[Federal Register Volume 63, Number 186 (Friday, September 25, 1998)]
[Notices]
[Pages 51381-51383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25726]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23442; 812-11314]
Gradison-McDonald Cash Reserve Trust, et al.; Notice of
Application
September 22, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section 15(a)
of the Act.
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SUMMARY: The requested order would permit the implementation, without
prior shareholder approval, of new investment advisory and subadvisory
agreements (the ``New Agreements'') for a period of up to 150 days
following the later of the date on which a merger between McDonald &
Company Investments, Inc. (``McDonald'') and KeyCorp is consummated
(the ``Merger Date'') or the date on which the requested order is
issued and continuing until the date the New Agreements are approved or
disapproved by the shareholders (but in no event later than April 1,
1999) (``Interim Period''). The order also would permit McDonald &
Company Securities, Inc. (the ``Adviser''), and Blairlogie Capital
Management (the ``Subadviser'') to receive all fees earned under the
New Agreements during the Interim Period following shareholder
approval.
APPLICANTS: Gradison-McDonald Cash Reserves Trust (``Cash Reserves
Trust''), Gradison Custodian Trust (``Custodian Trust''), Gradison-
McDonald Municipal Custodian Trust (``Municipal Trust''); Gradison
Growth Trust (``Growth Trust'') (collectively, the ``Trusts''), each on
behalf of its separate portfolios (the ``Funds''), the Adviser, and the
Subadviser.
FILING DATES: The application was filed on September 21, 1998.
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 13,
1998, 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;
Trusts and Adviser, 580 Walnut Street, Cincinnati, Ohio 45202; and
Subadviser, 125 Princes Street, Edinburgh, Scotland EH2, 4AD.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Attorney Adviser, at (202) 942-0574, or Edward P.
Macdonald, 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, 450 Fifth Street, NW, Washington, DC
20549 (tel. 202-942-8090).
Applicants' Representations
1. Each Trust is registered under the Act as an open-end management
investment company, and each Trust, except the Cash Reserves Trust
which is a Massachusetts business trust, is an Ohio business trust. The
Cash Reserves Trust, the Custodian Trust, and the Municipal Trust each
offer one Fund, and the Growth Trust offers four Funds.
2. The Adviser, a wholly-owned subsidiary of McDonald, is
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act'') and serves as investment adviser to the Funds. The Subadviser,
organized as a Scottish limited partnership, is registered under the
Advisers Act. The Subadviser acts as subadviser to the International
Fund series of the Growth Trust under a subadvisory agreement with the
Adviser.
3. On June 15, 1998, McDonald and Key Corp, a bank holding and
financial services company, entered into an Agreement and Plan of
Merger under which Key Corp will acquire McDonald and its direct and
indirect subsidiaries including the Adviser (the ``Merger''). Upon
consummation of the Merger, McDonald will merge into KeyCorp with
KeyCorp as the surviving entity.
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McDonald and KeyCorp currently intend to combine the businesses of the
Adviser and Key Capital Markets, Inc., a wholly-owned subsidiary of
KeyCorp, into one wholly-owned subsidiary of KeyCorp with the Adviser
continuing as the surviving entity.
4. Applicants state that the Merger will result in an assignment,
and thus automatic termination, of the Adviser's existing investment
advisory agreements with the Trusts and the Subadviser's existing
investment subadvisory agreement with the Adviser (the ``Existing
Agreements''). Applicants anticipate that the Merger will occur on or
about October 12, 1998.
5. Applicants request an exemption to permit the implementation,
during the Interim Period and prior to obtaining shareholder approval,
of the New Agreements. The requested exemption would cover an Interim
Period of not more than 150 days, beginning on the later of the Merger
Date or the date the requested order is issued and continuing until the
date the New Agreements are approved or disapproved by each Fund's
shareholders (but in no event later than April 1, 1999).\1\ The
requested order also would permit the Adviser and Subadviser to receive
all fees earned under the New Agreements during the Interim Period if,
and to the extent, the New Agreements are approved by the Fund's
shareholders. Applicants state that the terms and conditions of the New
Agreements will substantially identical to those of the Existing
Agreements, except for the effective and termination dates and the
inclusion of escrow arrangements described below.
