[Federal Register Volume 61, Number 171 (Tuesday, September 3, 1996)]
[Notices]
[Pages 46493-46496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22356]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22173; 812-10236]
First American Strategy Funds, Inc., et al.; Notice of
Application
August 26, 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: First American Strategy Funds, Inc. (``FASF''); First
American Investment Funds, Inc. (``FAIF''); First American Funds, Inc.
(``FAF''); First Bank National Association (``First Bank''); SEI
Financial Services Company (``SEI'').
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 sections
6(c) and 17(b) of the Act for an exemption from section 17(a) of the
Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
FASF to invest primarily in the securities of certain affiliated
investment companies in excess of the limits of section 12(d)(1).
FILING DATE: The application was filed on July 5, 1996, and amended on
August 22, 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 20,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: FASF, FAIF, FAF and SEI, 680 East Swedesford Road,
Wayne, Pennsylvania, 19087; First Bank, 601 Second Avenue South,
Minneapolis, Minnesota 55402.
FOR FURTHER INFORMATION CONTACT:
Mercer E. Bullard, Branch Chief, at (202) 942-0564, or Elizabeth G.
Osterman, Assistant Director, 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. FASF, a Minnesota corporation, is registered as an open-end
management investment company under the Act. On July 2, 1996, FASF
filed a registration statement under the Securities Act of 1933 for the
offering of four series: Income Fund, Growth and Income Fund, Growth
Fund, and Aggressive Growth Fund (collectively, ``FASF Portfolios'').
Each FASF Portfolio will be separately managed and pursue a distinct
set of investment objectives and policies. The FASF Portfolios will
pursue their objectives by investing primarily in series of FAIF and
FAF (``Underlying Portfolios''). Additional FASF Portfolios may be
organized in the future.\1\
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\1\ Applicants request relief for such additional FASF
Portfolios, subject to the terms and conditions set forth herein.
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2. The FASF Portfolios initially will offer their shares in one
class that will be subject to an annual shareholder servicing fee equal
to .25% of average daily assets. This class will not be subject to
front-end or deferred sales charges, redemptions fees, or Rule 12b-1
distribution fees, although such charges and fees may be imposed in the
future.
3. FAIF is organized under Maryland law and registered as an open-
end management investment company under the Act. FAIF offers its shares
in 20 series with varying investment objectives and policies. The
series of FAIF that are currently proposed to be used as Underlying
Portfolios are: Equity Income Fund, Stock Fund, Diversified Growth
Fund, Emerging Growth Fund, Regional Equity Fund, Special Equity Fund,
International Fund, Technology Fund, Health Sciences Fund, Real Estate
Securities Fund, and Fixed Income Fund. FAF is organized under
Minnesota law and registered as an open-end management investment
company under the Act. FAF offers its shares in three series. Each
series holds itself out to the public as a money market fund and is
subject to the requirements of rule 2a-7 under the Act. The series of
FAF that is currently proposed to be used as an Underlying Portfolio is
the Prime Obligations Fund. Additional series of FAIF and FAF that
comply with the conditions set forth herein may be used as Underlying
Portfolios in the future.
4. The Underlying Portfolios offer their shares in several classes.
The FASF Portfolios initially will invest only in a class of an
Underlying Portfolio which is not subject to front-end of deferred
sales charges, redemption fees, rule 12b-1 distribution fees, or
shareholder servicing fees. The FASF Portfolios in the future may
invest in one or more classes of the Underlying Portfolios which bear
such charges and fees.
5. First Bank, a national banking association, is the investment
adviser for each of the FASF Portfolios and the Underlying Portfolios.
First Bank is a wholly-owned subsidiary of First Bank System, Inc.
(``FBS''), a bank holding company. First Bank's investment advisory
fees with respect to each FASF Portfolio and Underlying Portfolio are
[[Page 46494]]
calculated as a per annum percentage of net assets of each Portfolio.
