[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43278-43280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21321]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. IC-22145; 812-10138]
GE Investment Management Incorporated, et al.; Notice of
Application
August 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``Act'').
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APPLICANTS: GE Investment Management Incorporated (``GEIM''); GE
Investment Services Inc. (``GEIS'') and GE Funds, on behalf of
themselves and each open-end management investment company, or series
thereof, that is or will be part of a group of investment companies
that holds itself out to investors as related companies for purposes of
investment and investor services (a) for which GEIM or any entity
controlled by or under common control with GEIM now or in the future
acts as investment adviser, or (b) for which GEIS or any entity
controlling, controlled by or under common control with GEIS now or in
the future acts as distributor (collectively, with the GE Funds, the
``GE Family Funds'' or the ``Funds'').\1\
\1\ GE Funds is the only existing GE Family Fund that currently
intends to rely on the requested order. Other existing GE Family
Funds do not presently intend to rely on the requested order, but
may do so in the future in accordance with the terms thereof.
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RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from section 12(d)(1) of the Act, and under section
6(c) and 17(b) of the Act for an exemption from section 17(a) of the
Act.
SUMMARY OF APPLICATION: The requested order would permit applicants to
create a ``fund of funds,'' whereby the series of GE LifeStyle Funds
(``LifeStyle'') would allocate substantially all of their assets among
the series of the GE Funds.
FILING DATES: The application was filed on May 8, 1996, and amended on
August 9, 1996.
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 September 9,
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 who wish to
be notified of a hearing may request such notification by writing to
the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 3003 Summer Street, Stamford, Connecticut 06905.
FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Counsel, at (202) 942-0583, 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. GE Funds, a Massachusetts business trust, is registered under
the Act as an open-end management investment company. GE Funds consists
of eleven series, eight of which are offered currently.
2. GEIM, a Delaware corporation that is registered as an investment
adviser under the Investment Advisers Act of 1940, acts as investment
adviser and administrator to the existing series of GE Funds. GEIM is a
wholly-owned subsidiary of General Electric Company, a publicly-held
holding company. GEIS is the distributor of the GE Family Funds.
3. LifeStyle is organized as a Massachusetts business trust.
LifeStyle will be registered under the Act as a non-diversified, open-
end management investment company, and will operate as a ``fund of
funds.'' GEIM will serve as investment adviser to LifeStyle. Initially,
LifeStyle will consist of six series (the ``Investing Funds''): GE
Conservative Strategy Fund, GE Moderate Strategy Fund, and GE
Aggressive Strategy Fund (collectively, the ``Strategy Funds''), and GE
Conservative Allocation Fund, GE Moderate Allocation Fund, and GE
Aggressive Allocation Fund (collectively, the ``Allocation Funds'').
The Strategy Funds will not charge any rule 12b-1 fees, but will impose
either a front-end sales charge of up to 4.75% or, for purchases in
excess of $1 million not subject to the front-end sales charge, a
contingent deferred sales charge of up to 1% on shares held for less
than one year. The Allocation Funds initially will be sold without a
front-end or deferred sales charge, and will not charge any rule 12b-1
fees.
4. Substantially all of the assets of the Investing Funds will be
invested in shares of any GE Family Fund that is not itself an
Investing Fund (a ``Portfolio Fund''). The Portfolio Funds initially
will consist of the following series of GE Funds: GE U.S. Equity Fund,
GE International Equity Fund, GE Fixed Income Fund, GE Short-Term
Government Fund, and, potentially, GE Money Market Fund. Other GE
Family Funds may be added as Portfolio Funds in the future. The
Strategy Funds will invest in Class A shares of the Portfolio Funds,
which generally are offered with a front-end sales charge and are
subject to service and distribution fees at a combined annual rate of
.50% of the average net asset value attributable to the class. The
Allocation Funds will invest in Class D shares of the Portfolio Funds,
which are offered without a sales charge or rule 12b-1 fees. Neither
the Strategy Funds nor the Allocation Funds will pay initial sales
charges in connection with the Investing Funds' investments and
holdings in Portfolio Fund shares.
