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<PAGE> PAGE 2
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<PAGE> PAGE 3
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<PAGE> PAGE 4
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<PAGE> PAGE 5
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<PAGE> PAGE 6
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<PAGE> PAGE 7
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<PAGE> PAGE 9
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<PAGE> PAGE 10
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<PAGE> PAGE 11
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<PAGE> PAGE 12
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<PAGE> PAGE 13
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<PAGE> PAGE 14
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<PAGE> PAGE 15
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<PAGE> PAGE 16
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<PAGE> PAGE 17
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<PAGE> PAGE 18
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<PAGE> PAGE 19
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<PAGE> PAGE 20
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<PAGE> PAGE 21
048 A010400 0
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<PAGE> PAGE 22
066 A000400 Y
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069 000400 N
070 A010400 Y
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070 F020400 N
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070 G020400 N
070 H010400 N
070 H020400 N
070 I010400 N
070 I020400 N
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070 J020400 N
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070 K020400 N
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070 L020400 Y
070 M010400 N
070 M020400 N
070 N010400 Y
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070 Q010400 N
070 Q020400 N
070 R010400 N
070 R020400 N
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071 B000400 13355
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<PAGE> PAGE 23
072 A000400 6
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<PAGE> PAGE 24
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015 A000501 KEY TRUST COMPANY OF OHIO, N.A.
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<PAGE> PAGE 25
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<PAGE> PAGE 26
048 J010500 0
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<PAGE> PAGE 27
070 C020500 N
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<PAGE> PAGE 28
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<PAGE> PAGE 29
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015 A000601 KEY TRUST COMPANY OF OHIO, N.A.
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<PAGE> PAGE 30
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<PAGE> PAGE 31
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<PAGE> PAGE 32
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<PAGE> PAGE 33
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015 A000701 KEY TURST COMPANY OF OHIO, N.A.
015 B000701 C
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<PAGE> PAGE 34
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<PAGE> PAGE 35
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<PAGE> PAGE 36
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<PAGE> PAGE 37
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<PAGE> PAGE 38
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015 A000801 KEY TRUST COMPANY OF OHIO, N.A.
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<PAGE> PAGE 39
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<PAGE> PAGE 40
050 000800 N
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<PAGE> PAGE 41
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SIGNATURE ERIC MEIRING
TITLE FIN ANALYST
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<CIK> 0000722832
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<TABLE> <S> <C>
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<TABLE> <S> <C>
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<NAME> SBSF CONVERTIBLE SECURITIES FUND
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<NAME> KEYCHOICE MODERATE GROWTH FUND
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Change in Registrant's
Certifying Accountant
1. On February 19, 1997, based upon
the recommendation of the Audit
Committee of the Registrant's Board of
Trustees, and in accordance with
Section 32 of the Investment Company
Act of 1940, as amended, and the rules
thereunder, the Board of Trustees
determined not to retain Price
Waterhouse LLP as the Registrant's
independent accountants and voted to
appoint Coopers & Lybrand LLP as the
Registrant's independent accountants
for the fiscal year ending November 30,
1997.
2. During the Registrant's two most
recent fiscal years ended November 30,
1996 and 1995, Price Waterhouse LLP's
reports on the Registrant's financial
statements contained no adverse opinion
or disclaimer of opinion, nor were they
qualified or modified as to
uncertainty, audit scope, or accounting
principles.
3. During the Registrant's's two
most recent fiscal years ended
November 30, 1996 and 1995, there were
no disagreements with Price Waterhouse
LLP on any matter of accounting
principles or practices, financial
statement disclosure, or auditing scope
or procedure, which disagreements, if
not resolved to the satisfaction of
Price Waterhouse LLP, would have caused
it to make reference to the subject
matter of the disagreement in
connection with its report.
4. During the Registrant's two most
recent fiscal years, there have been no
reportable events as such term is
described in Item 304 (a)(1)(v) of
Regulation S-K with respect to Price
Waterhouse LLP.
5. On February 19, 1997 the
Registrant engaged Coopers & Lybrand
LLP as its principal accountants to
audit the Registrant's financial
statements. During the Registrant's
two most recent years through February
19, 1997, the Registrant has not
consulted with Coopers & Lybrand LLP
on items with (i) concerned the
application of accounting principles
to a specified transaction, either
completed or proposed, or the type of
audit opinion that might be rendered
on the Registrant's financial
statements or (ii) concerned the
subject matter of a disagreement or
reportable event with Price Waterhouse
LLP.
6. The Registrant has requested
Price Waterhouse LLP to furnish it with
a letter addressed to the Securities
and Exchange Commission stating whether
Price Waterhouse LLP agrees with the
statements contained in the second,
third and fourth paragraphs above. A
copy of the letter from Price
Waterhouse LLP to the Securities and
Exchange Commission is filed as Annex
1 hereto.
July 16, 1997
Securities and Exchange Commission
40 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Key Mutual Funds
We have read Item 77 K of Key Mutual Funds' Form N-SAR for the
six months ended May 31, 1997 and are in agreement with the
statements contained therein.
Yours very truly,
/s/ Price Waterhouse L.L.P.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
IN THE MATTER OF
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
THE VICTORY PORTFOLIOS
CONCORD FINANCIAL GROUP, INC.
VICTORY BROKER-DEALER SERVICES, INC.
KEYCORP MUTUAL FUND ADVISERS, INC.
AND SPEARS, BENZAK, SALOMON & FARRELL, INC.
APPLICATION PURSUANT TO SECTIONS 6(c) AND 17(b) OF
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED,
FOR AN ORDER EXEMPTING THE APPLICANTS FROM THE
PROVISIONS OF SECTIONS 12(d) AND 17(a) AND FOR AN
ORDER PURSUANT TO SECTION 17(d) OF THAT ACT AND
RULE 17d-1 THEREUNDER PERMITTING THE PROPOSED
TRANSACTIONS.
Please direct all communications concerning this Application to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, NW, Suite 5500
Washington, D.C. 20006-1888
(202) 887-1500
UNITED STATES OF AMERICA
BEFORE THE SECURITIES AND EXCHANGE COMMISSION
In The Matter Of:SBSF Funds, Inc. d/b/a Key Mutual Funds
The Victory Portfolios
Concord Financial Group, Inc.
Victory Broker-Dealer Services, Inc.
3435 Stelzer Road
Columbus, OH 43219
KeyCorp Mutual Fund Advisers, Inc.
127 Public Square
Cleveland, OH 44114
Spears, Benzak, Salomon & Farrell, Inc.45 Rockefeller Plaza
New York, NY 10111)
Application Pursuant To Sections 6(c) And 17(b) Of The Investment
Company Act Of 1940, As Amended, For An Order Exempting The
Applicants From The Provisions Of Sections 12(d) And 17(a) And For
An Order Pursuant To Section 17(d) Of That Act And Rule 17d-1
Thereunder Permitting The Proposed Transactions
.I. PRELIMINARY STATEMENT
SBSF Funds, Inc. d/b/a Key Mutual Funds ("KMF"), The Victory
Portfolios ("VP"), Concord Financial Group, Inc. ("CFGI"), Victory
Broker-Dealer Services, Inc. ("VBDSI"), KeyCorp Mutual Fund
Advisers, Inc. ("KMFAI") and Spears, Benzak, Salomon & Farrell, Inc.
("SBS&F"), (collectively, "Applicants"), hereby apply for an order of
the Securities and Exchange Commission (the "Commission") under
Section 6(c) of the Investment Company Act of 1940 ("1940 Act") for
an exemption from the limitations of Sections 12(d)(l)(A) and (B) to
the extent necessary to permit the series of KMF, VP and any other
investment company created in the future that is part of the same
"group of investment companies," as defined in Rule 11a-3 under the
1940 Act (the "Direct Funds") to purchase shares of investment
companies or series thereof, now existing or created in the future, that
are part of the same "group of investment companies," as so defined
(the "Underlying Portfolios"), and to permit the Underlying Portfolios
to sell such shares to the Direct Funds. Applicants also apply for an
order under Sections 6(c) and 17(b) of the 1940 Act for an exemption
from Section 17(a) to the extent necessary to permit purchases and
redemptions by the Direct Funds of shares of the Underlying Portfolios
and sales and redemptions by the Underlying Portfolios of their shares
in transactions with the Direct Funds. Additionally, Applicants apply
for an order under 1940 Act Section 17(d) and Rule 17d-1 thereunder
for an exemption to permit the foregoing transactions. Applicants
believe the requested exemptions are fully consistent with the policies
and purposes of the 1940 Act. Since no form has been prescribed for
this application, Applicants proceed under Rule 0-2 of the General
Rules and Regulations of the Commission under the 1940 Act.
II. BACKGROUND
A. The Underlying Portfolios and the Direct Funds
KMF is a Maryland corporation registered under the 1940 Act as an
open-end management investment company currently consisting of
four operating portfolios and two inactive portfolios. VP is a Delaware
business trust registered under the 1940 Act as an open-end diversified
management investment company currently consisting of 24 operating
and four inactive portfolios. It is anticipated that the initial Direct
Funds would be newly established portfolios of KMF. The proposed
Direct Funds would be structured as "funds of funds" that would invest
their assets in shares of various Underlying Portfolios. The Underlying
Portfolios are existing and future investment portfolios of KMF and
VP. The acquiring Direct Funds also may invest a portion of their
assets in stocks, bonds and other securities, including money market
instruments and shares of investment companies that are not part of the
same "group of investment companies," as defined in Rule 11a-3 under
the 1940 Act ("Other Portfolios"). Investment in Other Portfolios will
not exceed the percentage limitations imposed by Section 12(d)(1)(F)
of the 1940 Act and will also be limited to an aggregate value not in
excess of 20% of the value of the total assets of the Direct Fund at the
time of purchase. No exemptive relief is sought with respect to
investments by the Direct Funds in shares of Other Portfolios.
The mix of investments for each of the Direct Funds will be established
and varied using an asset allocation approach. Initial and subsequent
allocation decisions will be made as a result of investment analyses
undertaken by the Direct Fund's adviser, subject to supervision by the
Board of Directors of the Direct Fund. The prospectus and statement
of additional information for each Direct Fund will describe the Direct
Fund's permissible investments in Underlying Portfolios, as well as
stocks, bonds and other securities, including money market instruments
and shares of Other Portfolios.
B. Spears, Benzak, Salomon & Farrell, Inc.
SBS&F currently serves as investment adviser to the various operating
funds of KMF. Subject to the general supervision of KMF's Board of
Directors, in accordance with each advised entity's investment policies,
SBS&F formulates guidelines and lists of approved investments, makes
decisions with respect to and places orders for the KMF operating
funds' purchase and sale of securities, and maintains records relating to
such purchases and sales. SBS&F is a wholly owned subsidiary of
KeyCorp Asset Management Holdings, Inc. ("KAMHI"), which is a
wholly owned subsidiary of Society National Bank, a national banking
association, which, in turn, is a wholly owned subsidiary of KeyCorp, a
bank holding company.
C. KeyCorp Mutual Fund Advisers, Inc.
KMFAI currently serves as investment adviser to VP and to two funds
of KMF that have not yet commenced operations. Subject to the
general supervision of VP's Board of Trustees, and KMF's Board of
Directors, respectively, in accordance with each advised entity's
investment policies, KMFAI formulates guidelines and lists of
approved investments, makes decisions with respect to and places
orders for VP's purchases and sales of securities and maintains records
relating to such purchases and sales. KMFAI is a wholly owned
subsidiary of KAMHI. It is anticipated that KMFAI will serve as the
investment adviser to the initial Direct Funds.
D. Concord Financial Group, Inc. and Victory Broker-Dealer
Services, Inc.
CFGI, a registered broker-dealer under the Securities Exchange Act of
1934 (the "1934 Act"), will serve as distributor (principal underwriter)
of shares of the proposed Direct Funds. CFGI presently serves in this
capacity for the existing series of KMF. VBDSI, a registered broker-
dealer under the 1934 Act, presently serves as distributor (principal
underwriter) of shares of all of the existing series of VP. CFGI and
VBDSI are both wholly owned subsidiaries of BISYS Fund Services,
Inc. ("BISYS") and are not affiliated with KeyCorp. It is possible that
BISYS or another wholly owned subsidiary of BISYS will assume
responsibility for all distribution services relating to KMF and VP.
III. THE PROPOSED TRANSACTIONS
A. Proposed Structure
The Direct Funds will invest their assets in shares of Underlying
Portfolios that are part of the same "group of investment companies" as
the Direct Funds, as defined under 1940 Act Rule 11a-3. Any assets
that are not invested in such Underlying Portfolios will be invested in
stocks, bonds and other securities, including money market instruments
and shares of Other Portfolios to the extent permitted under Section
12(d)(1)(F) of the 1940 Act, subject to the 20% limitation described
above.
B. Investment Allocations
The Direct Funds will allocate their assets among the Underlying
Portfolios as noted above. The Direct Funds also may allocate assets
among stocks, bonds and other securities, including money market
instruments and shares of Other Portfolios, subject to the limitations
described above.
C. Direct Fund and Underlying Portfolio Expenses
1. Operational Expenses
The Underlying Portfolios will pay investment advisory fees to KMFAI
and/or SBS&F. Additionally, the Underlying Portfolios will pay fees
to their various service providers for all other services relating to
their operations. The Direct Funds' shareholders, therefore, will
indirectly pay their proportionate share of any Underlying Portfolio
fees and expenses.
The Direct Funds also may pay investment advisory fees to their
investment adviser(s). The services provided by the adviser to the
Direct Funds will be in addition to and not duplicative of those
provided by the adviser(s) to the Underlying Portfolios. Additionally,
the Direct Funds will pay fees to their various service providers for all
other services relating to their operations. Duplicative expenses are
expected to be minimal and are, to the some extent, expected to be
offset by cost savings at the Underlying Portfolio level.
2. Sales-Related Expenses
The Direct Funds will pay no front-end sales load or contingent
deferred sales charge in connection with the purchase or redemption of
shares of the Underlying Portfolios. The sales charges or service fees
relating to the shares of the Direct Funds will not exceed the limits set
forth in Article III, Section 26 of the National Association of Securities
Dealers, Inc. (the "NASD") Rules of Fair Practice when aggregated
with any sales charges or service fees that the Direct Funds pay relating
to Underlying Portfolio shares.
D. Purpose of the Direct Funds
The Direct Funds are intended as an efficient and cost-effective method
of allowing investors to structure and modify a comprehensive
allocation program in investments throughout the Underlying
Portfolios. The structure of the Direct Funds recognizes that differing
investment products do not move in tandem. For example, when
stocks perform poorly, bonds may perform better. Therefore, investing
in different types of investment products can help spread risk and even
out swings in performance.
The risk/return balance in a portfolio can be varied by altering the
proportion of assets allocated to different types of investments. For
example, an investor seeking higher growth potential generally would
invest a larger portion of assets in stocks while an investor seeking
less volatility generally would invest a larger portion of assets in high-
quality bonds or cash equivalents. This asset allocation approach is the
fundamental principle behind the Direct Funds.
IV. APPLICABLE LAW AND ANALYSIS.
A. Section 12(d)(1)
Section 12(d)(1)(A) of the 1940 Act provides, in pertinent part: "It
shall be unlawful for any registered investment company (the
"acquiring company") . . . to purchase or otherwise acquire any security
issued by any other investment company (the "acquired company") . . .
if the acquiring company and any company or companies controlled by
it immediately after such purchase or acquisition own in the aggregate
(I) more than 3 per centum of the total outstanding voting stock of the
acquired company;
(ii) securities issued by the acquired company having an aggregate
value in excess of 5 per centum of the value of the total assets of the
acquiring company; or
(iii) securities issued by the acquired company and all other
investment companies . . .having an aggregate value in excess of 10 per
centum of the value of the total assets of the acquiring company."
Section 12(d)(1)(B) of the 1940 Act provides, in pertinent part: "It
shall be unlawful for any registered open-end investment company (the
"acquired company") . . . knowingly to sell or otherwise dispose of any
security issued by the acquired company to any other investment
company (the "acquiring company") . . . if immediately after such sale
or disposition
(I) more than 3 per centum of the total outstanding voting stock of the
acquired company is owned by the acquiring company and any
company or companies controlled by it; or
(ii) more than 10 per centum of the total outstanding voting stock of
the acquired company is owned by the acquiring company and other
investment companies and companies controlled by them."