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\1\ Applicants state that if the Merger Date precedes the
issuance of the requested order, the Adviser and, if applicable, the
Subadviser will serve after the Merger Date and prior to the
issuance of the order in a manner consistent with their fiduciary
duty to provide investment advisory services to the Funds even
though approval of the New Agreements has not been secured from the
Funds' respective shareholders. Applicants submit that in such an
event, the Adviser and, if applicable, the Subadviser will be
entitled to receive from the Funds, with respect to the period from
the Merger Date until the issuance of the order, no more than the
actual out-of-pocket cost to the Adviser and, if applicable, the
Subadviser for providing investment advisory services to the Funds.
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6. Each Trust's board of trustees (the ``Boards''), including a
majority of each Board's trustees who are not interested persons of the
Funds, within the meaning of section 2(a)(19) of the Act (``Independent
Trustees'') met on July 31, 1998 and September 14, 1998 and received
information deemed reasonably necessary to evaluate whether the terms
of the New Agreements are in the best interest of the Funds and their
respective shareholders. Each Board, including the Independent
Trustees, approved the respective New Agreement in accordance with
section 15(c) of the Act and voted to recommend that shareholders of
the respective Fund approve the New Agreement during the Interim
Period.
7. Proxy materials for the approval of the New Agreements are
expected to be mailed to the Funds' shareholders on or about January
15, 1999. Applicants state that although no decisions have been made
with respect to the Funds, KeyCorp will likely recommend that the Funds
be merged or reorganized into funds of the KeyCorp family of mutual
funds during or by the close of the Interim Period. Applicants state
that commencing the proxy solicitations on or about January 15, 1999,
will allow the Funds to undertake a single proxy solicitation for
obtaining shareholder approval of the New Agreements and any proposed
mergers or reorganizations, rather than conducting multiple proxy
solicitations within a relatively short period of time, and thus,
should reduce costs and minimize any potential shareholder confusion
that may arise in the circumstances.
8. Fees earned by the Adviser or the Subadviser under the New
Agreements during the Interim Period will be maintained in an interest-
bearing escrow account with an unaffiliated bank. An escrow agent will
make payment of fees (including any interest earned) to the Adviser
only if each Fund's shareholders approve the respective New Agreement.
The amounts in the escrow account (including interest earned on such
paid fees) will be paid (i) to the Adviser or Subadviser only upon
approval of the New Agreements by the shareholders of the respective
Fund; or (ii) to the respective Fund, in the absence of shareholder
approval. The escrow agent will notify the relevant Boards when fees
are paid from the escrow account.
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in pertinent part, that it
shall be unlawful for any person to serve or act as an investment
adviser of a registered investment company, except pursuant to a
written contract that has been approved by the vote of a majority of
the outstanding voting securities of such registered investment
company. Section 15(a) of the Act further requires that such written
contract provide for automatic termination in the event of its
``assignment.'' Section 2(a)(4) of the Act defines ``assignment'' to
include any direct or indirect transfer of a contract by the assignor,
or of a controlling block of the assignor's outstanding voting
securities by a security holder of the assignor. Applicants state that
the Merger will result in an assignment, and thus automatic
termination, of the Existing Agreements.
2. Rule 15a-4 under the Act provides, in pertinent part, that if an
investment advisory contract with an investment company is terminated
by an assignment in which the adviser does not directly or indirectly
receive a benefit, the adviser may continue to act as such for the
company for 120 days under a written contract that has not been
approved by the company's shareholders, provided that: (a) The new
contract is approved by that company's board of directors (including a
majority of the non-interested directors); (b) the compensation to be
paid under the new contract does not exceed the compensation that would
have been paid under the contract most recently approved by the
company's shareholders; and (c) neither the adviser nor any controlling
person of the adviser ``directly or indirectly receives money or other
benefit'' in connection with the assignment. Applicants state that they
cannot rely on rule 15a-4 because the Adviser may be deemed to receive
a benefit in connection with the Merger.