5. Subject to the supervision and direction of LifeStyle's board of
trustees, allocations of the assets of each Investing Fund among shares
of the Portfolio Funds will be made in accordance with the investment
objective of the Fund. Subsequent allocations of these assets will be
made, consistent with quantitative and other market and economic
analyses developed by GEIM in its role as investment adviser to
LifeStyle. It is contemplated that GEIM will engage an investment
advisory firm to consult periodically with the board of trustees
concerning changes to: (a) the Portfolio Funds in which the Investing
Funds may invest; (b) the percentage range of assets that may be
invested by each Investing Fund in any one Portfolio Fund; and (c) the
percentage range of
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assets that may be invested by each Investing Fund in equity funds and
fixed-income funds. Any such agreement will be subject to section 15(a)
of the Act and condition 4 below.
6. In general, the only direct expenses (other than portfolio
brokerage expenses associated with short-term investment of cash, if
any) payable by the Investing Funds will be the advisory and
administration fee to be charged by GEIM, which may be waived
initially, and certain operating expenses. Although GEIM would also
earn advisory and administration fees arising by virtue of its
investment advisory and administration contracts with the Portfolio
Funds, these fees would not be duplicative of any fee charged directly
to the Investing Funds. Although shareholders of each Investing Fund
would indirectly pay their proportional share of the advisory and
administration fees charged to the relevant Portfolio Fund(s), any
advisory fee charged at the level of the Investing Funds would
compensate GEIM for services unique to the Investing Funds and not
provided at the level of the Portfolio Funds.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(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 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, 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. Applicants request an
order under section 6(c) exempting them from section 12(d)(1) (A) and
(B) to permit each Investing Fund to invest in shares of any Portfolio
Fund in excess of the percentage limitations of section 12(d)(1).
3. Section 12(d) was intended to prevent unregulated pyramiding of
investment companies and the negative effects that were perceived to
arise from such pyramiding. Applicants assert that, in contrast to the
funds of funds of a previous era, the Investing Funds present no threat
to the integrity of any other mutual fund and no irreconcilable
conflicts of interest. They are, rather, a straightforward, sensible,
cost-effective response to investor demand for simplification and
diversification. Applicants believe that the fund of funds structure
will enhance the advantages of diversification because fund managers
will be able to draw on a wider range of specialized expertise in
different market areas. Each Investing Fund will allow investors to
rely on GEIM to determine the portion of the assets of each Investing
Fund to be invested in each of several Portfolio Funds and the timing
of such investments. In addition, each Investing Fund will generate
benefits for the Portfolio Funds in which it invests by providing
additional assets with which to generate economies of scale.
4. Applicants assert that the advisory fees charged to the
Investing Funds and the Portfolio Funds would not be duplicative. If
GEIM determines to increase any advisory fee borne by an Investing
Fund, such fees will conform to the requirements of the conditions to
the requested order, including the requirement for approval by the
trustees who are not ``interested persons'' of the Investing Fund as
that term is defined in section 2(a)(19) of the Act (the ``Independent
Trustees''). This requirement is designed to ensure that any advisory
fee borne by an Investing Fund would be for services that augment,
rather than duplicate, those advisory services provided to the
Portfolio Funds. In addition, any investment consulting fee paid to an
investment advisory firm engaged by GEIM will be paid by GEIM out of
its advisory and administrative fee and, consequently, will have no
effect on shareholders of the Investing Funds.
5. Applicants also assert that their proposal does not present any
danger of excessive sales loads. The fact that there may be a payment
of sales charges or service fees at both the Investing Fund and
Portfolio Fund level will not permit any excessive or duplicative
sales-related charges. If the sales charge structure described in the
application is varied in the future, it will be done only in conformity
with the NASD's restrictions on aggregate sales charges and service
fees. Further, the Investing Funds would pay no sales charges with
respect to their investments in the Portfolio Funds, unless such
charges had been reviewed and approved by the Investing Fund's
Independent Trustees.
6. Applicants believe that the Investing Funds would pose no threat
of excessive control over the Portfolio Funds. Applicants state that
redemption threats and the concomitant risk of lost advisory fees would
not apply in the context of a fund of funds, all of which belong to the
same family of investment companies. The Investing Funds will be
internal funds that will acquire only shares of other GE Family
Funds.\2\ Because GEIM affiliates are the advisers to the GE Family
funds and GEIM will be the adviser to the Investing Funds, a redemption
from one GE Family Fund will simply lead to the placing of the proceeds
into another GE Family Fund. As no Portfolio Fund will be permitted to
invest in securities of any other investment company in excess of the
limits contained in section 12(d)(1)(A) of the Act except as permitted
under the Sweep Application order, there cannot be a ``fund of funds of
funds'' structure under the terms of the application. For these
reasons, applicants submit that the requested order exempting
applicants from section 12(d)(1) to the extent described in the
application meets the standards of section 6(c).