Absent exemptive relief, Sections 12(d)(1)(A) and (B) of the 1940 Act
would prohibit operation of the Direct Funds. Therefore, Applicants
seek an exemption from the limitations of Section 12(d)(1)(A) and (B)
to the extent necessary to permit: (a) the Direct Funds to purchase an
unlimited amount of the outstanding voting shares of each Underlying
Portfolio; (b) the securities of each Underlying Portfolio to have an
aggregate value of as much as 100% of the total assets of the Direct
Funds; (c) the Direct Funds to invest up to 100% of their assets in the
securities of the Underlying Portfolios; and (d) each of the Underlying
Portfolios to sell more than 3% of its total outstanding voting stock to
the Direct Funds.
Section 12(d)(1)(F) of the 1940 Act provides in pertinent part: "The
provisions of this paragraph (1) shall not apply to securities purchased
or otherwise acquired by a registered investment company if (i)
immediately after such purchase or acquisition, not more than 3 per
centum of the total outstanding stock of such issuer is owned by such
registered investment company and all affiliated persons of such
registered investment company; and (ii) such registered investment
company has not offered or sold . . . and is not proposing to offer or
sell any security issued by it through a principal underwriter or
otherwise at a public offering price which includes a sales load of more
than 1 1/2 per centum."
Section 12(d)(1)(F) of the 1940 Act further provides that: "No issuer
of any security purchased or acquired by a registered investment
company . . . shall be obligated to redeem such security in an amount
exceeding 1 per centum of such issuer's total outstanding securities
during any period of less than thirty days . . . ."
1. Legislative Purpose
The express purpose of Section 12(d)(l) of the 1940 Act, as enacted
and amended by Congress in 1970, was to limit and address the
perceived adverse consequences of "pyramiding" of investment
companies in a "fund of funds" arrangement. These consequences are
discussed in a comprehensive Commission report on the subject1
("Report") and include: the duplicative costs involved in such a
structure, the exercise of undue influence or control over the
underlying series and the potential adverse impact of large-scale
redemptions. As detailed below, Applicants assert that the structure of
the Direct Funds avoids these adverse consequences, and request that
the Commission approve the application on that basis.
2. Layering of costs to investors
a. Advisory Fees
The Report states that "all fund holding companies . . . subject their
investors to two layers of advisory fees." Applicants believe that the
proposed structure of the Direct Funds will avoid this concern. Before
approving any advisory contract under Section 15 of the 1940 Act, the
Directors of the Direct Funds, including a majority of the directors who
are not "interested persons," as defined in Section 2(a)(19), will find
that any advisory fees charged under the contract are based on services
provided that are in addition to, rather than merely duplicative of,
services provided under any Underlying Portfolio advisory contract.
This finding, and the basis upon which the finding was made, will be
fully documented in the minute books of the Direct Funds.
b. Sales Load
The Report also states that "all investors in load funds including
fund holding companies must pay a sales charge . . . [I]nvestors in a
holding company are in turn subjected to a second layer of sales
charges on their purchases of shares in the holding company. The
investor is subjected to the dual sales load only where both the fund
holding company and its portfolio investment companies are open-end,
load funds."2
The proposed structure of the Direct Funds addresses this issue by
committing that the Direct Funds will pay no front-end or contingent
deferred sales charge in connection with the purchase or redemption of
shares of the Underlying Portfolios. In addition, as a condition to the
requested exemptive relief, any sales charges or service fees relating to
the shares of the Direct Funds will not exceed the limits set forth in
Article III, Section 26 of the NASD's Rules of Fair Practice, when
aggregated with any sales charges or service fees that the Direct Funds
may pay relating to acquisition, holding or disposition of Underlying
Portfolio shares. The aggregate sales charges, therefore, will not
exceed the amount that otherwise lawfully could be charged at either
fund level. Accordingly, the proposed structure of the Direct Funds
does not raise the sales charge layering concerns underlying Section
12(d)(1).
c. Administrative Expenses
The Report notes that "investors in fund holding companies are also
subjected to a layering of administrative expenses including stock
transfer, dividend disbursements and custodial fees and the cost of
shareholder communications."3 The proposed structure of the Direct
Funds addresses this issue.
Administrative and similar fees will be charged at the Direct Fund and
Underlying Portfolio levels. However, Applicants believe that the
redundancy of administrative fees and expenses between the Direct
Funds and the Underlying Portfolios will be minimal, since distinct
services are being provided at each level. In any event, Applicants
believe that administrative and other expenses may be reduced at both
levels under the proposed Direct Funds structure. Accordingly, an
investment in the Direct Funds should not be significantly more
expensive than a direct investment in an Underlying Portfolio.
Reduced expenses for each Underlying Portfolio may result from the
following: (1) the addition of assets from the Direct Funds may reduce
the expense ratios for each Underlying Portfolio to the extent
economies of scale are achieved or fixed expenses are spread across a
larger asset base; (2) to the extent that shareholders of the Direct Funds
otherwise would have opened direct accounts with each of the
Underlying Portfolios, the number of accounts maintained by the
Direct Funds in the aggregate, and the resulting transfer agency and
other shareholder servicing fees for the Underlying Portfolios, may be
reduced; and (3) the redemption rates for the Underlying Portfolios
may be lower due to the long-term asset allocation approach employed
by the Direct Funds. Custodial expenses and fund accounting fees for
the Direct Funds will be minimized to the extent that the Direct Funds
hold mutual fund shares rather than individual portfolio securities.
d. Value of Services Analysis
The Report states that "an investor in a fund of funds incurs more
expenses than he would incur simply by investing directly in any one,
some or all of its portfolio funds."4 Applicants believe that any
additional incremental cost incurred by investing in the Direct Funds is
in return for a substantial investment management service, namely the
initial and ongoing asset allocation of investments made in the
Underlying Portfolio.
As a condition to the requested relief, Applicants will provide to the
Chief Financial Analyst of the Commission's Division of Investment
Management (the "CFA"), in an electronic format, annual expense
ratios for the Direct Funds and each Underlying Portfolio. This will
enable the Commission to monitor the expenses relating to each of the
Direct Funds on an ongoing basis. Applicants note that the financial
media carefully monitors and reports the performance of mutual funds,
including "funds of funds." Accordingly, Applicants expect that
expense information about the Direct Funds will be readily available to
the public. Applicants will have to price these products in a manner
that is competitive with the market to attract and retain investors.
3. Diversification
The Report expresses some skepticism that increased diversification
results from fund of funds arrangements, calling the "added value of
diversification . . . largely illusory. . . ."5 It further notes that
"[a] fund holding company vehicle so duplicates and reduplicates the
diversification achieved by the investment in a single fund that the
expenses incurred defeat the investor's objectives."6
This view of diversification is clearly dated and does not reflect the
current thinking of the investment management community. It also
relates to a mutual fund and investment world vastly different from that
which exists today and does not take into account the development of
asset allocation funds which seek to invest across asset classes.
Unlike the fund holding companies in the Report, the Direct Funds will
provide meaningful additional diversification benefits since the
Underlying Portfolios pursue different investment strategies. This can
be monitored by the Commission, as Applicants agree to provide the
CFA, as soon as reasonably practicable following the fiscal year-end,
the monthly average assets for each of the Direct Funds and each
Underlying Portfolio, in an electronic format (unless the CFA notifies
Applicants in writing that such information need no longer be
submitted). Applicants also will provide the CFA with month-end
allocations of the assets of each of the Direct Funds among the
Underlying Portfolios, following each Direct Fund's fiscal year end.
The Report also expressed concern over "wash transactions"7 which
achieve no true investment purpose. These transactions occur where
"management of one portfolio fund will be buying for its portfolio the
same securities the management of another will be selling."8 Again,
this concern is not raised by the Direct Funds. Wash transactions will
be rare in the case of the Direct Funds since the Underlying Portfolios
will, as a general matter, pursue different investment strategies, and
therefore, invest in different types of securities. 4. Control
The Report criticizes the potential for "pyramiding control in the hands
of an individual or group of individuals whose financial stake in all of
the constituent companies of the group is comparatively nominal."9 It
focuses on fund holding companies because of their "potential for the
exercise of undue influence or control over the activities of portfolio
funds."10 Again, this concern is addressed by the proposed structure
of the Direct Funds. To allow the Commission to monitor these control
issues, Applicants will provide the CFA with a description of any vote
taken by the shareholders of any Underlying Portfolio, including a
statement of the percentage of votes cast for and against the proposal
by the Direct Funds and by the other shareholders of the Underlying
Portfolio. It also should be noted that the Other Portfolios, which are
not within the same "group of investment companies" as the Direct
Funds, cannot be controlled in any meaningful way by the Direct
Funds because Section 12(d)(1)(F) limits them, together with their
affiliates, to acquiring no more than 3% of the total outstanding stock
of any Other Portfolio.
5. Impact of Large Scale Redemptions
On a related point, the Report notes that the management of the
underlying fund "must be continually aware that a possible large
redemption carries with it a loss of advisory fees in approximate
proportion to the percentage of the fund redeemed."11 An entity
owning such a large share may attempt to exert influence over the
underlying fund. Applicants believe that concern over this potential
abuse is not relevant to the proposed arrangements. There is little
risk that the Direct Funds' adviser(s) will exercise inappropriate
control over the Underlying Portfolios, which are part of the same
"group of investment companies." Similarly, because the Direct
Funds, together with their affiliates, will be limited by
Section 12(d)(1)(F) to acquiring no more
than 3% of the total outstanding stock of any Other Portfolio, there is
little risk that the Direct Funds' adviser(s) will be in a position to
exercise inappropriate control over any Other Portfolio. Section
12(d)(1)(F) also permits the Other Portfolios to reject redemption
requests by a Direct Fund that exceed 1% of the Other Portfolio's total
outstanding securities during any period of less than 30 days.
As a condition to the requested exemptive relief, Applicants will
provide the CFA with the following information, in an electronic
format: monthly average total assets for each Direct Fund and
Underlying Portfolio; monthly purchases and redemptions (other than
by exchange) for each Direct Fund and Underlying Portfolio; and
monthly exchanges into and out of each of the Direct Funds and
Underlying Portfolio (the "Redemption Information").
The Report also expresses concern about the impact that the threat of
large scale redemptions might have on the "orderly management of an
underlying fund."12 For example, to address the threat of large scale
redemptions, an underlying fund may be forced to maintain excessive
cash balances. Otherwise, it might have to sell off a substantial
portion of its assets, thereby saddling the fund's remaining shareholders
with capital gains and a greater pro rata portion of fixed costs.
The Direct Funds generally will be designed for intermediate and long-
term investors. This will reduce the possibility of the Direct Funds
being used as short-term trading vehicles and further protect the Direct
Funds and the Underlying Portfolios from unexpected large
redemptions.
6. Conflicting Interests
The Commission also has raised conflict of interest concerns about the
fund holding company structure in proceedings to approve other
exemptive applications. See Vanguard Special Tax-Advantaged
Retirement Fund, et al., Investment Company Act Release Nos. 14153
(Sept. 11, 1984) (notice) and 14361 (Feb. 7, 1985) (order). As a
condition to the requested relief, a majority of the Directors/Trustees
of the Direct Funds will not be "interested persons" as defined in
Section 2(a)(19) of the 1940 Act.
The Direct Funds' investment adviser is subject to a conflict of interest
to the extent it has the authority to allocate the Direct Funds' assets
across unaffiliated Other Portfolios as well as affiliated Underlying
Portfolios. Applicants submit that this conflict is analogous to the
conflict faced by an adviser in deciding among various affiliated
Underlying Portfolios that pay different rates for advisory and other
services that are provided by the same adviser (or its affiliates). This
conflict will be addressed, in part, by limiting the adviser to a range of
allocations to unaffiliated Other Funds (e.g., no less than 15% and no
more than 20% of a Direct Fund's total assets may be invested in shares
of Other Funds, at the time of purchase). Any departure from the
prescribed range will have to be approved by the Board of
Directors/Trustees of the Direct Fund.
7. Complexity
Finally, the Report expresses concern that the popularity of funds of
funds could lead to the creation of more complex vehicles that would
not serve any meaningful purpose. Specifically, the Report states that,
"[i]f funds of funds are permitted to proliferate, how could an investor
decide among the many such companies seeking his investment dollar?
Would he not need a fund of funds of funds to make the decision?"13
Applicants believe that this and the other perceived abuses of the fund
holding company structure discussed above are addressed by virtue of
the fact that no Underlying Portfolio can acquire securities of any other
investment company in excess of the limits contained in Section
12(d)(1)(A). The Direct Funds also commit not to allocate assets to
shares of any Other Portfolio that is organized in a "fund of funds"
structure.
8. Conclusion
Section 12(d)(1) is designed to prohibit arrangements and practices
that bear practically no relation to the purpose and structure of the
Direct Funds. Unlike the fund holding companies that troubled
Congress 30 years ago, the Direct Funds will provide a simple answer
to investor demand for a diversified, professionally managed fund of
funds. Accordingly, Applicants believe that this is an appropriate
instance for the Commission to exercise its authority under Section 6(c)
to exempt Applicants from the restrictions of Section 12(d)(1) to the
extent requested in this Application.
B. Section 17(a)
Section 17(a) of the 1940 Act prohibits an affiliated person of a
registered investment company or an affiliated person of such affiliated
person from: (1) knowingly selling any security or other property to the
registered investment company or (2) knowingly purchasing any
security or other property from the company. Section 17(b) authorizes
the Commission to exempt a proposed transaction from the restrictions
of Section 17(a) if the evidence establishes that (1) the terms of the
proposed transaction, including the consideration paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned; (2) the proposed transaction is consistent with the
policies of each registered investment company concerned; and (3) the
proposed transaction is consistent with the general purposes of the
1940 Act.
The Direct Funds and the Underlying Portfolios will be advised by the
Advisers or their affiliates and, therefore, may be deemed to be
"affiliated persons" of one another by virtue of being under the
common control of their adviser(s).14 They also may be deemed to be
affiliated persons of one another to the extent that Direct Funds own
5% or more of the shares of an Underlying Portfolio.15 Purchases by
the Direct Funds of shares of the Underlying Portfolios and sales by the
Underlying Portfolios of their shares to the Direct Funds could be
deemed to be principal transactions between affiliated persons under
Section 17(a). Applicants seek an exemption under Sections 17(b) and
6(c) from the prohibitions of Section 17(a) to allow the transactions
described in this application to the extent that such prohibition would
apply.
Applicants believe that relief under Section 6(c) is appropriate for
many of the reasons discussed above. Applicants also believe that
relief is appropriate under Section 17(b) because the proposed
arrangement meets the requirements of that section.
First, the terms of the proposed arrangement are fair and reasonable
and do not involve overreaching. The consideration paid for the sale
and redemption of shares of the Underlying Portfolios will be based on
the net asset values of the Underlying Portfolios.
Second, the proposed arrangement will be specifically contemplated by
and consistent with the policies of the Direct Funds. The investment of
assets of the Direct Funds in shares of the Underlying Portfolios and
the issuance of shares of the Underlying Portfolios to the Direct Funds
will be effected in accordance with the investment restrictions of the
Direct Funds and will be consistent with the policies as set forth in the
registration statement of the Direct Funds.
Finally, the proposed arrangement is consistent with the general
purposes of the 1940 Act. Section 17(a) is intended to prohibit
affiliated persons in a position of influence or control over an
investment company from furthering their own interests by selling
property that they own to an investment company at an inflated price,
purchasing property from an investment company at less than its fair
value, or selling or purchasing property on terms that involve any self-
dealing or overreaching by the affiliated person. The proposed
arrangement does not involve any such wrongful conduct by the
Applicants.
C. Section 17(d) and Rule 17d-1
Section 17(d) of the 1940 Act prohibits an affiliated person of a
registered investment company or an affiliated person of such affiliated
person, acting as principal, from effecting any transaction in which
such registered company is a joint or a joint and several participant in
contravention of Commission rules and regulations. Rule 17d-1
provides that no joint transaction covered by such rule may be
consummated unless the Commission issues an order upon application.
In order to grant an exemption from the restrictions of Section 17(d)
and Rule 17d-1, Rule 17d-1(b) requires the Commission to consider
whether an investment company's participation in a joint enterprise or
joint arrangement is consistent with the provisions, policies and
purposes of the 1940 Act, and the extent to which the participation is
on a basis different from or less advantageous than that of other
participants. Although it is not clear that the transactions described
in this application raise prohibited transaction concerns under these
provisions, Applicants seek an exemption under Section 17(d) and Rule
17d-1 to the extent that such transactions are deemed to be joint
transactions between affiliated persons.
Applicants believe that the proposed structure and operation of the
Direct Funds is consistent with the provisions, policies and purposes of
the 1940 Act for the reasons discussed above. The Direct Funds and
the Underlying Portfolios will not participate in the proposed
arrangement on a basis that is different or less advantageous than the
participants that are not investment companies. Indeed, the proposed
arrangement is intended to provide substantial benefits for both the
Direct Funds and the Underlying Portfolios and their respective
shareholders, including increased diversification and more efficient
portfolio management, a larger asset base and potentially reduced
expenses. Since the proposal satisfies the standards of Rule 17d-1, the
Commission should grant relief from Section 17(d) and Rule 17d-1.
