[Federal Register Volume 60, Number 182 (Wednesday, September 20, 1995)]
[Notices]
[Pages 48741-48743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23295]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21357; 812-9612]
Sierra Trust Funds, et al.; Notice of Application
September 13, 1995.
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: Sierra Trust Funds, The Sierra Variable Trust
(collectively, the ``Existing Funds''), any registered investment
companies, or series thereof, for which Sierra Investment Advisors
Corporation (``Sierra Advisors'') or any entity controlling, controlled
by, or under common control with Sierra Advisors, acts in the future as
investment adviser or principal underwriter (``Future Funds,'' and
together with the Existing Funds, the ``Funds''), and Sierra Advisors.
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from sections 13(a)(2), 13(a)(3), 18(a), 18(c),
18(f)(1), 22(f), 22(g), and 23(a) and rule 2a-7 thereunder, under
sections 6(c) and 17(b) of the Act for an exemption from section
17(a)(1), and under section 17(d) of the Act and rule 17d-1 thereunder
to permit certain joint arrangements.
SUMMARY OF APPLICATION: Applicants request an order that would permit
each applicant investment company to enter into deferred compensation
arrangements with its trustees who are not interested persons of the
company.
FILING DATES: The application was filed on May 19, 1995 and amended on
August 18, 1995 and September 8, 1995.
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 October 10,
1995, 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 notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, 9301 Corbin Avenue, Suite 333 Northridge, California 91324.
FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or C. David
Messman, 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 at the
SEC's Public Reference Branch.
Applicants' Representations
1. Each of the Existing Funds is a Massachusetts business trust
registered under the Act as an open-end management investment company.
The Sierra Trust Funds continuously offers its shares for sale to the
general investing public and has three money market series. The Sierra
Variable Trust continuously offers its shares for sale to insurance
company separate accounts that fund variable annuity contracts and has
one money market series. Sierra Advisors is the investment adviser to
each Fund and is registered under the Investment Advisers Act of 1940.
2. Each Existing Fund has a board of trustees (collectively, the
``Boards''), a majority of the members of which are not ``interested
persons'' (the ``Independent Trustees'') of such Existing Fund within
the meaning of section 2(a)(19) of the Act. Each Independent Trustee or
one or more of the Funds receives fees each year which collectively
are, and are expected to continue to be, insignificant in comparison to
the total net assets of the Funds. Applicants request an order to
permit the Independent Trustees to elect to defer receipt of 50% or
more of their trustees' fees pursuant to a deferred compensation plan
(the ``Plan'') and related election agreement entered into between each
Independent Trustee and the appropriate Fund. Under the Plan, the
Independent Trustees could defer payment of trustees' fees (the
``Deferred Compensation'') in order to defer payment of income taxes,
or for other
[[Page 48742]]
reasons. Participation in the Plan will be limited to the Independent
Trustees.
3. Under the Plan, the deferred fees payable by a Fund to a
participating Independent Trustee (a ``Participant'') will be credited
to a book reserve account established by the Fund (an ``Account''), as
of the first business day following the date such fees would have been
paid to the Independent Trustee. The value of an Account will be
determined by reference to a hypothetical investment in shares of one
or more of the Funds, as selected by each Participant or the Boards
from a list as designated from time to time by the committee
established to administer the Plan, in its sole discretion, as eligible
for hypothetical investment under the Plan (the ``Investment Funds'').
Each Participant may elect to have his or her Deferred Compensation
treated as if it had been invested and reinvested in shares of one or
more of the Investment Funds (the ``Underlying Securities'').
4. With respect to open-end Funds, the initial value of Deferred
Compensation credited to an Account will be effected at the respective
current net asset value of each such open-end Fund. With respect to
closed-end Funds, the initial value of Deferred Compensation credited
to an Account will be effected at the respective current market price,
less any brokerage fees which would be payable upon the acquisition of
shares of such closed-end Fund in the open market. Thereafter, the
value of such Account will fluctuate as the net asset value of the
shares of each open-end Fund fluctuates or as the market value of the
shares of each closed-end Fund fluctuates, as the case may be, and will
also reflect the value of assumed reinvestment of dividends and capital
gains distributions from each open-end and closed-end Fund in
additional shares of such Fund.
