directors of FAIF, including the disinterested
trustees and directors, found, as required by rule 17a-8(a), that
participation in the Reorganizations is in the best interests of the
Acquired Funds and the Acquiring Funds and that the interests of
existing shareholders of such funds will not be diluted as a result of
the Reorganizations. The Boards also unanimously approved the
Reorganizations. In doing so, the Boards considered: The compatibility
of the investment objectives, policies, and restrictions of the
respective Acquired Funds and Acquiring Funds; the expected advantages
to the Acquired Funds and the Acquiring Funds of the Reorganizations;
the anticipated tax-free nature of the Reorganizations; the terms and
conditions of the Reorganizations; the costs associated with the
Reorganizations, and the agreement of the Adviser to bear such costs;
the anticipated advisory fees and sales charges before and after the
Reorganization, the Adviser's agreement to waive a portion of such
fees, and the provision for giving credit to former Acquired Fund
shareholders for the period they held their shares in applying deferred
sales charges; and the potential benefits to the Adviser of the
Reorganizations.
13. The expected advantages to the Acquired Funds and Acquiring
Funds considered by the Boards include: elimination of certain
duplicative expenses of separate funds and of separate legal entities;
spreading of relatively fixed expenses across larger asset bases;
potential increased sales of the surviving funds due to the ability of
FAIF to offer a ``full line'' of funds; and facilitation of portfolio
management. The potential benefits to the Adviser considered by the
Boards include potentially reduced expenses for advisory fee waivers to
the extent that the total expense ratios before waivers of the combined
funds decrease as a result of the Reorganizations. The Boards found
that the expected advantages to the Acquiring Funds and the Acquired
Funds outweighed the potential benefits to the Adviser.
14. Applicants have agreed not to make any material changes to the
reorganization agreements that affect the application without the prior
approval of the SEC staff. Applicants also have agreed not to waive,
amend, or modify any provision of the reorganization agreements that is
required by state or federal law in order to effect the
Reorganizations.
Applicants' Legal Analysis
1. Section 2(a)(3) of the Act provides, in pertinent part, that any
person directly or indirectly owning, controlling, or holding with
power to vote 5% or more of the outstanding voting securities of any
other person is an affiliated person of that person.
2. Section 17(a), in pertinent part, prohibits an affiliated person
of a registered investment company, or any affiliated person of such a
person, acting as principal, from selling to or purchasing from such
registered company, or any company controlled by such registered
company, any security or other property.
3. Section 17(b) provides that the Commission may exempt a
transaction from the provisions of section 17(a) if evidence
establishes that the terms of the proposed transaction, including the
consideration to be paid, are reasonable and fair and do not involve
overreaching on the part of any person concerned, and that the proposed
transaction is consistent with the policy of the registered investment
company concerned and with the general purposes of the Act.
4. Rule 17a-8 under the Act exempts from the prohibitions of
section 17(a) mergers, consolidations, or purchases or sales of
substantially all of the assets of registered investment companies that
are affiliated persons solely by reason of having a common investment
adviser, common directors, and/or common officers, provided that
certain conditions set forth in the rule are satisfied.
5. As noted above, the Acquiring Funds and the Acquired Funds have
a common investment adviser. Thus, the Reorganizations would be exempt
from the provisions of section 17(a) by virtue of rule 17a-8, but for
the fact that the Acquiring Funds and the Acquired Funds may be
affiliated for reasons other than those set forth in the rule.
Boulevard Bank and its affiliates hold of record more than 5% of the
outstanding voting securities of each of the Acquired Funds and hold or
share voting and/or investment discretion with respect to a portion of
such shares. Because of this ownership, each Acquired Fund is an
affiliated person of Boulevard Bank under section 2(a)(3)(B). Boulevard
Bank is an affiliated person of the Adviser because it is under common
ownership and control with the Adviser. The Adviser, in turn, is an
affiliated person of each Acquiring Fund under section 2(a)(3)(E) by
virtue of its investment advisory relationship with these funds.
Therefore, each Acquiring Fund is an affiliated person of an affiliated
person of each Acquired Fund.