V. AUTHORITY
The relief requested by this application is substantially similar to that
recently granted by the Commission to Qualivest Funds, et al.,
Investment Company Act Release Nos. 21874 (Apr. 5, 1996) (notice)
and 21933 (May 1, 1996) (order); Twentieth Century Blended
Portfolios, Inc., et al., Investment Company Act Release Nos. 21813
(Mar. 11, 1996) (notice) and 21875 (Apr. 8, 1996) (order), Schwab
Capital Trust, et al., Investment Company Act Release Nos. 21726
(Jan. 31, 1996) (notice) and 21788 (Feb. 27, 1996) (order), DFA
Investment Dimensions Group, Inc., et al., Investment Company Act
Release Nos. 21642 (Dec. 29, 1995) (notice) and 21701 (Jan. 24, 1996)
(order), The Diversified Investors Funds Group, et al., Investment
Company Act Release Nos. 21597 (Dec. 13, 1995) (notice) and 21669
(Jan. 11, 1996) (order), SEI Institutional Managed Trust, et al.,
Investment Company Act Release Nos. 21539 (Nov. 22, 1995) (notice)
and 21615 (Dec. 20, 1995) (order), Smith Barney, Inc., et al.,
Investment Company Act Release Nos. 21537 (Nov. 21, 1995) (notice)
and 21613 (Dec. 19, 1995) (order), Vanguard STAR Fund, et al.,
Investment Company Act Release Nos. 21372 (Sept. 22, 1995) (notice)
and 21426 (Oct. 18, 1995) (order), T. Rowe Price Spectrum Fund, Inc.,
et al., Investment Company Act Release Nos. 21371 (Sept. 22, 1995)
(notice) and 21425 (Oct. 18, 1995) (order). No relief is sought with
respect to the ability of the Direct Funds to purchase shares of
unaffiliated Other Portfolios.
VI. CONDITIONS TO RELIEF
Applicants expressly consent to the imposition of the following
conditions in connection with this request for exemptive relief.
All Underlying Portfolios will be part of the same "group of investment
companies," as defined in 1940 Act Rule 11a-3, as the Direct Funds.
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. No Direct Fund will allocate assets to any unaffiliated Other
Portfolio that is organized in a "fund of funds" structure.
A majority of the Directors/Trustees of the Direct Funds will not be
"interested persons" of the Direct Funds, as defined in Section 2(a)(19)
of the 1940 Act.
Any sales charges or service fees relating to the shares of the Direct
Funds, when aggregated with any sales charges or service fees paid by
the Direct Funds relating to its acquisition, holding or disposition of
shares of the Underlying Portfolios, will not exceed the limits set forth
in Article III, Section 26, of the NASD's Rules of Fair Practice.
Before approving any advisory contract under Section 15 of the 1940
Act, the boards of Directors/Trustees of the Direct Funds, including a
majority of the Directors/Trustees 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. This finding, and the basis upon which the
finding was made, will be recorded fully in the minute books of the
Direct Funds.
Applicants agree to provide the following information, in an electronic
format, to the Chief Financial Analyst of the Commission's Division of
Investment Management: monthly average total assets for the Direct
Funds and Underlying Portfolios; monthly purchases and redemptions
(other than by exchange) for the Direct Funds and each Underlying
Portfolio; monthly exchanges into and out of the Direct Funds and each
Underlying Portfolio; month-end allocations of the Direct Funds' assets
among the Underlying Portfolios; annual expense ratios for the Direct
Funds 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 cast for and against the proposal
by the Direct Funds and by the other shareholders of the Underlying
Portfolio. The information will be provided as soon as reasonably
practicable following each fiscal year-end of the Direct Funds (unless
the Chief Financial Analyst notifies applicants in writing that the
information need no longer be submitted).
VII. PROCEDURAL MATTERS
1. Pursuant to Rule 0-2(f) under the Act, Applicants hereby state
that their addresses are as stated on the first page of this Application.
Applicants further state that all communications or questions should be
directed to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W., Suite 5500
Washington, D.C. 20006-1888
(202) 887-1500
2. Pursuant to Rule 0-2(c)(1) under the Act, each Applicant hereby
states that the officer signing and filing this Application on behalf of
each Applicant is fully authorized to do so. Under the provisions of
each Applicant's Declaration of Trust and/or Articles of Incorporation
and/or By-Laws, responsibility for the management of the affairs and
business of the Applicant is vested in its Board of Trustees or
Directors. Each Applicant has complied with all requirements for the
execution and filing of this Application in the name and on behalf of
each Applicant.
3. The verifications required by Rule 0-2(d) under the 1940 Act are
attached hereto as Exhibits B-1 through B-6. The notice of the
proceeding initiated by the filing of this Application required by Rule
0-2(g) under the 1940 Act is attached as Exhibit C to this Application.
IN WITNESS WHEREOF, each Applicant has caused this Application
to be duly executed this 15th day of May, 1996.
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
By:/s/ Robert L. Tuch
Name: Robert L. Tuch
Title: Assistant Secretary
THE VICTORY PORTFOLIOS
By: /s/ George O. Martinez
Name: George O. Martinez
Title: Assistant Secretary
CONCORD FINANCIAL GROUP, INC.
By: /s/ Michael D. Burns
Name: Michael D. Burns
Title: Vice President
KEYCORP MUTUAL FUND ADVISERS, INC.
By: /s/ William J. Blake
Name: William J. Blake
Title: Secretary
SPEARS, BENZAK, SALOMON & FARRELL, INC.
By: /s/ Michael R. Parker
Name: Michael R. Parker
Title: Vice President & General Counsel
VICTORY BROKER-DEALER SERVICES, INC.
By: /s/ Michael D. Burns
Name: Michael D. Burns
Title: Vice President
EXHIBIT INDEX
Exhibits
Sequential Page NumberA-1
Certification of SBSF Funds, Inc. d/b/a Key Mutual Funds Pursuant to
Rule 0-2(c)(1)A-1A-2
Certification of The Victory Portfolios
Pursuant to Rule 0-2(c)(1)A-3A-3
Certification of Spears, Benzak, Salomon & Farrell, Inc.
Pursuant to Rule 0-2(c)(1)A-5A-4
Certification of Keycorp Mutual Fund Advisers, Inc.
Pursuant to Rule 0-2(c)(1)A-7A-5
Certification of Concord Financial Group, Inc.
Pursuant to Rule 0-2(c)(1)A-9A-6
Certification of Victory Broker-Dealer Services, Inc.
Pursuant to Rule 0-2(c)(1)A-11B-1
Verification of SBSF Funds, Inc. d/b/a Key Mutual Funds
Pursuant to Rule 0-2(d)B-1B-2
Verification of The Victory Portfolios
Pursuant to Rule 0-2(d)B-2B-3
Verification of Spears, Benzak, Salomon & Farrell Inc.
Pursuant to Rule 0-2(d)B-3B-4
Verification of Keycorp Mutual Fund Advisers, Inc.
Pursuant to Rule 0-2(d) B-4B-5
Verification of Concord Financial Group, Inc.
Pursuant to Rule 0-2(d)B-5B-6
Verification of Victory Broker-Dealer Services, Inc.
Pursuant to Rule 0-2(d)B-6C
Notice of ApplicationC-1
Exhibit A-1
Authorization
Rule 0-2(c)(1)SBSF Funds, Inc. d/b/a Key Mutual Funds
Certificate
I, Robert L. Tuch, of SBSF Funds, Inc. (d/b/a Key Mutual Funds) (the
"Company") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c) and 17(b) of the 1940 Act, for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder,
and any amendments or supplements thereto, if the same shall be
necessary or appropriate; and
FURTHER RESOLVED, that the appropriate Officers of the Company
be, and each hereby is, authorized and directed to take such additional
actions, and to execute and deliver on behalf of the Company such
other documents or instruments as they deem necessary or appropriate
in furtherance of the above resolution, his or her authority therefor to
be conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have executed this Certificate this 15th
day of May, 1996.
/s/ Robert L. Tuch
Name: Robert L. Tuch
Title: Assistant Secretary
SBSF Funds, Inc. (d/b/a Key Mutual Funds)
EXHIBIT A-2
AUTHORIZATION
RULE 0-2(C)(1)
THE VICTORY PORTFOLIOS
CERTIFICATE
I, George O. Martinez, of The Victory Portfolios (the "Trust") hereby
certify that the following resolutions authorizing the filing with the
Securities and Exchange Commission (the "SEC") of an application for
an order pursuant to Sections 6(c) and 17(b) of the Investment
Company Act of 1940 (the "1940 Act"), for an order exempting the
Company from the provisions of Sections 12(d) and 17(a) and for an
order pursuant to Section 17(d) of the 1940 Act and Rule 17d-1
thereunder, and any amendments or other documents related thereto,
were duly adopted by the Trust's Board of Trustees and that such
resolutions have not been amended, modified or rescinded:
VOTED, that the Officers of the Trust be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Trust, an
exemptive application to the SEC for an order pursuant to Sections 6(c)
and 17(b) of the 1940 Act, for an order exempting the Company from
the provisions of Sections 12(d) and 17(a) and for an order pursuant to
Section 17(d) of the 1940 Act and Rule 17d-1 thereunder, and any
amendments or supplements thereto, if the same shall be necessary or
appropriate; and
FURTHER VOTED, that the appropriate Officers of the Trust be, and
each hereby is, authorized and directed to take such additional actions,
and to execute and deliver on behalf of the Trust such other documents
or instruments as they deem necessary or appropriate in furtherance of
the above resolution, his or her authority therefor to be conclusively
evidenced by the taking of any such actions or the execution or
delivery of any such document.
IN WITNESS WHEREOF, I have executed this Certificate this 15th
day of May, 1996.
By: /s/ George O. Martinez
Name: George O. Martinez
Title: Assistant Secretary
The Victory Portfolios
EXHIBIT A-3
AUTHORIZATION
RULE 0-2(C)(1)
SPEARS, BENZAK, SALOMON & FARRELL, INC.
CERTIFICATE
I, Michael R. Parker, of Spears, Benzak, Salomon & Farrell, Inc. (the
"Company") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c), 17(b) and (d) of the 1940 Act and Rule 17d-1 thereunder, and any
amendments or supplements thereto, if the same shall be necessary or
appropriate; and
FURTHER RESOLVED, that the appropriate Officers of Spears, the
Company be, and each hereby is, authorized and directed to take such
additional actions, and to execute and deliver on behalf of the
Company such other documents or instruments as they deem necessary
or appropriate in furtherance of the above resolution, his or her
authority therefor to be conclusively evidenced by the taking of any
such actions or the execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 20th day
of May, 1996.
/s/ Michael R. Parker
Name: Michael R. Parker
Title: Vice President & General Counsel
Spears, Benzak, Salomon & Farrell, Inc.
EXHIBIT A-4
AUTHORIZATION
RULE 0-2(C)(1)
KEYCORP MUTUAL FUND ADVISERS, INC.
CERTIFICATE
I, William J. Blake, Secretary of KeyCorp Mutual Advisers, Inc. (the
"Corporation") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Corporation from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Corporation's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the officers of the Corporation be, and each hereby
is, authorized to prepare, execute and submit, on behalf of the
Corporation, an exemptive application to the Securities and Exchange
Commission for an order pursuant to Sections 6(c), 17(b) and (d) of the
1940 Act and Rule 17d-1 thereunder, and any amendments or
supplements thereto, if the same shall be necessary or appropriate; and
FURTHER RESOLVED, that the officers of the Corporation be, and
each hereby is, authorized and directed to take such additional actions,
and to execute and deliver on behalf of the Corporation such other
documents or instruments as they deem necessary or appropriate in
furtherance of the above vote, his or her authority therefor to be
conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 10th day
of May, 1996.
/s/ William J. Blake
William J. Blake
Secretary
KeyCorp Mutual Fund Advisers, Inc.
EXHIBIT A-5
AUTHORIZATION
RULE 0-2(C)(1)
CONCORD FINANCIAL GROUP, INC.
CERTIFICATE
I, Michael D. Burns, of Concord Financial Group, Inc. (the
"Company"), hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
Inc., an exemptive application to the SEC for an order pursuant to
Sections 6(c), 17(b) and (d) of the 1940 Act and Rule 17d-1
thereunder, and any amendments or supplements thereto, if the same
shall be necessary or appropriate; and
FURTHER RESOLVED, that the appropriate Officers of the Company
be, and each hereby is, authorized and directed to take such additional
actions, and to execute and deliver on behalf of the Company such
other documents or instruments as they deem necessary or appropriate
in furtherance of the above resolution, his or her authority therefor to
be conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day
of May, 1996.
/s/ Michael D. Burns
Name: Michael D. Burns
Title: Vice President
Concord Financial Group, Inc.
EXHIBIT A-6
AUTHORIZATION
RULE 0-2(C)(1)
VICTORY BROKER-DEALER SERVICES, INC.
CERTIFICATE
I, Michael D. Burns, of Victory Broker-Dealer Services, Inc. (the
"Company"), hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c), 17(b) and (d) of the 1940 Act and Rule 17d-1 thereunder, and any
amendments or supplements thereto, if the same shall be necessary or
appropriate; and
FURTHER RESOLVED, that the appropriate Officers of the Company
be, and each hereby is, authorized and directed to take such additional
actions, and to execute and deliver on behalf of the Company such
other documents or instruments as they deem necessary or appropriate
in furtherance of the above resolution, his or her authority therefor to
be conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day
of May, 1996.
/s/ Michael D. Burns
Name: Michael D. Burns
Title: Vice President
Victory Broker-Dealer Services, Inc.
EXHIBIT B-1
VERIFICATION
RULE 0-2(d)
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
VERIFICATION
STATE OF OHIO )
) ss:
COUNTY OF FRANKLIN )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Application for an Order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting the Company from the provisions
of Sections 12(d) and 17(a) and for an order pursuant to Section 17(d)
of the 1940 Act and Rule 17d-1 thereunder, dated May 15, 1996 for
and on behalf of SBSF Funds, Inc. (the "Company"); that he is the
Assistant Secretary of such Company; and that all action by
stockholders, directors and other bodies necessary to authorize
deponent to execute and file such instrument on behalf of the Company
has been taken. Deponent further says that he is familiar with such
instrument, and the contents thereof, and that the facts therein set
forth are true to the best of his knowledge, information and belief.
/s/ Robert L. Tuch
Name: Robert L. Tuch
Title: Assistant Secretary
SBSF Funds, Inc. (d/b/a Key Mutual Funds)
Subscribed and sworn to before me, a Notary Public, this ___ day of
May, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-2
VERIFICATION
RULE 0-2(d)
THE VICTORY PORTFOLIOS
VERIFICATION
STATE OF _____________ )
) ss:
COUNTY OF ___________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Application for an Order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting the Company from the provisions
of Sections 12(d) and 17(a) and for an order pursuant to Section 17(d)
of the 1940 Act and Rule 17d-1 thereunder, dated May __, 1996 for
and on behalf of The Victory Portfolios (the "Trust"); that he is the
_________________ of such Trust; and that all action by interest
holders, trustees and other bodies necessary to authorize deponent to
execute and file such instrument on behalf of the Trust has been take
n. Deponent further says that he is familiar with such instrument, and
the contents thereof, and that the facts therein set forth are true to
the best of his knowledge, information and belief.
/s/
Name:______________________________
Title: ______________________________
The Victory Portfolios
Subscribed and sworn to before me, a Notary Public, this ___ day of
May, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-3
VERIFICATION
RULE 0-2(d)
SPEARS, BENZAK, SALOMON & FARRELL, INC.
VERIFICATION
STATE OF _______________ )
) ss:
COUNTY OF _____________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Application for an Order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting the Company from the provisions
of Sections 12(d) and 17(a) and for an order pursuant to Section 17(d)
of the 1940 Act and Rule 17d-1 thereunder, dated May __, 1996 for
and on behalf of Spears, Benzak, Salomon & Farrell, Inc. (the "Trust");
that he is the _________________ of such Company; and that all
action by shareholders, directors and other bodies necessary to
authorize deponent to execute and file such instrument on behalf of the
Company has been taken. Deponent further says that he is familiar
with such instrument, and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and
belief.
/s/
Name:______________________________
Title: ______________________________
Spears, Benzak, Salomon & Farrell, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
May, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-4
VERIFICATION
RULE 0-2(d)
KEYCORP MUTUAL FUND ADVISERS, INC.