3. Section 6(c) provides that the SEC may 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.
4. Applicants submit that the requested relief meets this standard.
Applicants state that the terms and timing of the Merger were
determined by McDonald and KeyCorp in response to a number of factors
beyond the scope of the Act and substantially unrelated to the Funds.
Applicants also state that there is not a sufficient opportunity to
secure shareholder approval of the New Agreements before the Merger
Date. Applicants assert that the requested relief would permit the
continuity of investment management of the Funds, without interruption,
during the period following the consummation of the Merger.
5. Applicants submit that the scope and quality of the investment
advisory and subadvisory services provided to the Funds during the
Interim Period will be equivalent to the scope and quality of the
services currently provided to the Funds. Applicants state that the
Existing Agreements were approved by the Boards and the
[[Page 51383]]
shareholders of the Funds. Applicants represent that the New Agreements
will have substantially the same terms and conditions as the Existing
Agreements, except for the dates of commencement and termination and
the inclusion of the escrow arrangements. Accordingly, applicants
assert that each Fund will receive, during the Interim Period,
substantially identical investment advisory and/or subadvisory
services, provided in the same manner, as it received prior to the
Effective Date. Applicants state that, in the event of any material
change in the personnel of the Adviser or the Subadviser providing
services during the Interim Period, the Adviser or Subadviser will
apprise and consult the Boards to assure that the Boards, including a
majority of the Independent Directors, are satisfied that the services
provided by the Adviser and Subadviser will not be diminished in scope
or quality.
6. Applicants contend that to deprive the Adviser and the
Subadviser of their customary fees during the Interim Period would be
an unduly harsh and unreasonable penalty. Applicants note that the fees
payable to the Adviser and the Subadviser under the New Agreements will
be the same as the fees paid under the Existing Agreements. Applicants
also note that the fees will not be released by the escrow agent to the
Adviser or the Subadviser without the approval of the Funds'
shareholders.
Applicants' Conditions
Applicants agree as conditions to the issuance of the exemptive
order requested by the application that:
1. Each New Agreement will have the same terms and conditions as
the respective Existing Agreement, except for their effective and
termination dates and the inclusion of escrow arrangements.
2. Fees earned by the Adviser or the Subadviser in accordance with
a New Agreement during the Interim Period will be maintained in an
interest-bearing escrow account with an unaffiliated bank, and amounts
in the account (including interest earned on such paid fees) will be
paid: (a) to the Adviser and, if applicable, the Subadviser, upon
approval of the New Agreements by the respective Fund's shareholders;
or (b) to the respective Fund, in the absence of shareholder approval.
3. Each Fund will promptly schedule a meeting of shareholders to
vote on approval of the respective New Agreement to be held within 150
days following the commencement of the Interim Period (but in no event
later than April 1, 1999).
4. McDonald, KeyCorp and/or one or more of their subsidiaries, but
not the Funds, will pay the costs of preparing and filing the
application and the costs relating to the solicitation of shareholder
approval of the New Agreements.
5. The Adviser and Subadviser will take all appropriate actions to
ensure that the scope and quality of advisory and other services
provided to the Fund during the Interim Period will be at least
equivalent, in the judgment of the respective Board, including a
majority of the Independent Trustees, to the scope and quality of
services provided under the Existing Agreement. In the event of any
material change in personnel providing services under the New
Agreements, the Adviser or Subadviser will apprise and consult the
Boards to assure that the Boards, including a majority of the
Independent Trustees, are satisfied that the services provided will not
be diminished in scope or quality.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-25726 Filed 9-24-98; 8:45 am]
BILLING CODE 8010-01-M