6. Similarly, one Acquiring Fund might be deemed an affiliated
person of an affiliated person of its counterpart Acquired Fund because
First Trust and its affiliates hold of record more than 5% of the
outstanding voting securities of such Acquiring Fund and hold or share
voting and/or investment discretion with respect to a portion of such
shares.
7. Section 17(d) of the Act prohibits any affiliated person of, or
principal underwriter for, a registered investment company, or any
affiliated person of such a person, acting as principal from effecting
any transaction in which such registered company is a joint, or joint
and several, participant with such person in contravention of such
rules and regulations as the Commission may prescribe for the purpose
of limiting or preventing participation by such registered company on a
basis different from, or less advantageous than, that of such other
participant. Rule 17d-1 under the Act provides that no joint
transaction covered by the rule may be consummated unless the SEC
grants exemptive relief after considering whether the participation of
the investment company is consistent with the provisions, policies and
purposes of the Act and the extent to which the participation in on a
basis different from or less advantageous than that of other
participants.
8. The proposed sale of assets by each Acquired Fund to its
respective Acquiring Fund and the related transactions involved in the
Reorganizations might be deemed to be a joint enterprise or other joint
arrangement in which a registered investment company and affiliated
person of such company are participants.
9. Applicants submit that the Reorganizations meet the standards
for relief under section 17(b) and rule 17d-1, in that the terms of the
Reorganizations, 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 Reorganizations are consistent with the
policy of each Acquired Fund and Acquiring Fund; the Reorganizations
are consistent with the general purposes of the Act; the participation
of the Acquired Funds and the Acquiring Funds in the Reorganizations on
the basis proposed is consistent with the provisions, policies, and
purposes of the Act; and the extent to which such participation is on a
basis different from or less advantageous than that of other
participants does not outweigh the advantages of such participation.
10. Section 15(f) of the Act permits an investment adviser or
affiliate thereof to receive any amount or benefit in connection with
the ``assignment'' of its investment advisory contract with a
registered investment company if the requirements of that section are
satisfied. Section 15(f)(1)(A) requires that, for three years after the
transaction, at least 75% of the directors of the investment company
(or its successor) are not interested persons, within the meaning of
section 2(a)(19) of the Act, of the investment adviser or predecessor
investment adviser of such investment company.
11. Applicants request an exemption from section 15(f)(1)(A)
because FBS' acquisition of indirect ownership of Boulevard Bank
constituted a sale of Boulevard Bank and an assignment of its advisory
contract with FAMF within the meaning of section 15(f).
12. Although FAMF's Board of Trustees currently meets the 75%
requirement of section 15(f)(1)(A), upon completion of the
Reorganizations FAIF's board of directors will not because two of its
six directors will be deemed ``interested persons'' of the Adviser
under section 2(a)(19). Thus, unless exemptive relief from section
15(f)(1)(A) is granted, the Reorganizations cannot be completed within
the ``safe harbor'' of section 15(f) unless the Board of Directors of
FAIF is reconstituted by either adding two disinterested directors or
by securing the resignation of one interested director. Neither of
these actions is believed by applicants to be in the best interests of
FAIF shareholders or necessary for the protection of FAMF shareholders.
13. Section 15(f)(3) of the Act provides that if an assignment of
an investment advisory contract with a registered investment company
results in a successor investment adviser to such company and such
adviser is then an investment adviser with respect to other assets
substantially greater in amount than the amount of assets of such
company, such discrepancy in size of assets shall be considered by the
Commission in determining whether or to what extent an application for
exemption from the provisions of section 15(f)(1)(A) should be granted.
14. As of June 13, 1994, FAMF had total net assets of approximately
$129 million, while FAIF had total net assets of approximately $979
million. Applicants submit that this substantial disparity in assets
should be taken into account under section 15(f)(3) in determining
whether to grant exemptive relief. Applicants believe that it is
appropriate to compare the overall size of FAIF to that of FAMF,
because the question is whether the Board that is responsible for all
series of FAIF (and not just for the Acquiring Funds) is to be
reconstituted. Applicants further submit that the requested relief from
section 15(f)(1)(A) is necessary and appropriate in the public
interest, consistent with the protection of investors, and consistent
with the purposes fairly intended by the Act, as required by section
6(c).
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19679 Filed 8-11-94; 8:45 am]
BILLING CODE 8010-01-M