With respect to one of the Underlying Portfolios (FAIF's International
Fund), First Bank has engaged a subadviser, Marvin & Palmer Associates,
Inc., which is not affiliated with First Bank or any of its affiliates.
First Trust National Association, a wholly-owned subsidiary of FBS, is
the custodian for the FASF Portfolios and the Underlying Portfolios.
6. SEI, which is not affiliated with First Bank, is principal
underwriter for each FASF Portfolio and Underlying Portfolio.
Applicants request relief for SEI only in its capacity as principal
underwriter for the FASF Portfolios and Underlying Portfolios and not
in its capacity as principal underwriter for other groups of investment
companies.\2\ Applicants request that the relief extend to any future
principal underwriter for the FASF Portfolios and the Underlying
Portfolios, provided the conditions set forth herein are satisfied.
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\2\ SEI previously received an SEC order to permit the operation
of a ``fund or funds'' similar to that proposed herein where all of
the funds were advised or distributed by SEI. SEI Institutional
Managed Trust, Investment Company Act Release No. 21539 (Nov. 22,
1995) (notice) and 21615 (Dec. 20, 1995) (order).
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7. The investment objectives of the FASF Portfolios are intended to
provide differing balances between the objectives of current income and
growth of capital. First Bank will allocate and re-allocate the FASF
Portfolios' assets among the Underlying Portfolios according to initial
percentage ranges as described in the application.
8. The FASF Portfolios will invest primarily in Underlying
Portfolio shares. The FASF Portfolios also may invest in cash and cash
item for temporary defensive purposes and to maintain liquidity, and in
futures contracts and options on futures in order to: remain fully
invested in proportions consistent with their current asset allocation
strategy in a cost effective manner; re-allocate assets among asset
categories while minimizing transaction costs; maintain cash reserves
while simulating full investment; facilitate trading; or seek higher
investment returns when a futures contract is priced more attractively
than the underlying security or index.
9. The FASF Portfolios may redeem Underlying Portfolio shares
through in-kind distributions of portfolio securities of Underlying
Portfolios. The FASF Portfolio would hold such securities until its
adviser determined that is was appropriate to dispose of them. Such in-
kind distributions would be made only in order to resolve potential
conflicts of interest between an FASF Portfolio and an Underlying
Portfolio. For example, when a redemption by an FASF Portfolio would
cause the Underlying Portfolio to incur sizable brokerage commissions,
the transaction may be effected in-kind so that the brokerage costs
would be borne only by the FASF Portfolio and not by the Underlying
Portfolio's shareholders. Any such in-kind redemption would be made pro
rata and comply with paragraph (a) through (f) of rule 17a-7 under the
Act, except that the consideration for the securities distributed by
the Underlying Portfolio would be the Underlying Portfolio's shares
rather than cash.
10. Applicants request that any relief granted pursuant to the
application also apply to any open-end management investment company
that is or will be part of the same ``group of investment companies,''
as defined in rule 11a-3 under the Act, as FASF.\3\
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\3\ Rule 11a-3 under the Act defines ``group of investment
companies'' as two or more companies that: (1) Hold themselves out
to investors as related companies for purposes of investment and
investor services, and (2) have a common investment adviser or
principal underwriter.
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Applicant's Legal Analysis
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 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. The restrictions in section 12(d)(1) were intended to prevent
certain abuses perceived to be associated with the pyramiding of
investment companies, including: (1) Unnecessary duplication of costs
(e.g. sales loads, advisory fees, and administrative costs); (2) undue
influence by the fund holding company over its underlying funds; (3)
the threat of large scale redemptions of the securities of the
underlying investment companies; and (4) unnecessary complexity. For
the following reasons, applicants believe that the proposed
arrangements will not give rise to these dangers.