VERIFICATION
STATE OF OHIO )
) ss:
COUNTY OF CUYAHOGA)
The undersigned being duly sworn deposes and states that he has
duly executed the attached Application for an Order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting the Company from the provisions
of Sections 12(d) and 17(a) and for an order pursuant to Section 17(d)
of the 1940 Act and Rule 17d-1 thereunder, dated May ___, 1996 for
and on behalf of KeyCorp Mutual Fund Advisers, Inc. (the
"Corporation"); that he is the Secretary of such Corporation; and that
all action by shareholders, directors and other bodies necessary to
authorize deponent to execute and file such instrument on behalf of the
Corporation has been taken. Deponent further says that he is familiar
with such instrument, and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and
belief.
/s/
William J. Blake
Secretary
KeyCorp Mutual Fund Advisers, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
May, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-5
VERIFICATION
RULE 0-2(d)
CONCORD FINANCIAL GROUP, INC.
VERIFICATION
STATE OF _______________ )
) ss:
COUNTY OF _____________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Application for an Order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting the Company from the provisions
of Sections 12(d) and 17(a) and for an order pursuant to Section 17(d)
of the 1940 Act and Rule 17d-1 thereunder, dated May __, 1996 for
and on behalf of Concord Financial Group, Inc. (the "Company"); that
he is the _________________ of such Company; and that all action by
shareholders, directors and other bodies necessary to authorize
deponent to execute and file such instrument on behalf of the Company
has been taken. Deponent further says that he is familiar with such
instrument, and the contents thereof, and that the facts therein set
forth are true to the best of his knowledge, information and belief.
/s/
Name:______________________________
Title: ______________________________
Concord Financial Group, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
May, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-6
VERIFICATION
RULE 0-2(d)
VICTORY BROKER-DEALER SERVICES, INC.
VERIFICATION
STATE OF _______________ )
) ss:
COUNTY OF _____________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Application for an Order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting Victory Broker-Dealer Services,
Inc. (the "Company") from the provisions of Sections 12(d) and 17(a)
and for an order pursuant to Section 17(d) of the 1940 Act and Rule
17d-1 thereunder, dated May __, 1996 for and on behalf of the
Company; that he is the _________________ of such Company; and
that all action by shareholders, directors and other bodies necessary to
authorize deponent to execute and file such instrument on behalf of the
Company has been taken. Deponent further says that he is familiar
with such instrument, and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and
belief.
/s/
Name:______________________________
Title: ______________________________
Victory Broker-Dealer Services, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
May, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT C
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT COMPANY ACT OF 1940, Release No. ______
SBSF Funds, Inc. d/b/a Key Mutual Funds et al.
___________, 1996
Agency: Securities and Exchange Commission ("Commission").
Action: Notice of Application for an Order under the Investment
Company Act of 1940 (the "1940 Act").
Applicants: SBSF Funds, Inc. d/b/a Key Mutual Funds ("KMF"),
The Victory Portfolios ("VP"), Spears, Benzak, Salomon & Farrell, Inc.
("SBS&F"), KeyCorp Mutual Fund Advisers, Inc. ("KMFAI"),
Concord Financial Group, Inc. ("CFGI") and Victory Broker-Dealer
Services, Inc. ("VBDSI").
Relevant 1940 Act Sections: Order requested under Section 6(c) of the
1940 Act from section 12(d)(1) of the Act, under sections 6(c) and
17(b) of the 1940 Act from section 17(a) of the Act, and pursuant to
section 17(d) of the 1940 Act and Rule 17d-1 thereunder.
Summary of Application: The requested order would permit the use of
existing funds or the creation of new funds (the "Direct Funds") that
will acquire shares of investment companies or series thereof, now
existing or created in the future, that are part of the same "group of
investment companies," as defined in Rule 11a-3 under the 1940 Act
(the "Underlying Portfolios") and to permit the Underlying Portfolios
to sell such shares to the Direct Funds.
Filing Dates: The application was filed on _________.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on _________, 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
Commission's Secretary.
Addresses: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants: KMF, VP, CFGI,
VBDSI, 3435 Stelzer Road, Columbus, OH 43219; KMFAI, 127
Public Square, Cleveland, OH 44114; SBS&F, 45 Rockefeller Plaza,
New York, NY 10111.
For Further Information Contact: _________, Staff Attorney, at (202)
942-____, or , _________, Branch Chief at (202) 942-____ (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 from
the Commission's Public Reference Branch.
Applicants' Representations:
1. KMF is a Maryland corporation registered under the 1940 Act as an
open-end management investment company consisting of four
operating portfolios and two inactive portfolios. VP is a Delaware
business trust registered under the 1940 Act as an open-end diversified
management investment company consisting of 24 operating and four
inactive portfolios.
2. It is anticipated that the initial Direct Funds would be newly
established portfolios of KMF. The proposed Direct Funds would be
structured as "funds of funds" that would invest their assets in shares
of various Underlying Portfolios. The Underlying Portfolios are
existing and future investment portfolios of KMF and VP. The
acquiring Direct Funds also may invest a portion of their assets in
stocks, bonds and other securities, including money market instruments
and shares of investment companies that are not part of the same
"group of investment companies," as defined in Rule 11a-3 under the
1940 Act ("Other Portfolios"). Investment in Other Portfolios will not
exceed the percentage limitations imposed by Section 12(d)(1)(F) of
the 1940 Act and will also be limited to an aggregate value not in
excess of 20% of the total assets of the Direct Funds at the time of
purchase. No exemptive relief is sought with respect to investments by
the Direct Funds in shares of Other Portfolios.
3. The Direct Funds seek to provide diversification among major asset
categories and stock sub-categories. The mix of investments for each
of the Direct Funds will be established and varied using an asset
allocation approach. Initial and subsequent allocation decisions will be
made as a result of investment analyses undertaken by the Direct
Fund's adviser, subject to supervision by the Board of Directors of the
Direct Fund. The prospectus and statement of additional information
for each Direct Fund will describe the Direct Fund's permissible
investments in Underlying Portfolios, as well as stocks, bonds and
other securities, including money market instruments and shares of
Other Portfolios.
4. SBS&F currently serves as investment adviser to the various
operating funds of KMF. Subject to the general supervision of KMF's
Board of Directors, in accordance with each advised entity's investment
policies, SBS&F formulates guidelines and lists of approved
investments, makes decisions with respect to and places orders for the
KMF operating funds' purchases and sales of securities and maintains
records relating to such purchases and sales. SBS&F is a wholly
owned subsidiary of KeyCorp Asset Management Holdings, Inc.
("KAMHI"), which is a wholly owned subsidiary of Society National
Bank, a national banking association, and KeyCorp, a bank holding
company. KMFAI serves as investment adviser to VP and to two funds
of KMF that have not yet commenced operations. Subject to the
general supervision of VP's Board of Trustees and KMF's Board of
Directors, respectively, in accordance with each advised entity's
investment policies, KMFAI formulates guidelines and lists of
approved investments, makes decisions with respect to and places
orders for VP's purchases and sales of securities and maintains records
relating to such purchases and sales. KMFAI is also a wholly owned
subsidiary of KAMHI. It is anticipated that KMFAI will serve as the
investment adviser to the initial Direct Funds.
5. CFGI, a registered broker-dealer under the Securities Exchange Act
of 1934, will serve as principal underwriter and distributor of shares of
the initial Direct Funds. CFGI presently serves in this capacity for the
existing series of KMF. VBDSI, a registered broker-dealer under the
Securities Exchange Act of 1934, serves in this capacity for the
existing series of VP. CFGI and VBDSI are both wholly owned
subsidiaries of BISYS Fund Services, Inc. ("BISYS") and are not
affiliated with KeyCorp. It is possible that BISYS or another wholly
owned subsidiary of BISYS will assume responsibility for all
distribution services relating to KMF and VP.
Applicants' Legal Analysis:
1. Section 12(d)(1)(A) 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. Section
12(d)(1)(F) of the 1940 Act provides that the provisions of section
12(d)(1) shall not apply to securities purchased or otherwise acquired
by a registered investment company if immediately after such
purchase or acquisition, not more than 3 per centum of the total
outstanding stock of such issuer is owned by such registered
investment company and all affiliated persons of such registered
investment company; and such registered investment company has not
offered or sold and is not proposing to offer or sell any security issued
by it through a principal underwriter or otherwise at a public offering
price which includes a sales load of more than 1 1/2 per centum.
Further no issuer of shares purchased under section 12(d)(1)(F) shall be
obligated to redeem such security in an amount exceeding 1 per centum
of such issuer's total outstanding securities during any period of less
than thirty days.
2. Section 6(c) provides that the Commission may exempt persons or
transactions 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 1940 Act. Applicants request an order under section 6(c)
exempting them from the limitations of section 12(d)(1)(A) and (B) to
the extent necessary to permit each Direct Fund to purchase an
unlimited amount of the outstanding voting shares of each Underlying
Portfolio; the securities of each Underlying Portfolio to have an
aggregate value of as much as 100% of the total assets of a Direct
Fund; the Direct Funds to invest up to 100% of their assets in the
securities of the Underlying Portfolios; and each of the Underlying
Portfolios to sell more than 3% of its total outstanding voting stock
to a Direct Fund.
3. The purpose of section 12(d)(l) of the 1940 Act was to limit and
address the perceived adverse consequences of "pyramiding" of
investment companies in a "fund of funds" arrangement. These include
the duplicative costs involved in such a structure, the exercise of undue
influence or control over the underlying series and the potential
adverse impact of large-scale redemptions.
4. The proposed arrangement will not raise the fee layering concerns
contemplated by section 12(d)(1). The proposed arrangement will not
involve the layering of advisory fees, as before approving any advisory
contract under section 15 of the 1940 Act, the directors of the Direct
Funds, including a majority of the directors who are not "interested
persons," as defined in section 2(a)(19), 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. The proposed structure of the
Direct Funds will not involve the layering of sales charges as the Direct
Funds will pay no front-end or contingent deferred sales charge in
connection with the purchase or redemption of shares of the
Underlying Portfolios. In addition, as a condition to the requested
exemptive relief, any sales charges or service fees relating to the
shares of the Direct Funds will not exceed the limits set forth in
Article III, Section 26 of the NASD's Rules of Fair Practice, when
aggregated with any sales charges or service fees that the Direct Funds
may pay relating to acquisition, holding or disposition of Underlying
Portfolio shares. The aggregate sales charges, therefore, will not
exceed the amount that otherwise lawfully could be charged at either
fund level.
5. The proposed arrangement will be structured to minimize large
scale redemption concerns. There is little risk that the Direct Funds'
adviser(s) will exercise inappropriate control over the Underlying
Portfolios, which are part of the same "group of investment
companies." Similarly, because the Direct Funds, together with their
affiliates, will be limited by section 12(d)(1)(F) to acquiring no more
than 3% of the total outstanding stock of any Other Portfolio, there is
little risk that the Direct Funds' adviser(s) will be in a position to
exercise inappropriate control over any Other Portfolio.
6. The Direct Funds and the Underlying Portfolios will be advised by
the Advisers or their affiliates and, therefore, may be deemed to be
"affiliated persons" of one another by virtue of being under the
common control of their adviser(s). They also may be deemed to be
affiliated persons of one another to the extent that Direct Funds own
5% or more of the shares of an Underlying Portfolio. Purchases by the
Direct Funds of shares of the Underlying Portfolios and the sale by the
Underlying Portfolios of their shares to the Direct Funds could be
deemed to be principal transactions between affiliated persons under
section 17(a). Applicants seek an exemption under sections 17(b) and
6(c) from the prohibitions of section 17(a) to allow the transactions
described in this application to the extent that such prohibition would
apply. The Applicants believe that relief under section 6(c) is
appropriate for many of the reasons discussed above. Applicants also
believe that relief is appropriate under section 17(b) because the
proposed arrangement meets the requirements of that section.
7. Section 17(b) provides that the Commission shall exempt a
proposed transaction from section 17(a) if evidence establishes that the
terms of the proposed transaction are reasonable and fair and do not
involve overreaching, the proposed transaction is consistent with the
policies of the registered investment company involved, and the
proposed transaction is consistent with the general provisions of the
1940 Act. Section 6(c) permits the Commission to exempt any person,
security, or transaction, or any class or classes of persons, securities,
or transactions, from any provisions of the 1940 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. Applicants believe that the proposed
transactions meet the standards of sections 6(c) and 17(b). Applicants
believe that their proposal is structured to assure that neither the
Direct Funds nor the Underlying Portfolios will participate on a basis
that is different or less advantageous than any other participant.
8. Section 17(d) prohibits an affiliated person of a registered
investment company, or an affiliated person of such person, acting as
principal, from effecting any transaction in which such investment
company is a joint, or joint and several, participant with such person in
contravention of Commission rules and regulations. Rule 17d-1
provides that an affiliated person of a registered investment company
or an affiliated person of such person, acting as principal, shall not
participate in, or effect any transaction in connection with, any joint
enterprise or other joint arrangement in which the registered investment
company is a participant unless the Commission has issued an order
approving the arrangement. When the Direct Fund purchases the
shares of the Underlying Portfolios and the Underlying Portfolios sell
their shares to the Direct Fund, they could be deemed to be "joint or
joint and several participants" in respect of such transactions in
violation of Rule 17d-1.
9. Applicants request that the Commission issue an order under
section 17(d) and Rule 17d-1 approving the proposed arrangements
and transactions described herein. Applicants believe that such
arrangements and transactions are structured to assure that the Direct
Funds and the Underlying Portfolios will not participate in the
proposed arrangement on a basis that is different or less advantageous
than the participants that are not investment companies.
Applicants' Conditions:
Applicants agree that the order granting the requested relief shall be
subject to the following conditions:
All Underlying Portfolios will be part of the same "group of investment
companies," as defined in 1940 Act Rule 11a-3, as the Direct Funds.
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. No Direct Fund will allocate assets to any unaffiliated Other
Portfolio that is organized in a "fund of funds" structure.
A majority of the Directors/Trustees of the Direct Funds will not be
"interested persons" of the Direct Funds, as defined in Section 2(a)(19)
of the 1940 Act.
Any sales charges or service fees relating to the shares of the Direct
Funds, when aggregated with any sales charges or service fees paid by
the Direct Funds relating to its acquisition, holding or disposition of
shares of the Underlying Portfolios, will not exceed the limits set forth
in Article III, Section 26, of the NASD's Rules of Fair Practice.
Before approving any advisory contract under Section 15 of the 1940
Act, the boards of Directors/Trustees of the Direct Funds, including a
majority of the Directors/Trustees 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. This finding, and the basis upon which the
finding was made, will be recorded fully in the minute books of the
Direct Funds.
Applicants agree to provide the following information, in an electronic
format, to the Chief Financial Analyst of the Commission's Division of
Investment Management: monthly average total assets for the Direct
Funds and Underlying Portfolios; monthly purchases and redemptions
(other than by exchange) for the Direct Funds and each Underlying
Portfolio; monthly exchanges into and out of the Direct Funds and each
Underlying Portfolio; month-end allocations of the Direct Funds' assets
among the Underlying Portfolios; annual expense ratios for the Direct
Funds 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 cast for and against the proposal
by the Direct Funds and by the other shareholders of the Underlying
Portfolio. The information will be provided as soon as reasonably
practicable following each fiscal year-end of the Direct Funds (unless
the Chief Financial Analyst notifies applicants in writing that the
information need no longer be submitted).
For the Commission, by the Division of Investment Management,
under delegated authority.
dc-31500
1 Report of the Securities and Exchange Commission on the Public
Policy Implications of Investment Company Growth: Report of the
Committee on Interstate and Foreign Commerce, H.R. Doc. No. 2337,
89th Cong., 2d Sess., 314 (l966).
2 Id. at 319.3 Id.4 Id.5 Id. at 320.6 Id.7 Id.8 Id.9 Id. at 314-315.10
Id. at 315.11 Id.12 Id. at 316.13 Id. at 321 (emphasis in original).
14 See Section 2(a)(3)(C) of the 1940 Act.15 See Section 2(a)(3)(A)
and 2(a)(3)(B) of the 1940 Act.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
IN THE MATTER OF
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
THE VICTORY PORTFOLIOS
BISYS FUND SERVICES LIMITEDPARTNERSHIP,
d/b/a BISYS FUND SERVICES
KEYCORP MUTUAL FUND ADVISERS, INC.
AND SPEARS, BENZAK, SALOMON & FARRELL, INC.
FIRST AMENDMENT AND RESTATEMENT TO APPLICATION
PURSUANT TO SECTIONS
6(c) AND 17(b) OF THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED, FOR AN ORDER EXEMPTING THE APPLICANTS
FROM THE PROVISIONS OF SECTIONS 12(d) AND 17(a) AND
FOR AN ORDER PURSUANT TO SECTION 17(d) OF THAT ACT
AND RULE 17d-1 THEREUNDER PERMITTING THE PROPOSED
TRANSACTIONS.