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\2\ Applicants, with other parties, have filed a separate
application seeking relief from the provisions of section 12(d)(1)
of the Act (The G.E. Funds, File No. 812-9838) (the ``Sweep
Application''). If the relief requested in the Sweep Application is
granted, the applicant funds would be able to invest excess cash in
excess of the limits in section 12(d)(1) in an affiliated fund that
would be excluded from the definition of an investment company under
section 3(c)(1) of the Act.
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B. Section 17(a)
1. Section 17(a) of the Act makes it unlawful for an affiliated
person of a registered investment company, or an affiliated person of
such person, to sell securities to, or purchase securities from, the
company. Because the Investing Funds and the Portfolio Funds are each
advised by GEIM, the Investing Funds and the Portfolio Funds may be
considered ``affiliated persons'' of each other, as defined in section
2(a)(3). Thus, purchases by the Investing Funds of the shares of the
Portfolio Funds and the sale by the Portfolio Funds of their shares to
the Investing Funds could be deemed to be principal transactions
between affiliated persons under section 17(a).
2. 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
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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 permit the sale of shares of the Portfolio
Funds to the Investing Funds.\3\ Applicants believe that the proposed
transactions meet the standards of sections 6(c) and 17(b).
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\3\ Section 17(b) applies to specific proposed transactions,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c)
frequently is used to grant relief from section 17(a) to permit an
ongoing series of future transactions.
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Applicants' Conditions
Applicants agree that any order granting the requested relief shall
be subject to the following conditions:
1. The Investing Funds and the Portfolio Funds will be part of the
same ``group of investment companies,'' as defined in paragraph (a)(5)
of rule 11a-3 under the Act.
2. No Portfolio Fund in which an Investing Fund invests shall
acquire securities of any other investment company in excess of the
limits contained in section 12(d)(1)(A) of the Act, except as permitted
under the Sweep Application order.
3. At least a majority of the trustees of LifeStyle will be
Independent Trustees, and the selection of the Independent Trustees
necessary to fill any vacancies on the board of trustees, as well as
the nomination of those persons to be recommended by the board of
trustees in connection with any shareholder vote, will be committed to
the discretion of such Independent Trustees.
4. Prior to approving any advisory contract of an Investing Fund
under section 15 of the Act, the trustees of LifeStyle, including a
majority of the Independent Trustees, shall find that any advisory fees
charged under such contract are based on services that will be in
addition to, rather than duplicative of, the services provided under
the advisory contract of any Portfolio Fund in which the Investing Fund
may invest. These findings and their basis will be recorded fully in
the minute book of LifeStyle.
5. Any sales charges or service fees, as such terms are defined
under rule 2830(b) of the NASD Rules of Conduct,\4\ as may be charged
with respect to securities of an Investing Fund, when aggregated with
any such sales charges or service fees borne by the Investing Fund with
respect to the shares of a Portfolio Fund, shall not exceed the limits
set forth in rule 2830(d) of the NASD Rules of Conduct.
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\4\ The staff notes that, until recently, rule 2830 of the NASD
Rules of Conduct was section 26 of Article III of the NASD Rules of
Fair Practice.
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6. Applicants will provide the following information in electronic
format to the Chief Financial Analyst of the SEC's Division of
Investment Management as soon as reasonably practicable following each
fiscal year-end of each Investing Fund, unless the Chief Financial
Analyst notifies applicants that the information need no longer be
submitted: (a) monthly average total assets for each Investing Fund and
each Portfolio Fund in which an Investing Fund invests; (b) monthly
purchases and redemptions (other than by exchange) for each Investing
Fund and each Portfolio Fund in which an Investing Fund invests; (c)
monthly exchanges into and out of each Investing Fund and each
Portfolio Fund in which an Investing Fund invests; (d) month-end
allocations of each Investing Fund's assets among the Portfolio Funds
in which it invests; (e) annual expense ratios for each Investing Fund
and each Portfolio Fund in which an Investing Fund invests; and (f) a
description of any vote taken by the shareholders of any Portfolio Fund
in which an Investing Fund invests, including a statement of the
percentage of votes cast for and against the proposal by the Investing
Fund and by the other shareholders of that Portfolio Fund.
7. Substantially all of the assets of each Investing Fund will be
invested in shares of Portfolio Funds. Each Investing Fund will not
hold any investment securities other than shares of Portfolio Funds and
money market instruments.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21321 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M