4. Applicants contend that the proposed structure will not raise
the sales charge layering concerns underlying section 12(d)(1). The
FASF initially will offer one class of shares that charges an annual
shareholder servicing fee of .25% of average daily assets. This class
will not be subject to any front-end or deferred sales charges,
redemption fees, or rule 12b-1 distribution fees. The class of
Underlying Portfolio shares in which the FASF Portfolios will invest
initially will not be subject to any front-end or deferred sales
charges, redemption fees, rule 12b-1 distribution fees, or shareholder
servicing fees. Although future classes of FASF Portfolios and classes
of Underlying Portfolios in which the FASF Portfolios invest may be
subject to such charges and fees, any sales charges or service fees
relating to the shares of an FASF Portfolio will not exceed the limits
set forth in rule 2830 of the NASD's Conduct Rules when aggregated with
any sales charges or service fees that the FASF Portfolio pays relating
to Underlying Portfolio shares.
5. With regard to concerns about layering of advisory fees,
applicants state that, before approving any advisory contract under
section 15 of the Act, the board of directors of FASF, including a
majority of the directors who are not ``interested persons,'' as
defined in section 2(a)(19) of the Act, will find that any advisory
fees charged under the contract are based on services provided that are
in addition to, rather than duplicative of, services provided under any
Underlying Portfolio advisory contract.
6. Applicants believe that, while administrative and other fees are
expected to be charged at both the FASF Portfolio and Underlying
Portfolio levels, overall expenses may be reduced under the proposed
arrangement. Applicants anticipate that the total expense ratio of the
FASF Portfolios, including the expenses borne directly at the FASF
Portfolio level and indirectly at the Underlying Portfolio level, will
be disclosed in the FASF Portfolios' prospectuses. Applicants contend
that investors will have a means for determining whether the layering
of administrative and other expenses results in total expense ratios
which are
[[Page 46495]]
out of line from those of other mutual funds.
7. Applicants believe that the FASF Portfolios will provide a
simple means through which investors can obtain professional allocation
services. Applicants also believe that any additional expenses
associated with investing in FASF will be deemed by many investors to
be outweighed by the benefits received by such investors in the form of
such asset allocation services.
8. Applicants contend that the risk that a ``fund of funds'' may be
able to control the management decisions of the underlying funds by
threatening large redemptions is not relevant to the proposed
arrangements. The FASF Portfolios and the Underlying Portfolios will be
part of the same ``group of investment companies,'' as defined in rule
11a-3 under the Act, and the FASF Portfolios and Underlying Portfolios
therefore will share the same or affiliated investment advisers or
principal underwriters. Applicants argue that, where the FASF
Portfolios and Underlying Portfolios have a common investment adviser
and investment decisions for the Underlying Portfolios already are
controlled by the adviser for the FASF Portfolios, the adviser has no
incentive to wield this control in a manner which is detrimental to the
Underlying Portfolios.
9. Applicants contend that the FASF Portfolios will be structured
in a manner intended to minimize problems related to the impact that
large scale redemptions may have on the orderly management of the
Underlying Portfolios. The FASF Portfolios generally are designed for
long-term investors, which applicants assert should reduce the
possibility of the FASF Portfolios being used as short-term trading
vehicles and further protect the FASF Portfolios and the Underlying
Portfolios from unexpected large redemptions.
10. Applicants believe that the problem of unnecessarily complex
investment vehicles is addressed by the condition set forth herein that
prohibits Underlying Portfolios from acquiring securities in another
investment company in excess of the limits of section 12(d)(1)(A),
except as authorized under a prior SEC order that permits series of
FAIF to invest in series of FAF in excess of the limits of section
12(d)(1)(A)(ii) of the Act up to the greater of $2.5 million or 5% of
the FAIF series' assets (``Cash Sweep Order'').\4\
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\4\ First American Investment Funds, Inc., Investment Company
Act Release Nos. 21722 (Jan. 30, 1996) (notice) and 21784 (Feb. 27,
1996) (order).