Please direct all communications concerning this First Amendment to
Application to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, NW, Suite 5500
Washington, D.C. 20006-1888
(202) 887-1500
UNITED STATES OF AMERICA
BEFORE THE SECURITIES AND EXCHANGE COMMISSION
In The Matter Of:
SBSF Funds, Inc. d/b/a Key Mutual Funds
The Victory Portfolios
Bisys Fund Services Limited Partnership, d/b/a Bisys Fund
Services3435 Stelzer Road
Columbus, OH 43219
KeyCorp Mutual Fund Advisers, Inc.127 Public Square
Cleveland, OH 44114
Spears, Benzak, Salomon & Farrell, Inc.
45 Rockefeller Plaza
New York, NY 10111
First Amendment and Restatement to Application Pursuant To Sections
6(c) And 17(b) Of The Investment Company Act Of 1940, As
Amended, For An Order Exempting The Applicants From The
Provisions Of Sections 12(d) And 17(a) And For An Order Pursuant To
Section 17(d) Of That Act And Rule 17d-1 Thereunder Permitting The
Proposed Transactions.
I. PRELIMINARY STATEMENT
SBSF Funds, Inc. d/b/a Key Mutual Funds ("KMF"), The Victory
Portfolios ("VP"), BISYS Fund Services Limited Partnership, d/b/a
BISYS Fund Services, ("BISYS") (which assumed the responsibility
for all distribution services formerly performed by Concord Financial
Group, Inc. and Victory Broker-Dealer Services, Inc.), KeyCorp
Mutual Fund Advisers, Inc. ("KMFAI") and Spears, Benzak, Salomon
& Farrell, Inc. ("SBS&F"), (collectively, "Applicants"), hereby amend
and restate the application for an order of the Securities and Exchange
Commission (the "Commission") under Section 6(c) of the Investment
Company Act of 1940 ("1940 Act") for an exemption from the
limitations of Sections 12(d)(l)(A) and (B) to the extent necessary to
permit the series of KMF, VP and any other investment company
created in the future that is part of the same "group of investment
companies," as defined in Rule 11a-3 under the 1940 Act (the "Direct
Funds") to purchase shares of investment companies or series thereof,
now existing or created in the future, that are part of the same "group
of investment companies," as so defined (the "Underlying Portfolios"),
as the Direct Funds, and to permit the Underlying Portfolios to sell
such shares to the Direct Funds. Applicants also apply for an order
under Sections 6(c) and 17(b) of the 1940 Act for an exemption from
Section 17(a) to the extent necessary to permit purchases and
redemptions by the Direct Funds of shares of the Underlying Portfolios
and sales and redemptions by the Underlying Portfolios of their shares
in transactions with the Direct Funds. Additionally, Applicants apply
for an order under 1940 Act Section 17(d) and Rule 17d-1 thereunder
for an exemption to permit the foregoing transactions. Applicants
believe the requested exemptions are fully consistent with the policies
and purposes of the 1940 Act. Since no form has been prescribed for
this application, Applicants proceed under Rule 0-2 of the General
Rules and Regulations of the Commission under the 1940 Act.
II. BACKGROUND
A. The Underlying Portfolios and the Direct Funds
KMF is a Maryland corporation registered under the 1940 Act as an
open-end management investment company currently consisting of six
operating portfolios. VP is a Delaware business trust registered under
the 1940 Act as an open-end diversified management investment
company currently consisting of 24 operating and four inactive
portfolios. The initial Direct Funds would be newly established
portfolios of KMF. The Direct Funds would be structured as "funds of
funds" that would invest their assets in shares of various Underlying
Portfolios. The Underlying Portfolios are existing and future
investment portfolios of KMF and VP. The acquiring Direct Funds
also may invest a portion of their assets in stocks, bonds and other
securities, including money market instruments and shares of
investment companies that are not part of the same "group of
investment companies," as defined in Rule 11a-3 under the 1940 Act
("Other Portfolios"). Investment in Other Portfolios will not exceed the
percentage limitations imposed by Section 12(d)(1)(F) of the 1940 Act
and will also be limited to an aggregate value of between 15% and 20%
of the value of the total assets of the Direct Fund at the time of
purchase. Any departure from the prescribed range will have to be
approved by the Board of Directors/Trustees of the Direct Funds. No
exemptive relief is sought with respect to investments by the Direct
Funds in shares of Other Portfolios.
The mix of investments for each of the Direct Funds will be established
and varied using an asset allocation approach. Initial and subsequent
allocation decisions will be made as a result of investment analyses
undertaken by the Direct Fund's adviser, subject to supervision by the
Board of Directors of the Direct Fund. The prospectus and statement
of additional information for each Direct Fund will describe the Direct
Fund's permissible investments in Underlying Portfolios, as well as
stocks, bonds and other securities, including money market instruments
and shares of Other Portfolios.
B. Spears, Benzak, Salomon & Farrell, Inc.
SBS&F currently serves as investment adviser to the various operating
funds of KMF. Subject to the general supervision of KMF's Board of
Directors, in accordance with each advised entity's investment policies,
SBS&F formulates guidelines and lists of approved investments, makes
decisions with respect to and places orders for the KMF operating
funds' purchase and sale of securities, and maintains records relating to
such purchases and sales. SBS&F is a wholly owned subsidiary of
KeyCorp Asset Management Holdings, Inc. ("KAMHI"), which is a
wholly owned subsidiary of KeyBank National Association, a national
banking association, which, in turn, is a wholly owned subsidiary of
KeyCorp, a bank holding company.
C. KeyCorp Mutual Fund Advisers, Inc.
KMFAI currently serves as investment adviser to VP and to two funds
of KMF that have recently commenced operations. Subject to the
general supervision of VP's Board of Trustees, and KMF's Board of
Directors, respectively, in accordance with each advised entity's
investment policies, KMFAI formulates guidelines and lists of
approved investments, makes decisions with respect to and places
orders for VP's purchases and sales of securities and maintains records
relating to such purchases and sales. KMFAI is a wholly owned
subsidiary of KAMHI. It is anticipated that KMFAI will serve as the
investment adviser to the initial Direct Funds.
D. BISYS Fund Services
BISYS, a registered broker-dealer under the Securities Exchange Act
of 1934 (the "1934 Act"), will serve as distributor (principal
underwriter) of shares of the proposed Direct Funds. Since the filing of
the original Application with the SEC on May 20, 1996, BISYS
assumed the responsibility for all distribution services relating to KMF
and VP and, accordingly, presently serves as distributor for the
existing series of KMF and VP.
III. THE PROPOSED TRANSACTIONS
A. Proposed Structure
The Direct Funds will invest their assets in shares of Underlying
Portfolios that are part of the same "group of investment companies" as
the Direct Funds, as defined under 1940 Act Rule 11a-3. Any assets
that are not invested in such Underlying Portfolios will be invested in
stocks, bonds and other securities, including money market instruments
and shares of Other Portfolios to the extent permitted under Section
12(d)(1)(F) of the 1940 Act, subject to the 20% limitation described
above.
Some of the Underlying Portfolios might rely upon a "manager of
manager" exemptive order granted by the SEC, whereby the
Underlying Portfolios would have the authority to select a sub-adviser
without the approval of the shareholders of the Underlying Portfolio,
subject to certain conditions. However, reliance upon such exemptive
order will not change the analysis with respect to the proposed
structure here, since the Underlying Portfolios would all be part of the
same "group of investment companies" as the Direct Funds, regardless
of the identity of their sub-advisers.
B. Investment Allocations
The Direct Funds will allocate their assets among the Underlying
Portfolios as noted above. The Direct Funds also may allocate assets
among stocks, bonds and other securities, including money market
instruments and shares of Other Portfolios, subject to the limitations
described above.
C. Direct Fund and Underlying Portfolio Expenses
1. Operational Expenses
The Underlying Portfolios will pay investment advisory fees to KMFAI
and/or SBS&F. Additionally, the Underlying Portfolios will pay fees
to their various service providers for all other services relating to
their operations. The Direct Funds' shareholders, therefore, will
indirectly pay their proportionate share of any Underlying Portfolio
fees and expenses.
The Direct Funds also may pay investment advisory fees to their
investment adviser(s). The services provided by the adviser to the
Direct Funds will be in addition to and not duplicative of those
provided by the adviser(s) to the Underlying Portfolios. Additionally,
the Direct Funds will pay fees to their various service providers for all
other services relating to their operations. Duplicative expenses are
expected to be minimal and are, to the some extent, expected to be
offset by cost savings at the Underlying Portfolio level.
2. Sales-Related Expenses
The Direct Funds will pay no front-end sales load or contingent
deferred sales charge in connection with the purchase or redemption of
shares of the Underlying Portfolios. The sales charges or service fees
relating to the shares of the Direct Funds will not exceed the limits set
forth in Article III, Section 26 of the National Association of Securities
Dealers, Inc. (the "NASD") Rules of Fair Practice when aggregated
with any sales charges or service fees that the Direct Funds pay relating
to Underlying Portfolio shares.
D. Purpose of the Direct Funds
The Direct Funds are intended as an efficient and cost-effective method
of allowing investors to structure and modify a comprehensive
allocation program in investments throughout the Underlying
Portfolios. The structure of the Direct Funds recognizes that differing
investment products do not move in tandem. For example, when
stocks perform poorly, bonds may perform better. Therefore, investing
in different types of investment products can help spread risk and even
out swings in performance.
The risk/return balance in a portfolio can be varied by altering the
proportion of assets allocated to different types of investments. For
example, an investor seeking higher growth potential generally would
invest a larger portion of assets in stocks while an investor seeking less
volatility generally would invest a larger portion of assets in high-
quality bonds or cash equivalents. This asset allocation approach is the
fundamental principle behind the Direct Funds.
IV. APPLICABLE LAW AND ANALYSIS.
A. Section 12(d)(1)
Section 12(d)(1)(A) of the 1940 Act provides, in pertinent part: "It
shall be unlawful for any registered investment company (the
"acquiring company") . . . to purchase or otherwise acquire any security
issued by any other investment company (the "acquired company") . . .
if the acquiring company and any company or companies controlled by
it immediately after such purchase or acquisition own in the aggregate
(I) more than 3 per centum of the total outstanding voting stock of the
acquired company;
(ii) securities issued by the acquired company having an aggregate
value in excess of 5 per centum of the value of the total assets of the
acquiring company; or
(iii) securities issued by the acquired company and all other
investment companies . . .having an aggregate value in excess of 10 per
centum of the value of the total assets of the acquiring company."
Section 12(d)(1)(B) of the 1940 Act provides, in pertinent part: "It
shall be unlawful for any registered open-end investment company (the
"acquired company") . . . knowingly to sell or otherwise dispose of any
security issued by the acquired company to any other investment
company (the "acquiring company") . . . if immediately after such sale
or disposition
(I) more than 3 per centum of the total outstanding voting stock of the
acquired company is owned by the acquiring company and any
company or companies controlled by it; or
(ii) more than 10 per centum of the total outstanding voting stock of
the acquired company is owned by the acquiring company and other
investment companies and companies controlled by them."
Absent exemptive relief, Sections 12(d)(1)(A) and (B) of the 1940 Act
would prohibit operation of the Direct Funds. Therefore, Applicants
seek an exemption from the limitations of Section 12(d)(1)(A) and (B)
to the extent necessary to permit: (a) the Direct Funds to purchase an
unlimited amount of the outstanding voting shares of each Underlying
Portfolio; (b) the securities of each Underlying Portfolio to have an
aggregate value of as much as 100% of the total assets of the Direct
Funds; (c) the Direct Funds to invest up to 100% of their assets in the
securities of the Underlying Portfolios; and (d) each of the Underlying
Portfolios to sell more than 3% of its total outstanding voting stock to
the Direct Funds.
Section 12(d)(1)(F) of the 1940 Act provides in pertinent part: "The
provisions of this paragraph (1) shall not apply to securities purchased
or otherwise acquired by a registered investment company if (i)
immediately after such purchase or acquisition, not more than 3 per
centum of the total outstanding stock of such issuer is owned by such
registered investment company and all affiliated persons of such
registered investment company; and (ii) such registered investment
company has not offered or sold . . . and is not proposing to offer or
sell any security issued by it through a principal underwriter or
otherwise at a public offering price which includes a sales load of more
than 1 1/2 per centum."
Section 12(d)(1)(F) of the 1940 Act further provides that: "No issuer
of any security purchased or acquired by a registered investment
company . . . shall be obligated to redeem such security in an amount
exceeding 1 per centum of such issuer's total outstanding securities
during any period of less than thirty days . . . ."
1. Legislative Purpose
The express purpose of Section 12(d)(l) of the 1940 Act, as enacted
and amended by Congress in 1970, was to limit and address the
perceived adverse consequences of "pyramiding" of investment
companies in a "fund of funds" arrangement. These consequences are
discussed in a comprehensive Commission report on the subject1
("Report") and include: the duplicative costs involved in such a
structure, the exercise of undue influence or control over the
underlying series and the potential adverse impact of large-scale
redemptions. As detailed below, Applicants assert that the structure of
the Direct Funds avoids these adverse consequences, and request that
the Commission approve the application on that basis.
2. Layering of costs to investors
a. Advisory Fees
The Report states that "all fund holding companies . . . subject their
investors to two layers of advisory fees." Applicants believe that the
proposed structure of the Direct Funds will avoid this concern. Before
approving any advisory contract under Section 15 of the 1940 Act, the
Directors of the Direct Funds, including a majority of the directors who
are not "interested persons," as defined in Section 2(a)(19), will find
that any advisory fees charged under the contract are based on services
provided that are in addition to, rather than merely duplicative of,
services provided under any Underlying Portfolio advisory contract.
This finding, and the basis upon which the finding was made, will be
fully documented in the minute books of the Direct Funds. The
Directors of the Direct Funds will make a similar finding with respect
to the Other Portfolios, as well, which will be fully documented.
b. Sales Load
The Report also states that "all investors in load funds including
fund holding companies must pay a sales charge . . . [I]nvestors in a
holding company are in turn subjected to a second layer of sales
charges on their purchases of shares in the holding company. The
investor is subjected to the dual sales load only where both the fund
holding company and its portfolio investment companies are open-end,
load funds."2
The proposed structure of the Direct Funds addresses this issue by
committing that the Direct Funds will pay no front-end or contingent
deferred sales charge in connection with the purchase or redemption of
shares of the Underlying Portfolios. In addition, as a condition to the
requested exemptive relief, any sales charges or service fees relating to
the shares of the Direct Funds will not exceed the limits set forth in
Article III, Section 26 of the NASD's Rules of Fair Practice, when
aggregated with any sales charges or service fees that the Direct Funds
may pay relating to acquisition, holding or disposition of Underlying
Portfolio and Other Portfolio shares. The aggregate sales charges,
therefore, will not exceed the amount that otherwise lawfully could be
charged at either fund level. Accordingly, the proposed structure of the
Direct Funds does not raise the sales charge layering concerns
underlying Section 12(d)(1).
c. Administrative Expenses
The Report notes that "investors in fund holding companies are also
subjected to a layering of administrative expenses including stock
transfer, dividend disbursements and custodial fees and the cost of
shareholder communications."3 The proposed structure of the Direct
Funds addresses this issue.
Administrative and similar fees will be charged at the Direct Fund and
Underlying Portfolio/Other Portfolio levels. However, Applicants
believe that the redundancy of administrative fees and expenses
between the Direct Funds and the Underlying Portfolios will be
minimal, since distinct services are being provided at each level.
Likewise, the Applicants believe that distinct services will be provided
at each level of the Direct Funds' investment in Other Portfolios, thus
minimizing any concerns of redundancy of administrative fees and
expenses. In any event, Applicants believe that administrative and
other expenses may be reduced at both levels under the proposed
Direct Funds structure. Accordingly, an investment in the Direct Funds
should not be significantly more expensive than a direct investment in
an Underlying Portfolio or Other Portfolio.