5. The Funds' respective obligations to make payments of amounts
accrued under the Plan will be general unsecured obligations, payable
solely from their respective general assets and property. The Plan
provides that the Funds will be under no obligation to purchase, hold
or dispose of any investments under the Plan, but, if one or more of
the Funds choose to purchase investments to cover their obligations
under the Plan, then any and all such investments will continue to be a
part of the respective general assets and property of such Funds.
6. As a matter of prudent risk management, to the extent a
Participant selects an Investment Fund other than the Fund for which
the Participant is deferring his or her trustee's fees, each Fund
intends to and, with respect to any money market Fund that values its
assets by the amortized cost method, will, purchase and hold shares of
the Underlying Securities in amounts equal in value to the deemed
investments of the Accounts of its Participants. Thus, in cases where
the Funds purchase shares of the Underlying Securities, liabilities
created by the credits to the Accounts under the Plan are expected to
be matched by an equal amount of assets (i.e., a direct investment in
Underlying Securities), which assets would not be held by the Fund if
trustee's fees were paid on a current basis.
7. Payments under the Plan will be made in one lump sum or in
generally equal annual installments over a five year period beginning
as soon as administratively feasible after the Participant's
termination of service. In the event of Participant's death, amounts
payable under the Plan will thereafter be payable to the Participant's
designated beneficiaries. In all other events, a Participant's right to
receive payments will be nontransferable. In the event of the
liquidation dissolution, or winding up of a Fund or the distribution of
all or substantially all of a Fund's assets and property to its
shareholders (unless the Fund's obligation under the Plan have been
assumed by a financially responsible party purchasing such assets) or
in the event of a merger or reorganization of a Fund (unless prior to
such merger or reorganization, the Fund' Board determines that the Plan
shall survive the merger or reorganization), all unpaid amounts in the
Accounts maintained by such Fund shall be paid in a lump sum to the
Participants on the effective date thereof.\1\ The Plan will not
obligate any participating Fund to retain a trustee in such a capacity,
nor will it obligate any Fund to pay any (or any particular level of)
trustee's fees to any trustee.
\1\Applicants acknowledge that the requested order would not
permit a party acquiring a Fund's assets to assume a Fund's
obligations under the Plan if such obligations would constitute a
violation of the Act by the assuming party.
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Applicants' Legal Analysis
1. Applicants request an order which would exempt the Funds
(including each Fund's successors in interest\2\): (a) under section
6(c) of the Act from sections 13(a)(2), 13(a)(3), 18(a), 18(c),
18(f)(1), 22(f), 22(g), and 23(a) and rule 2a-7 thereunder, to the
extent necessary to permit the Funds to adopt and implement the Plan;
(b) under sections 6(c) and 17(b) of the Act from section 17(a)(1) to
permit the funds to sell securities for which they are the issuer to
participating Funds in connection with the Plan; and (c) under section
17(d) of the Act and rule 17d-1 thereunder to permit the Funds to
effect certain joint transactions incident to the Plan.
\2\``Successors in interest'' is herein limited to entities that
result from a reorganization into another jurisdiction or a change
in the type of business organization.
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2. Sections 18(a) and 18(c) restrict the ability of a registered
closed-end investment company to issue senior securities.\3\ Section
18(f)(1) generally prohibits a registered open-end investment company
from issuing senior securities. Section 13(a)(2) 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. Applicants state that the Plan possesses
none of the characteristics of senior securities that led Congress to
enact these sections. The Plan would not: (a) induce speculative
investments or provide opportunities for manipulative allocation of any
Fund's expenses or profits; (b) affect control of any Fund; or (c)
confuse investors or convey a false impression as to the safety of
their investments. All liabilities created under the Plan would be
offset by equal amounts of assets that would not otherwise exist if the
fees were paid on a current basis.
\3\Although none of the Funds currently are closed-end funds,
applicants request relief from sections 18(a), 18(c), and 23(a) of
the Act in the event that Future Funds may include closed-end funds.
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3. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by
open-end investment companies. The Plan would set forth all such
restrictions, which would be included primarily to benefit the
Participants and would not adversely affect the interests of the
trustees or of any shareholder.