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11. Section 17(a) of the Act makes it unlawful for an affiliated
person of a registered investment company to sell securities to, or
purchase securities from, the company. Applicants believe that the FASF
Portfolios and the Underlying Portfolios could be deemed ``affiliated
persons'' of each other, as defined in section 2(a)(3) of the Act, by
virtue of being under the control of a common investment adviser, First
Bank, or because an FASF Portfolio owns 5% or more of the shares of an
Underlying Portfolio. Applicants believe that purchases by the FASF
Portfolios of Underlying Portfolio shares and sales by the Underlying
Portfolios of their shares to the FASF Portfolios may be deemed to be
principal transactions between affiliated persons under section 17(a).
12. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that:
(1) The terms of the proposed transaction are reasonable and fair and
do not involve overreaching; (2) the proposed transaction is consistent
with the policies of the registered investment company involved; and
(3) the proposed transaction is consistent with the general provisions
of the Act.
13. Applicants request an exemption under section 6(c) from the
limits of sections 12(d)(1) (A) and (B), and under sections 6(c) and
17(b) from section 17(a), to permit the transactions described above.
Applicants believe that the requested exemptions are fully consistent
with the policies and purposes of the Act and that, for the reasons
provided above, it would be appropriate for the SEC to grant the
requested relief under section 6(c).
14. Applicants also believe that the section 17(b) standard has
been satisfied for the following reasons. First, the consideration paid
for the sale and redemption of Underlying Portfolio shares will be
based on the net asset values of the Portfolios, subject to any
applicable sales charges. Second, the investment of assets of the FASF
Portfolios in Underlying Portfolio shares and the issuance of
Underlying Portfolio shares will be effected in accordance with each
FASF Portfolio's investment restrictions and will be consistent with
the policies as set forth in each FASF Portfolio's registration
statement. Finally, the Proposed arrangement does not involve
overreaching by applicants and is consistent with the purposes of the
Act for the reasons discussed above.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each FASF Portfolio and each Underlying Portfolio will be part
of the same ``group of investment companies,'' as defined in rule 11a-3
under the Act.
2. No Underlying Portfolio will acquire securities of any other
investment company in excess of the limits contained in Section
12(d)(1)(A) of the 1940 Act, except as permitted under the Cash Sweep
Order.
3. A majority of the Board of Directors of FASF will not be
``interested persons,'' as defined in section 2(a)(19) of the Act.
4. Any sales charges or service fees charged relating to the shares
of an FASF Portfolio, when aggregated with any sales charges or service
fees paid by the FASF Portfolio relating to its acquisition, holding or
disposition of shares of the Underlying Portfolios, will not exceed the
limits set forth in rule 2830 of the NASD's Conduct Rules.
5. Before approving any advisory contract under section 15 of the
Act, the Board of Directors of FASF, including a majority of Directors
who are not ``interested persons,'' as defined in section 2(a)(19),
will find that the advisory fees charged under the contract are based
on services provided that are in addition to, rather than duplicative
of, services provided under any Underlying Portfolio advisory contract.
The finding, and the basis upon which the finding was made, will be
recorded fully in the minute books of the FASF Portfolios.
6. Applicants agree to provide the following information, in
electronic format, to the Chief Financial Analyst of the SEC's Division
of Investment Management: monthly average total assets of each FASF
Portfolio and Underlying Portfolio; monthly purchases and redemptions
(other than by exchange) for each FASF Portfolio and each Underlying
Portfolio; monthly exchanges into and out of each FASF Portfolio and
each Underlying Portfolio; month-end allocations of each FASF
Portfolio's assets among the Underlying Portfolios; annual expense
ratios for each FASF Portfolio and each Underlying Portfolio; and a
description of any vote taken by the shareholders of any Underlying
Portfolio, including a statement of the percentage of votes case for
and against the proposal by the FASF Portfolios and by the other
shareholders of the Underlying Portfolio. The information will be
[[Page 46496]]
provided as soon as reasonably practicable following each fiscal year-
end of the FASF Portfolio (unless the Chief Financial Analyst shall
notify applicants in writing that such information need no longer be
submitted).
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22356 Filed 8-30-96; 8:45 am]
BILLING CODE 8010-01-M