Reduced expenses for each Underlying Portfolio/Other Portfolio may
result from the following: (1) the addition of assets from the Direct
Funds may reduce the expense ratios for each Underlying
Portfolio/Other Portfolio to the extent economies of scale are achieved
or fixed expenses are spread across a larger asset base; (2) to the extent
that shareholders of the Direct Funds otherwise would have opened
direct accounts with each of the Underlying Portfolios/Other Portfolios,
the number of accounts maintained by the Direct Funds in the
aggregate, and the resulting transfer agency and other shareholder
servicing fees for the Underlying Portfolios/Other Portfolios, may be
reduced; and (3) the redemption rates for the Underlying
Portfolios/Other Portfolios may be lower due to the long-term asset
allocation approach employed by the Direct Funds. Custodial expenses
and fund accounting fees for the Direct Funds will be minimized to the
extent that the Direct Funds hold mutual fund shares rather than
individual portfolio securities.
d. Value of Services Analysis
The Report states that "an investor in a fund of funds incurs more
expenses than he would incur simply by investing directly in any one,
some or all of its portfolio funds."4 Applicants believe that any
additional incremental cost incurred by investing in the Direct Funds is
in return for a substantial investment management service, namely the
initial and ongoing asset allocation of investments made in the
Underlying Portfolio. Investors in the Direct Funds likewise will
receive such services with respect to investments made by the Direct
Funds in Other Portfolios.
As a condition to the requested relief, Applicants will provide to the
Chief Financial Analyst of the Commission's Division of Investment
Management (the "CFA"), in an electronic format, annual expense
ratios for the Direct Funds and each Underlying Portfolio. This will
enable the Commission to monitor the expenses relating to each of the
Direct Funds on an ongoing basis. Applicants note that the financial
media carefully monitors and reports the performance of mutual funds,
including "funds of funds." Accordingly, Applicants expect that
expense information about the Direct Funds will be readily available to
the public. Applicants will have to price these products in a manner
that is competitive with the market to attract and retain investors.
3. Diversification
The Report expresses some skepticism that increased diversification
results from fund of funds arrangements, calling the "added value of
diversification . . . largely illusory. . . ."5 It further notes that
"[a] fund holding company vehicle so duplicates and reduplicates the
diversification achieved by the investment in a single fund that the
expenses incurred defeat the investor's objectives."6
This view of diversification is clearly dated and does not reflect the
current thinking of the investment management community. It also
relates to a mutual fund and investment world vastly different from that
which exists today and does not take into account the development of
asset allocation funds which seek to invest across asset classes.
Unlike the fund holding companies in the Report, the Direct Funds will
provide meaningful additional diversification benefits since the
Underlying Portfolios pursue different investment strategies. This can
be monitored by the Commission, as Applicants agree to provide the
CFA, as soon as reasonably practicable following the fiscal year-end,
the monthly average assets for each of the Direct Funds and each
Underlying Portfolio, in an electronic format (unless the CFA notifies
Applicants in writing that such information need no longer be
submitted). Applicants also will provide the CFA with month-end
allocations of the assets of each of the Direct Funds among the
Underlying Portfolios, following each Direct Fund's fiscal year end.
Any concerns as to diversification are minimal with respect to the
Other Portfolios since Section 12(d)(1)(F) limits the Direct Funds'
investment in the Other Portfolios to no more than 3% of the total
outstanding stock of any Other Portfolio. Nevertheless, the Direct
Funds also commit to employ a meaningful diversification strategy
with respect to the Other Portfolios by investing in Other Portfolios that
pursue different investment strategies.
The Report also expressed concern over "wash transactions"7 which
achieve no true investment purpose. These transactions occur where
"management of one portfolio fund will be buying for its portfolio the
same securities the management of another will be selling."8 Again,
this concern is not raised by the Direct Funds. Wash transactions will
be rare in the case of the Direct Funds since the Underlying Portfolios
will, as a general matter, pursue different investment strategies, and
therefore, invest in different types of securities. Wash transactions
similarly are not a concern with respect to the Other Portfolios as they
will likewise pursue different investment strategies.
4. Control
The Report criticizes the potential for "pyramiding control in the hands
of an individual or group of individuals whose financial stake in all of
the constituent companies of the group is comparatively nominal."9 It
focuses on fund holding companies because of their "potential for the
exercise of undue influence or control over the activities of portfolio
funds."10 Again, this concern is addressed by the proposed structure
of the Direct Funds. To allow the Commission to monitor these control
issues, Applicants will provide the CFA with a description of any vote
taken by the shareholders of any Underlying Portfolio, including a
statement of the percentage of votes cast for and against the proposal
by the Direct Funds and by the other shareholders of the Underlying
Portfolio. It also should be noted that the Other Portfolios, which are
not within the same "group of investment companies" as the Direct
Funds, cannot be controlled in any meaningful way by the Direct
Funds because Section 12(d)(1)(F) limits them, together with their
affiliates, to acquiring no more than 3% of the total outstanding stock
of any Other Portfolio.
5. Impact of Large Scale Redemptions
On a related point, the Report notes that the management of the
underlying fund "must be continually aware that a possible large
redemption carries with it a loss of advisory fees in approximate
proportion to the percentage of the fund redeemed."11 An entity
owning such a large share may attempt to exert influence over the
underlying fund.
Applicants believe that concern over this potential abuse is not relevant
to the proposed arrangements. There is little risk that the Direct Funds'
adviser(s) will exercise inappropriate control over the Underlying
Portfolios, which are part of the same "group of investment
companies." Similarly, because the Direct Funds, together with their
affiliates, will be limited by Section 12(d)(1)(F) to acquiring no more
than 3% of the total outstanding stock of any Other Portfolio, there is
little risk that the Direct Funds' adviser(s) will be in a position to
exercise inappropriate control over any Other Portfolio. Section
12(d)(1)(F) also permits the Other Portfolios to reject redemption
requests by a Direct Fund that exceed 1% of the Other Portfolio's total
outstanding securities during any period of less than 30 days.
As a condition to the requested exemptive relief, Applicants will
provide the CFA with the following information, in an electronic
format: monthly average total assets for each Direct Fund and
Underlying Portfolio; monthly purchases and redemptions (other than
by exchange) for each Direct Fund and Underlying Portfolio; and
monthly exchanges into and out of each of the Direct Funds and
Underlying Portfolio (the "Redemption Information").
The Report also expresses concern about the impact that the threat
of large scale redemptions might have on the "orderly management of an
underlying fund."12 For example, to address the threat of large scale
redemptions, an underlying fund may be forced to maintain excessive
cash balances. Otherwise, it might have to sell off a substantial portion
of its assets, thereby saddling the fund's remaining shareholders with
capital gains and a greater pro rata portion of fixed costs.
The Direct Funds generally will be designed for intermediate and long-
term investors. This will reduce the possibility of the Direct Funds
being used as short-term trading vehicles and further protect the Direct
Funds and the Underlying Portfolios from unexpected large
redemptions.
6. Conflicting Interests
The Commission also has raised conflict of interest concerns about the
fund holding company structure in proceedings to approve other
exemptive applications. See Vanguard Special Tax-Advantaged
Retirement Fund, et al., Investment Company Act Release Nos. 14153
(Sept. 11, 1984) (notice) and 14361 (Feb. 7, 1985) (order). As a
condition to the requested relief, a majority of the Directors/Trustees of
the Direct Funds will not be "interested persons" as defined in Section
2(a)(19) of the 1940 Act.
The Direct Funds' investment adviser is subject to a conflict of interest
to the extent it has the authority to allocate the Direct Funds' assets
across unaffiliated Other Portfolios as well as affiliated Underlying
Portfolios. Applicants submit that this conflict is analogous to the
conflict faced by an adviser in deciding among various affiliated
Underlying Portfolios that pay different rates for advisory and other
services that are provided by the same adviser (or its affiliates). This
conflict will be addressed, in part, by limiting the adviser to a range of
allocations to unaffiliated Other Portfolios (e.g., no less than 15% and
no more than 20% of a Direct Fund's total assets may be invested in
shares of Other Portfolios, at the time of purchase). Any departure
from the prescribed range will have to be approved by the Board of
Directors/Trustees of the Direct Fund.
7. Complexity
Finally, the Report expresses concern that the popularity of funds of
funds could lead to the creation of more complex vehicles that would
not serve any meaningful purpose. Specifically, the Report states that,
"[i]f funds of funds are permitted to proliferate, how could an investor
decide among the many such companies seeking his investment dollar?
Would he not need a fund of funds of funds to make the decision?"13
Applicants believe that this and the other perceived abuses of the fund
holding company structure discussed above are addressed by virtue of
the fact that no Underlying Portfolio can acquire securities of any other
investment company in excess of the limits contained in Section
12(d)(1)(A). The Direct Funds also commit not to allocate assets to
shares of any Other Portfolio that is organized in a "fund of funds"
structure.
8. Conclusion
Section 12(d)(1) is designed to prohibit arrangements and practices
that bear practically no relation to the purpose and structure of the
Direct Funds. Unlike the fund holding companies that troubled
Congress 30 years ago, the Direct Funds will provide a simple answer
to investor demand for a diversified, professionally managed fund of
funds. Accordingly, Applicants believe that this is an appropriate
instance for the Commission to exercise its authority under Section 6(c)
to exempt Applicants from the restrictions of Section 12(d)(1) to the
extent requested in this Application.
B. Section 17(a)
Section 17(a) of the 1940 Act prohibits an affiliated person of a
registered investment company or an affiliated person of such affiliated
person from: (1) knowingly selling any security or other property to the
registered investment company or (2) knowingly purchasing any
security or other property from the company. Section 17(b) authorizes
the Commission to exempt a proposed transaction from the restrictions
of Section 17(a) if the evidence establishes that (1) the terms of the
proposed transaction, including the consideration paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned; (2) the proposed transaction is consistent with the
policies of each registered investment company concerned; and (3) the
proposed transaction is consistent with the general purposes of the
1940 Act.
The Direct Funds and the Underlying Portfolios will be advised by the
Advisers or their affiliates and, therefore, may be deemed to be
"affiliated persons" of one another by virtue of being under the
common control of their adviser(s).14 They also may be deemed to be
affiliated persons of one another to the extent that Direct Funds own
5% or more of the shares of an Underlying Portfolio.15 Purchases by
the Direct Funds of shares of the Underlying Portfolios and sales by the
Underlying Portfolios of their shares to the Direct Funds could be
deemed to be principal transactions between affiliated persons under
Section 17(a). Applicants seek an exemption under Sections 17(b) and
6(c) from the prohibitions of Section 17(a) to allow the transactions
described in this application to the extent that such prohibition would
apply.
Applicants believe that relief under Section 6(c) is appropriate for
many of the reasons discussed above. Applicants also believe that
relief is appropriate under Section 17(b) because the proposed
arrangement meets the requirements of that section.
First, the terms of the proposed arrangement are fair and reasonable
and do not involve overreaching. The consideration paid for the sale
and redemption of shares of the Underlying Portfolios will be based on
the net asset values of the Underlying Portfolios.
Second, the proposed arrangement will be specifically contemplated by
and consistent with the policies of the Direct Funds. The investment of
assets of the Direct Funds in shares of the Underlying Portfolios and
the issuance of shares of the Underlying Portfolios to the Direct Funds
will be effected in accordance with the investment restrictions of the
Direct Funds and will be consistent with the policies as set forth in the
registration statement of the Direct Funds.
Finally, the proposed arrangement is consistent with the general
purposes of the 1940 Act. Section 17(a) is intended to prohibit
affiliated persons in a position of influence or control over an
investment company from furthering their own interests by selling
property that they own to an investment company at an inflated price,
purchasing property from an investment company at less than its fair
value, or selling or purchasing property on terms that involve any self-
dealing or overreaching by the affiliated person. The proposed
arrangement does not involve any such wrongful conduct by the
Applicants.
C. Section 17(d) and Rule 17d-1
Section 17(d) of the 1940 Act prohibits an affiliated person of a
registered investment company or an affiliated person of such affiliated
person, acting as principal, from effecting any transaction in which
such registered company is a joint or a joint and several participant in
contravention of Commission rules and regulations. Rule 17d-1
provides that no joint transaction covered by such rule may be
consummated unless the Commission issues an order upon application.
In order to grant an exemption from the restrictions of Section 17(d)
and Rule 17d-1, Rule 17d-1(b) requires the Commission to consider
whether an investment company's participation in a joint enterprise or
joint arrangement is consistent with the provisions, policies and
purposes of the 1940 Act, and the extent to which the participation is
on a basis different from or less advantageous than that of other
participants. Although it is not clear that the transactions described in
this application raise prohibited transaction concerns under these
provisions, Applicants seek an exemption under Section 17(d) and Rule
17d-1 to the extent that such transactions are deemed to be joint
transactions between affiliated persons.
Applicants believe that the proposed structure and operation of the
Direct Funds is consistent with the provisions, policies and purposes of
the 1940 Act for the reasons discussed above. The Direct Funds and
the Underlying Portfolios will not participate in the proposed
arrangement on a basis that is different or less advantageous than the
participants that are not investment companies. Indeed, the proposed
arrangement is intended to provide substantial benefits for both the
Direct Funds and the Underlying Portfolios and their respective
shareholders, including increased diversification and more efficient
portfolio management, a larger asset base and potentially reduced
expenses. Since the proposal satisfies the standards of Rule 17d-1, the
Commission should grant relief from Section 17(d) and Rule 17d-1.
V. AUTHORITY
The relief requested by this application is substantially similar to that
recently granted by the Commission to Qualivest Funds, et al.,
Investment Company Act Release Nos. 21874 (Apr. 5, 1996) (notice)
and 21933 (May 1, 1996) (order); Twentieth Century Blended
Portfolios, Inc., et al., Investment Company Act Release Nos. 21813
(Mar. 11, 1996) (notice) and 21875 (Apr. 8, 1996) (order), Schwab
Capital Trust, et al., Investment Company Act Release Nos. 21726
(Jan. 31, 1996) (notice) and 21788 (Feb. 27, 1996) (order), DFA
Investment Dimensions Group, Inc., et al., Investment Company Act
Release Nos. 21642 (Dec. 29, 1995) (notice) and 21701 (Jan. 24, 1996)
(order), The Diversified Investors Funds Group, et al., Investment
Company Act Release Nos. 21597 (Dec. 13, 1995) (notice) and 21669
(Jan. 11, 1996) (order), SEI Institutional Managed Trust, et al.,
Investment Company Act Release Nos. 21539 (Nov. 22, 1995) (notice)
and 21615 (Dec. 20, 1995) (order), Smith Barney, Inc., et al.,
Investment Company Act Release Nos. 21537 (Nov. 21, 1995) (notice)
and 21613 (Dec. 19, 1995) (order), Vanguard STAR Fund, et al.,
Investment Company Act Release Nos. 21372 (Sept. 22, 1995) (notice)
and 21426 (Oct. 18, 1995) (order), T. Rowe Price Spectrum Fund, Inc.,
et al., Investment Company Act Release Nos. 21371 (Sept. 22, 1995)
(notice) and 21425 (Oct. 18, 1995) (order). No relief is sought with
respect to the ability of the Direct Funds to purchase shares of
unaffiliated Other Portfolios.
VI. CONDITIONS TO RELIEF
Applicants expressly consent to the imposition of the following
conditions in connection with this request for exemptive relief.
All Underlying Portfolios will be part of the same "group of investment
companies," as defined in 1940 Act Rule 11a-3, as the Direct Funds.
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. No Direct Fund will allocate assets to any unaffiliated Other
Portfolio that is organized in a "fund of funds" structure.
A majority of the Directors/Trustees of the Direct Funds will not be
"interested persons" of the Direct Funds, as defined in Section 2(a)(19)
of the 1940 Act.
Any sales charges or service fees relating to the shares of the Direct
Funds, when aggregated with any sales charges or service fees paid by
the Direct Funds relating to its acquisition, holding or disposition of
shares of the Underlying Portfolios (or Other Portfolios), will not
exceed the limits set forth in Article III, Section 26, of the NASD's
Rules of Fair Practice.
Before approving any advisory contract under Section 15 of the 1940
Act, the boards of Directors/Trustees of the Direct Funds, including a
majority of the Directors/Trustees 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 or Other Portfolio advisory contract. This finding, and the
basis upon which the finding was made, will be recorded fully in the
minute books of the Direct Funds.
Applicants agree to provide the following information, in an electronic
format, to the Chief Financial Analyst of the Commission's Division of
Investment Management: monthly average total assets for the Direct
Funds and Underlying Portfolios; monthly purchases and redemptions
(other than by exchange) for the Direct Funds and each Underlying
Portfolio; monthly exchanges into and out of the Direct Funds and each
Underlying Portfolio; month-end allocations of the Direct Funds' assets
among the Underlying Portfolios; annual expense ratios for the Direct
Funds 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 cast for and against the proposal
by the Direct Funds and by the other shareholders of the Underlying
Portfolio. The information will be provided as soon as reasonably
practicable following each fiscal year-end of the Direct Funds (unless
the Chief Financial Analyst notifies applicants in writing that the
information need no longer be submitted).
VII. PROCEDURAL MATTERS
1. Pursuant to Rule 0-2(f) under the Act, Applicants hereby state that
their addresses are as stated on the first page of this Application.