4. Sections 22(g) and 23(a) prohibit registered open-end investment
companies and closed-end investment companies, respectively, from
issuing any of their securities for services or for property other than
cash or securities. These provisions prevent the dilution of equity and
voting power that may result when securities are issued for
consideration that is not readily valued. Applicants believe that the
Plan would merely provide for deferral of payment of such fees and thus
should be viewed as being issued not in return for services but in
return for a Fund not being required to pay such fees on a current
basis.
[[Page 48743]]
5. Section 13d(a)(3) provides that no registered investment company
shall, unless authorized by the vote of a majority of its outstanding
voting securities, deviate from any investment policy that is
changeable only if authorized by shareholder vote. The relief requested
from section 13(a)(3) would extend only to Future Funds for which
Sierra Advisors becomes investment adviser subsequent to such Future
Fund's initial public offering and that have investment policies
prohibiting the purchase of investment company shares without
shareholder approval. Applicants believe that relief from section
13(a)(3) is appropriate to enable the affected Funds to invest in
Underlying Securities without a shareholder vote. Applicants will
provide notice to shareholders in the prospectus of each affected Fund
of the Deferred Compensation under the Plan. The value of the
Underlying Securities will be de minimis in relation to the total net
assets of the respective Fund, and will at all times equal the value of
the Fund's obligations to pay deferred fees (plus any increase in value
thereof.)
6. Rule 2a-7 imposes certain restrictions on the investments of
``money market funds.'' as defined under the rule, that would prohibit
a Fund that is a money market Fund from investing in the shares of any
other Fund. Applicants believe that the requested exemption would
permit the Funds to achieve an exact matching of Underlying Securities
with the deemed investments of the Accounts, thereby ensuring that the
deferred fees would not affect net asset value.
7. Section 6(c) provides, in relevant part, that the SEC may,
conditionally or unconditionally, by order, exempt any person or class
of persons from any provision of the Act or from any rule thereunder,
if such exemption is necessary or appropriate in the public interest,
consistent with the protection of investors, and consistent with the
purposes fairly intended by the policy and provisions of the Act.
Applicants submit that the relief requested from the above provisions
satisfies this standard.
8. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company from selling any security to such
registered investment company. Funds that are advised by the same
entity may be ``affiliated persons'' under section 2(a)(3)(C) of the
Act by reason of being under common control. Applicants asserts that
section 17(a)(1) was designed to prevent, among other things, sponsors
of investment companies from using investment company assets as capital
for enterprises with which they were associated or to acquire
controlling interest in such enterprises. Applicants submit that the
sale of securities issued by the Funds pursuant to the Agreement does
not implicate the concerns of Congress in enacting this section, but
merely would facilitate the matching of each Fund's liability for
deferred trustees' fees with the Underlying Securities that would
determine the amount of such Fund's liability.
9. Section 17(b) authorizes the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the transaction, 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 transaction is consistent with the policies
of the registered investment company, and the general purposes of the
Act. Applicants assert that the proposed transaction satisfies the
criteria of section 17(b). The finding that the terms of the
transaction are consistent with the policies of the registered
investment company is predicated on the assumption that relief is
granted from section 13(a)(3). Applicants also request relief from
section 17(a)(1) under section 6(c) to the extent necessary to
implement the Deferred Compensation under the Plan and Agreement on an
ongoing basis.
10. Section 17(d) and rule 17d-1 generally prohibit 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. Participants will not receive a benefit, directly or
indirectly, that would otherwise inure to a Fund or its shareholders.
Participants will receive tax deferral but the Plan otherwise will
maintain the parties, viewed both separately and in their relationship
to one another, in the same position as if the deferred fees were paid
on a current basis. When all payments have been made to a Participant,
the Participant will be no better off (apart from the effect of tax
deferral) than if he or she had received trustees fees on a current
basis and invested them in Underlying Securities.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. With respect to the relief requested from rule 2a-7, any money
market Fund, or series thereof, that values its assets in accordance
with a method prescribed by rule 2a-7 will buy and hold Underlying
Securities that determine the value of the Accounts to achieve an exact
match between such Fund's or series' liability to pay deferred fees and
the assets that offset that liability.
2. If a Fund purchases Underlying Securities issued by an
affiliated Fund, the Fund will vote such shares in proportion to the
votes of all other shareholders of such affiliated Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23295 Filed 9-19-95; 8:45 am]
BILLING CODE 8010-01-M