Applicants further state that all communications or questions should be
directed to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W., Suite 5500
Washington, D.C. 20006-1888
(202) 887-1500
2. Pursuant to Rule 0-2(c)(1) under the Act, each Applicant hereby
states that the officer signing and filing this Application on behalf of
each Applicant is fully authorized to do so. Authorizations filed as
Exhibits A-1 through A-6 with the Application filed May 20, 1996
remain in effect. Under the provisions of each Applicant's Declaration
of Trust and/or Articles of Incorporation and/or By-Laws,
responsibility for the management of the affairs and business of the
Applicant is vested in its Board of Trustees or Directors. Each
Applicant has complied with all requirements for the execution and
filing of this Application in the name and on behalf of each Applicant.
3. The verifications required by Rule 0-2(d) under the 1940 Act are
attached hereto as Exhibits B-1 through B-6. The notice of the
proceeding initiated by the filing of this Application required by Rule
0-2(g) under the 1940 Act is attached as Exhibit C to this Application.
IN WITNESS WHEREOF, each Applicant has caused this First
Amendment to Application to be duly executed as of the date set forth
below.
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
July __, 1996 By: /s/
Name: Robert L. Tuch
Title: Assistant Secretary
THE VICTORY PORTFOLIOS
July __, 1996 By: /s/
Name: George O. Martinez
Title: Assistant Secretary
BISYS FUND SERVICES LIMITED PARTNERSHIP d/b/a BISYS
FUND SERVICES
By: BISYS FUND SERVICES INC., General Partner
July __, 1996 By: /s/
Name: /s/
Title:
KEYCORP MUTUAL FUND ADVISERS, INC.
July __, 1996 By: /s/
Name: William J. Blake
Title: Secretary
SPEARS, BENZAK, SALOMON & FARRELL, INC.
July __, 1996 By: /s/
Name: Michael R. Parker
Title: Vice President & General Counsel
EXHIBIT INDEX
ExhibitsSequential Page Number
A-1Certification of SBSF Funds, Inc. d/b/a Key Mutual Funds Pursuant
to Rule 0-2(c)(1)A-1A-2Certification of The Victory Portfolios
Pursuant to Rule 0-2(c)(1)A-2A-3Certification of Spears, Benzak,
Salomon & Farrell, Inc. Pursuant to Rule 0-2(c)(1)A-3A-4Certification
of Keycorp Mutual Fund Advisers, Inc. Pursuant to Rule 0-2(c)(1)A-
4A-5Certification of BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services Pursuant to Rule 0-2(c)(1)A-5B-1Verification of
SBSF Funds, Inc. d/b/a Key Mutual Funds Pursuant to Rule 0-2(d)
B-1B-2Verification of The Victory Portfolios Pursuant to Rule 0-
2(d)B-2B-3Verification of Spears, Benzak, Salomon & Farrell Inc.
Pursuant to Rule 0-2(d)B-3B-4
Verification of Keycorp Mutual Fund Advisers, Inc. Pursuant to Rule
0-2(d) B-4B-5
Verification of BISYS Fund Services Limited Partnership d/b/a BISYS
Fund Services
Pursuant to Rule 0-2(d)B-5CNotice of ApplicationC-1
Exhibit A-1
Authorization
Rule 0-2(c)(1)
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
CERTIFICATE
I, Robert L. Tuch, of SBSF Funds, Inc. (d/b/a Key Mutual Funds) (the
"Company") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c) and 17(b) of the 1940 Act, for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder,
and any amendments or supplements thereto, if the same shall be
necessary or appropriate; and
FURTHER RESOLVED, that the appropriate Officers of the Company
be, and each hereby is, authorized and directed to take such additional
actions, and to execute and deliver on behalf of the Company such
other documents or instruments as they deem necessary or appropriate
in furtherance of the above resolution, his or her authority therefor to
be conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have executed this Certificate this 15th
day of May, 1996.
/s/ Robert L. Tuch
Name: Robert L. Tuch
Title: Assistant Secretary
SBSF Funds, Inc. (d/b/a Key Mutual Funds)
EXHIBIT A-2
AUTHORIZATION
RULE 0-2(C)(1)
THE VICTORY PORTFOLIOS
CERTIFICATE
I, George O. Martinez, of The Victory Portfolios (the "Trust") hereby
certify that the following resolutions authorizing the filing with the
Securities and Exchange Commission (the "SEC") of an application for
an order pursuant to Sections 6(c) and 17(b) of the Investment
Company Act of 1940 (the "1940 Act"), for an order exempting the
Company from the provisions of Sections 12(d) and 17(a) and for an
order pursuant to Section 17(d) of the 1940 Act and Rule 17d-1
thereunder, and any amendments or other documents related thereto,
were duly adopted by the Trust's Board of Trustees and that such
resolutions have not been amended, modified or rescinded:
VOTED, that the Officers of the Trust be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Trust, an
exemptive application to the SEC for an order pursuant to Sections 6(c)
and 17(b) of the 1940 Act, for an order exempting the Company from
the provisions of Sections 12(d) and 17(a) and for an order pursuant to
Section 17(d) of the 1940 Act and Rule 17d-1 thereunder, and any
amendments or supplements thereto, if the same shall be necessary or
appropriate; and
FURTHER VOTED, that the appropriate Officers of the Trust be, and
each hereby is, authorized and directed to take such additional actions,
and to execute and deliver on behalf of the Trust such other documents
or instruments as they deem necessary or appropriate in furtherance of
the above resolution, his or her authority therefor to be conclusively
evidenced by the taking of any such actions or the execution or
delivery of any such document.
IN WITNESS WHEREOF, I have executed this Certificate this 15th
day of May, 1996.
By: /s/ George O. Martinez
Name: George O. Martinez
Title: Assistant Secretary
The Victory Portfolios
EXHIBIT A-3
AUTHORIZATION
RULE 0-2(C)(1)
SPEARS, BENZAK, SALOMON & FARRELL, INC.
CERTIFICATE
I, Michael R. Parker, of Spears, Benzak, Salomon & Farrell, Inc. (the
"Company") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c), 17(b) and (d) of the 1940 Act and Rule 17d-1 thereunder, and any
amendments or supplements thereto, if the same shall be necessary or
appropriate; and
FURTHER RESOLVED, that the appropriate Officers of Spears, the
Company be, and each hereby is, authorized and directed to take such
additional actions, and to execute and deliver on behalf of the
Company such other documents or instruments as they deem necessary
or appropriate in furtherance of the above resolution, his or her
authority therefor to be conclusively evidenced by the taking of any
such actions or the execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 20th day
of May, 1996.
/s/ Michael R. Parker
Name: Michael R. Parker
Title: Vice President & General Counsel
Spears, Benzak, Salomon & Farrell, Inc.
EXHIBIT A-4
AUTHORIZATION
RULE 0-2(C)(1)
KEYCORP MUTUAL FUND ADVISERS, INC.
CERTIFICATE
I, William J. Blake, Secretary of KeyCorp Mutual Advisers, Inc. (the
"Corporation") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Corporation from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Corporation's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the officers of the Corporation be, and each hereby
is, authorized to prepare, execute and submit, on behalf of the
Corporation, an exemptive application to the Securities and Exchange
Commission for an order pursuant to Sections 6(c), 17(b) and (d) of the
1940 Act and Rule 17d-1 thereunder, and any amendments or
supplements thereto, if the same shall be necessary or appropriate; and
FURTHER RESOLVED, that the officers of the Corporation be, and
each hereby is, authorized and directed to take such additional actions,
and to execute and deliver on behalf of the Corporation such other
documents or instruments as they deem necessary or appropriate in
furtherance of the above vote, his or her authority therefor to be
conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 10th day
of May, 1996.
/s/ William J. Blake
William J. Blake
Secretary
KeyCorp Mutual Fund Advisers, Inc.
EXHIBIT A-5
AUTHORIZATION
RULE 0-2(C)(1)
BISYS FUND SERVICES LIMITED PARTNERSHIP
d/b/a BISYS FUND SERVICES
CERTIFICATE
I, _____________________________, of BISYS Fund Services Inc.,
general partner of BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services (the "Company"), hereby certify that the
following resolutions authorizing the filing with the Securities and
Exchange Commission of an application for an order pursuant to
Sections 6(c) and 17(b) of the Investment Company Act of 1940 (the
"1940 Act"), for an order exempting the Company from the provisions
of Sections 12(d) and 17(a) and for an order pursuant to Section 17(d)
of the 1940 Act and Rule 17d-1 thereunder, and any amendments or
other documents related thereto, were duly adopted by the Company's
general partner on behalf of the Company and that such resolutions
have not been amended, modified or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c), 17(b) and (d) of the 1940 Act and Rule 17d-1 thereunder, and any
amendments or supplements thereto, if the same shall be necessary or
appropriate; and
FURTHER RESOLVED, that the appropriate Officers of the Company
be, and each hereby is, authorized and directed to take such additional
actions, and to execute and deliver on behalf of the Company such
other documents or instruments as they deem necessary or appropriate
in furtherance of the above resolution, his or her authority therefor to
be conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of
July, 1996.
/s/
Name:
Title:
EXHIBIT B-1
VERIFICATION
RULE 0-2(d)
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
VERIFICATION
STATE OF OHIO )
) ss:
COUNTY OF FRANKLIN )
The undersigned being duly sworn deposes and states that he has
duly executed the attached First Amendment to Application for an
Order pursuant to Sections 6(c) and 17(b) of the Investment Company
Act of 1940 (the "1940 Act"), for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder
for and on behalf of SBSF Funds, Inc. (the "Company"); that he is the
Assistant Secretary of such Company; and that all action by
stockholders, directors and other bodies necessary to authorize
deponent to execute and file such instrument on behalf of the Company
has been taken. Deponent further says that he is familiar with such
instrument, and the contents thereof, and that the facts therein set forth
are true to the best of his knowledge, information and belief.
/s/
Name: Robert L. Tuch
Title: Assistant Secretary
SBSF Funds, Inc. (d/b/a Key Mutual Funds)
Subscribed and sworn to before me, a Notary Public, this ___ day of
July, 1996.
My commission expires:
Notary Public
Notarial Seal:
EXHIBIT B-2
VERIFICATION
RULE 0-2(d)
THE VICTORY PORTFOLIOS
VERIFICATION
STATE OF _____________ )
) ss:
COUNTY OF ___________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached First Amendment to Application for an
Order pursuant to Sections 6(c) and 17(b) of the Investment Company
Act of 1940 (the "1940 Act"), for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder
for and on behalf of The Victory Portfolios (the "Trust"); that he is the
Assistant Secretary of such Trust; and that all action by interest
holders, trustees and other bodies necessary to authorize deponent to
execute and file such instrument on behalf of the Trust has been taken.
Deponent further says that he is familiar with such instrument, and the
contents thereof, and that the facts therein set forth are true to the best
of his knowledge, information and belief.
/s/
Name: George O. Martinez
Title: Assistant Secretary
The Victory Portfolios
Subscribed and sworn to before me, a Notary Public, this ___ day of
July, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-3
VERIFICATION
RULE 0-2(d)
SPEARS, BENZAK, SALOMON & FARRELL, INC.
VERIFICATION
STATE OF _______________ )
) ss:
COUNTY OF _____________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached First Amendment to Application for an
Order pursuant to Sections 6(c) and 17(b) of the Investment Company
Act of 1940 (the "1940 Act"), for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder
for and on behalf of Spears, Benzak, Salomon & Farrell, Inc. (the
"Trust"); that he is the Vice President and General Counsel of such
Company; and that all action by shareholders, directors and other
bodies necessary to authorize deponent to execute and file such
instrument on behalf of the Company has been taken. Deponent
further says that he is familiar with such instrument, and the contents
thereof, and that the facts therein set forth are true to the best of his
knowledge, information and belief.
/s/
Name: Michael R. Parker
Title: Vice President and General Counsel
Spears, Benzak, Salomon & Farrell, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
July, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-4
VERIFICATION
RULE 0-2(d)
KEYCORP MUTUAL FUND ADVISERS, INC.
VERIFICATION
STATE OF OHIO )
) ss:
COUNTY OF CUYAHOGA)
The undersigned being duly sworn deposes and states that he has
duly executed the attached First Amendment to Application for an
Order pursuant to Sections 6(c) and 17(b) of the Investment Company
Act of 1940 (the "1940 Act"), for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder
for and on behalf of KeyCorp Mutual Fund Advisers, Inc. (the
"Corporation"); that he is the Secretary of such Corporation; and that
all action by shareholders, directors and other bodies necessary to
authorize deponent to execute and file such instrument on behalf of the
Corporation has been taken. Deponent further says that he is familiar
with such instrument, and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and
belief.
/s/
Name: William J. Blake
Title: Secretary
KeyCorp Mutual Fund Advisers, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
July, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-5
VERIFICATION
RULE 0-2(d)
BISYS FUND SERVICES LIMITED PARTNERSHIP
d/b/a BISYS FUND SERVICES
VERIFICATION
STATE OF _______________ )
) ss:
COUNTY OF _____________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached First Amendment to Application for an
Order pursuant to Sections 6(c) and 17(b) of the Investment Company
Act of 1940 (the "1940 Act"), for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder
for and on behalf of BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services (the "Company"); that he is the _____________
of BISYS Fund Services Inc., the general partner of such Company;
and that all action by shareholders, partners and other bodies necessary
to authorize deponent to execute and file such instrument on behalf of
the Company has been taken. Deponent further says that he is familiar
with such instrument, and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and
belief.
BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a BISYS
FUND SERVICES
By: BISYS FUND SERVICES INC.,
General Partner
By: /s/
Name:
Title:
Subscribed and sworn to before me, a Notary Public, this ___ day of
July, 1996.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT C
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT COMPANY ACT OF 1940, Release No. ______
SBSF Funds, Inc. d/b/a Key Mutual Funds et al.
___________, 1996
Agency: Securities and Exchange Commission ("Commission").
Action: Notice of Application for an Order under the Investment
Company Act of 1940 (the "1940 Act").
Applicants: SBSF Funds, Inc. d/b/a Key Mutual Funds ("KMF"), The
Victory Portfolios ("VP"), Spears, Benzak, Salomon & Farrell, Inc.
("SBS&F"), KeyCorp Mutual Fund Advisers, Inc. ("KMFAI"), and
BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services
("BISYS").
Relevant 1940 Act Sections: Order requested under Section 6(c) of the
1940 Act from section 12(d)(1) of the Act, under sections 6(c) and
17(b) of the 1940 Act from section 17(a) of the Act, and pursuant to
section 17(d) of the 1940 Act and Rule 17d-1 thereunder.
Summary of Application: The requested order would permit the use of
existing funds or the creation of new funds (the "Direct Funds") that
will acquire shares of investment companies or series thereof, now
existing or created in the future, that are part of the same "group of
investment companies," as defined in Rule 11a-3 under the 1940 Act
(the "Underlying Portfolios"), as the Direct Funds, and to permit the
Underlying Portfolios to sell such shares to the Direct Funds.
Filing Dates: The application was filed on _________.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on _________, 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
Commission's Secretary.
Addresses: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants: KMF, VP,
BISYS, 3435 Stelzer Road, Columbus, OH 43219; KMFAI, 127
Public Square, Cleveland, OH 44114; SBS&F, 45 Rockefeller Plaza,
New York, NY 10111.
For Further Information Contact: _________, Staff Attorney, at (202)
942-____, or , _________, Branch Chief at (202) 942-____ (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 from
the Commission's Public Reference Branch.
Applicants' Representations:
1. KMF is a Maryland corporation registered under the 1940 Act as an
open-end management investment company consisting of four
operating portfolios and two inactive portfolios. VP is a Delaware
business trust registered under the 1940 Act as an open-end diversified
management investment company consisting of 24 operating and four
inactive portfolios.
2. It is anticipated that the initial Direct Funds would be newly
established portfolios of KMF. The proposed Direct Funds would be
structured as "funds of funds" that would invest their assets in shares of
various Underlying Portfolios. The Underlying Portfolios are existing
and future investment portfolios of KMF and VP. The acquiring Direct
Funds also may invest a portion of their assets in stocks, bonds and
other securities, including money market instruments and shares of
investment companies that are not part of the same "group of
investment companies," as defined in Rule 11a-3 under the 1940 Act
("Other Portfolios"). Investment in Other Portfolios will not exceed the
percentage limitations imposed by Section 12(d)(1)(F) of the 1940 Act
and will also be limited to an aggregate value not in excess of 20% of
the total assets of the Direct Funds at the time of purchase. No
exemptive relief is sought with respect to investments by the Direct
Funds in shares of Other Portfolios.
3. The Direct Funds seek to provide diversification among major asset
categories and stock sub-categories. The mix of investments for each
of the Direct Funds will be established and varied using an asset
allocation approach. Initial and subsequent allocation decisions will be
made as a result of investment analyses undertaken by the Direct
Fund's adviser, subject to supervision by the Board of Directors of the
Direct Fund. The prospectus and statement of additional information
for each Direct Fund will describe the Direct Fund's permissible
investments in Underlying Portfolios, as well as stocks, bonds and
other securities, including money market instruments and shares of
Other Portfolios.
4. SBS&F currently serves as investment adviser to the various
operating funds of KMF. Subject to the general supervision of KMF's
Board of Directors, in accordance with each advised entity's investment
policies, SBS&F formulates guidelines and lists of approved
investments, makes decisions with respect to and places orders for the
KMF operating funds' purchases and sales of securities and maintains
records relating to such purchases and sales. SBS&F is a wholly
owned subsidiary of KeyCorp Asset Management Holdings, Inc.
("KAMHI"), which is a wholly owned subsidiary of Society National
Bank, a national banking association, and KeyCorp, a bank holding
company. KMFAI serves as investment adviser to VP and to two funds
of KMF that have not yet commenced operations. Subject to the
general supervision of VP's Board of Trustees and KMF's Board of
Directors, respectively, in accordance with each advised entity's
investment policies, KMFAI formulates guidelines and lists of
approved investments, makes decisions with respect to and places
orders for VP's purchases and sales of securities and maintains records
relating to such purchases and sales. KMFAI is also a wholly owned
subsidiary of KAMHI. It is anticipated that KMFAI will serve as the
investment adviser to the initial Direct Funds.
5. BISYS, a registered broker-dealer under the Securities Exchange
Act of 1934, will serve as principal underwriter and distributor of
shares of the initial Direct Funds. BISYS presently serves in this
capacity for the existing series of KMF and VP. BISYS is not affiliated
with KeyCorp.
Applicants' Legal Analysis:
1. Section 12(d)(1)(A) 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. Section
12(d)(1)(F) of the 1940 Act provides that the provisions of section
12(d)(1) shall not apply to securities purchased or otherwise acquired
by a registered investment company if immediately after such
purchase or acquisition, not more than 3 per centum of the total
outstanding stock of such issuer is owned by such registered
investment company and all affiliated persons of such registered
investment company; and such registered investment company has not
offered or sold and is not proposing to offer or sell any security issued
by it through a principal underwriter or otherwise at a public offering
price which includes a sales load of more than 1 1/2 per centum.
Further no issuer of shares purchased under section 12(d)(1)(F) shall be
obligated to redeem such security in an amount exceeding 1 per centum
of such issuer's total outstanding securities during any period of less
than thirty days.
2. Section 6(c) provides that the Commission may exempt persons or
transactions 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 1940 Act. Applicants request an order under section 6(c)
exempting them from the limitations of section 12(d)(1)(A) and (B) to
the extent necessary to permit each Direct Fund to purchase an
unlimited amount of the outstanding voting shares of each Underlying
Portfolio; the securities of each Underlying Portfolio to have an
aggregate value of as much as 100% of the total assets of a Direct
Fund; the Direct Funds to invest up to 100% of their assets in the
securities of the Underlying Portfolios; and each of the Underlying
Portfolios to sell more than 3% of its total outstanding voting stock to a
Direct Fund.
3. The purpose of section 12(d)(l) of the 1940 Act was to limit and
address the perceived adverse consequences of "pyramiding" of
investment companies in a "fund of funds" arrangement. These include
the duplicative costs involved in such a structure, the exercise of undue
influence or control over the underlying series and the potential
adverse impact of large-scale redemptions.
4. The proposed arrangement will not raise the fee layering concerns
contemplated by section 12(d)(1). The proposed arrangement will not
involve the layering of advisory fees, as before approving any advisory
contract under section 15 of the 1940 Act, the directors of the Direct
Funds, including a majority of the directors who are not "interested
persons," as defined in section 2(a)(19), 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. The proposed structure of the
Direct Funds will not involve the layering of sales charges as the Direct
Funds will pay no front-end or contingent deferred sales charge in
connection with the purchase or redemption of shares of the
Underlying Portfolios. In addition, as a condition to the requested
exemptive relief, any sales charges or service fees relating to the shares
of the Direct Funds will not exceed the limits set forth in Article III,
Section 26 of the NASD's Rules of Fair Practice, when aggregated with
any sales charges or service fees that the Direct Funds may pay relating
to acquisition, holding or disposition of Underlying Portfolio shares.
The aggregate sales charges, therefore, will not exceed the amount that
otherwise lawfully could be charged at either fund level.
5. The proposed arrangement will be structured to minimize large
scale redemption concerns. There is little risk that the Direct Funds'
adviser(s) will exercise inappropriate control over the Underlying
Portfolios, which are part of the same "group of investment
companies." Similarly, because the Direct Funds, together with their
affiliates, will be limited by section 12(d)(1)(F) to acquiring no more
than 3% of the total outstanding stock of any Other Portfolio, there is
little risk that the Direct Funds' adviser(s) will be in a position to
exercise inappropriate control over any Other Portfolio.
6. The Direct Funds and the Underlying Portfolios will be advised by
the Advisers or their affiliates and, therefore, may be deemed to be
"affiliated persons" of one another by virtue of being under the
common control of their adviser(s). They also may be deemed to be
affiliated persons of one another to the extent that Direct Funds own
5% or more of the shares of an Underlying Portfolio. Purchases by the
Direct Funds of shares of the Underlying Portfolios and the sale by the
Underlying Portfolios of their shares to the Direct Funds could be
deemed to be principal transactions between affiliated persons under
section 17(a). Applicants seek an exemption under sections 17(b) and
6(c) from the prohibitions of section 17(a) to allow the transactions
described in this application to the extent that such prohibition would
apply. The Applicants believe that relief under section 6(c) is
appropriate for many of the reasons discussed above. Applicants also
believe that relief is appropriate under section 17(b) because the
proposed arrangement meets the requirements of that section.
7. Section 17(b) provides that the Commission shall exempt a
proposed transaction from section 17(a) if evidence establishes that the
terms of the proposed transaction are reasonable and fair and do not
involve overreaching, the proposed transaction is consistent with the
policies of the registered investment company involved, and the
proposed transaction is consistent with the general provisions of the
1940 Act. Section 6(c) permits the Commission to exempt any person,
security, or transaction, or any class or classes of persons, securities,
or transactions, from any provisions of the 1940 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. Applicants believe that the proposed
transactions meet the standards of sections 6(c) and 17(b). Applicants
believe that their proposal is structured to assure that neither the
Direct Funds nor the Underlying Portfolios will participate on a basis
that is different or less advantageous than any other participant.
8. Section 17(d) prohibits an affiliated person of a registered
investment company, or an affiliated person of such person, acting as
principal, from effecting any transaction in which such investment
company is a joint, or joint and several, participant with such person in
contravention of Commission rules and regulations. Rule 17d-1
provides that an affiliated person of a registered investment company
or an affiliated person of such person, acting as principal, shall not
participate in, or effect any transaction in connection with, any joint
enterprise or other joint arrangement in which the registered investment
company is a participant unless the Commission has issued an order
approving the arrangement. When the Direct Fund purchases the
shares of the Underlying Portfolios and the Underlying Portfolios sell
their shares to the Direct Fund, they could be deemed to be "joint or
joint and several participants" in respect of such transactions in
violation of Rule 17d-1.
9. Applicants request that the Commission issue an order under
section 17(d) and Rule 17d-1 approving the proposed arrangements
and transactions described herein. Applicants believe that such
arrangements and transactions are structured to assure that the Direct
Funds and the Underlying Portfolios will not participate in the
proposed arrangement on a basis that is different or less advantageous
than the participants that are not investment companies.
Applicants' Conditions:
Applicants agree that the order granting the requested relief shall be
subject to the following conditions:
All Underlying Portfolios will be part of the same "group of investment
companies," as defined in 1940 Act Rule 11a-3, as the Direct Funds.
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. No Direct Fund will allocate assets to any unaffiliated Other
Portfolio that is organized in a "fund of funds" structure.
A majority of the Directors/Trustees of the Direct Funds will not be
"interested persons" of the Direct Funds, as defined in Section 2(a)(19)
of the 1940 Act.
Any sales charges or service fees relating to the shares of the Direct
Funds, when aggregated with any sales charges or service fees paid by
the Direct Funds relating to its acquisition, holding or disposition of
shares of the Underlying Portfolios (or Other Portfolios), will not
exceed the limits set forth in Article III, Section 26, of the NASD's
Rules of Fair Practice.
Before approving any advisory contract under Section 15 of the 1940
Act, the boards of Directors/Trustees of the Direct Funds, including a
majority of the Directors/Trustees 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 or Other Portfolio advisory contract. This finding, and the
basis upon which the finding was made, will be recorded fully in the
minute books of the Direct Funds.
Applicants agree to provide the following information, in an electronic
format, to the Chief Financial Analyst of the Commission's Division of
Investment Management: monthly average total assets for the Direct
Funds and Underlying Portfolios; monthly purchases and redemptions
(other than by exchange) for the Direct Funds and each Underlying
Portfolio; monthly exchanges into and out of the Direct Funds and each
Underlying Portfolio; month-end allocations of the Direct Funds' assets
among the Underlying Portfolios; annual expense ratios for the Direct
Funds 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 cast for and against the proposal
by the Direct Funds and by the other shareholders of the Underlying
Portfolio. The information will be provided as soon as reasonably
practicable following each fiscal year-end of the Direct Funds (unless
the Chief Financial Analyst notifies applicants in writing that the
information need no longer be submitted).
For the Commission, by the Division of Investment Management,
under delegated authority.
dc-41832
1 Report of the Securities and Exchange Commission on the Public
Policy Implications of Investment Company Growth: Report of the
Committee on Interstate and Foreign Commerce, H.R. Doc. No. 2337,
89th Cong., 2d Sess., 314 (l966).
2 Id. at 319.3 Id.4 Id.5 Id. at 320.6 Id.7 Id.8 Id.9 Id. at 314-315.10
Id. at 315.11 Id.12 Id. at 316.13 Id. at 321 (emphasis in original).
14 See Section 2(a)(3)(C) of the 1940 Act.15
See Section 2(a)(3)(A) and 2(a)(3)(B) of the 1940 Act.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
IN THE MATTER OF
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
THE VICTORY PORTFOLIOS
KEYCORP MUTUAL FUND ADVISERS, INC.
AND SPEARS, BENZAK, SALOMON & FARRELL, INC.
SECOND AMENDMENT AND RESTATEMENT TO
APPLICATION PURSUANT TO SECTIONS 6(c), 12(d)(1)(J) AND
17(b) OF THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED, FOR AN ORDER EXEMPTING THE APPLICANTS
FROM THE PROVISIONS OF SECTIONS 12(d)(1)(A), (B) AND
17(a) PERMITTING THE PROPOSED TRANSACTIONS.
Please direct all communications concerning this Second Amendment
and Restatement to Application to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, NW, Suite 5500
Washington, D.C. 20006-1888
(202) 887-1500
UNITED STATES OF AMERICA
BEFORE THE SECURITIES AND EXCHANGE COMMISSION
In The Matter Of:SBSF Funds, Inc. d/b/a Key Mutual Funds
The Victory Portfolios3435 Stelzer Road
Columbus, OH 43219
KeyCorp Mutual Fund Advisers, Inc.
127 Public Square
Cleveland, OH 44114
Spears, Benzak, Salomon & Farrell, Inc.
45 Rockefeller Plaza
New York, NY 10111)
Second Amendment and Restatement to Application Pursuant To
Sections 6(c), 12(d)(1)(j) And 17(b) Of The InvestmenT COMPANY
ACT OF 1940, AS AMENDED, FOR AN ORDER EXEMPTING
THE APPLICANTS FROM THE PROVISIONS OF SECTIONS
12(d)(1)(A), (B) AND 17(a) PERMITTING THE PROPOSED
TRANSACTIONS.
I. PRELIMINARY STATEMENT
SBSF Funds, Inc. d/b/a Key Mutual Funds ("KMF"), The Victory
Portfolios ("VP"), KeyCorp Mutual Fund Advisers, Inc. ("KMFAI")
and Spears, Benzak, Salomon & Farrell, Inc. ("SBS&F"),
(collectively, "Applicants"), hereby amend and restate the application
for an order of the Securities and Exchange Commission (the
"Commission") under Section 12(d)(1)(J) of the Investment Company
Act of 1940 ("1940 Act") for an exemption from the limitations of
Sections 12(d)(l)(A) and (B) to the extent necessary to permit the
series of KMF, VP and any other investment company created in the
future that is part of the same "group of investment companies", as
defined in Section 12(d)(1)(G)(ii) of the 1940 Act, as KMF or VP (the
"Direct Funds"), to purchase shares of investment companies or series
thereof, now existing or created in the future, that are part of the same
"group of investment companies," as so defined, as the Direct Funds
(the "Underlying Portfolios"), and to permit the Underlying Portfolios
to sell such shares to the Direct Funds. Applicants also apply for an
order under Sections 6(c) and 17(b) of the 1940 Act for an exemption
from Section 17(a) to the extent necessary to permit purchases and
redemptions by the Direct Funds of shares of the Underlying
Portfolios and sales and redemptions by the Underlying Portfolios of
their shares in transactions with the Direct Funds. Applicants believe
the requested exemptions are fully consistent with the policies and
purposes of the 1940 Act. Since no form has been prescribed for this
application, Applicants proceed under Rule 0-2 of the General Rules
and Regulations of the Commission under the 1940 Act.
II. BACKGROUND
A. The Underlying Portfolios and the Direct Funds
KMF is a Maryland corporation registered under the 1940 Act as an
open-end management investment company currently consisting of
eight operating portfolios, including the Direct Funds,1 and one
inactive portfolio. VP is a Delaware business trust registered under
the 1940 Act as an open-end diversified management investment
company currently consisting of 24 operating and four inactive
portfolios. The initial Direct Funds are newly established portfolios
of KMF. The Direct Funds are structured as "funds of funds" that
may invest their assets in shares of various Underlying Portfolios,
which are existing and future investment portfolios of KMF and VP.
The investment policies of the Direct Funds also permit each Fund to
invest a portion of its assets in Government securities, certain short-
term obligations and, subject to receipt of the exemptive order
requested hereby (the "Requested Order"), shares of other investment
companies that are not part of the same "group of investment
companies", as defined in Section 12(d)(1)(G)(ii) of the 1940 Act, as
KMF and VP ("Other Portfolios"). Investments in Other Portfolios
will not exceed the percentage limitations imposed by Section
12(d)(1)(F) of the 1940 Act and also will be limited to an aggregate
value of between 15% and 20% of the value of the total assets of a
Direct Fund at the time of purchase; any departure from this range
must be approved by the Board of Directors/Trustees of the Direct
Funds. Because investments in Other Portfolios will not exceed the
percentage limitations imposed by Section 12(d)(1)(F), no exemptive
relief is sought therefrom with respect to investments by the Direct
Funds in shares of Other Portfolios.
The mix of investments for each of the Direct Funds is established and
varied using an asset allocation approach. Initial and subsequent
allocation decisions are made as a result of investment analyses
undertaken by the Direct Fund's adviser, subject to supervision by the
Board of Directors/Trustees of the Direct Fund. The prospectus and
statement of additional information for each Direct Fund describe the
Direct Fund's permissible investments in Underlying Portfolios, as
well as Government securities, certain short-term obligations and
shares of Other Portfolios.
B. Spears, Benzak, Salomon & Farrell, Inc.
SBS&F currently serves as investment adviser to four of the operating
funds of KMF. Subject to the general supervision of KMF's Board of
Directors, in accordance with each advised entity's investment
policies, SBS&F formulates guidelines and lists of approved
investments, makes decisions with respect to and places orders for the
KMF operating funds' purchase and sale of securities, and maintains
records relating to such purchases and sales. SBS&F is a wholly
owned subsidiary of KeyCorp Asset Management Holdings, Inc.
("KAMHI"), which is a wholly owned subsidiary of KeyBank
National Association, a national banking association, which, in turn, is
a wholly owned subsidiary of KeyCorp, a bank holding company.
C. KeyCorp Mutual Fund Advisers, Inc.
KMFAI currently serves as investment adviser to VP and to four
funds of KMF, including the initial Direct Funds. In addition,
KMFAI has been retained to act as investment adviser to a fund of
KMF that has yet to commence operations. Subject to the general
supervision of VP's Board of Trustees, and KMF's Board of Directors,
respectively, in accordance with each advised entity's investment
policies, KMFAI formulates guidelines and lists of approved
investments, makes decisions with respect to and places orders for
purchases and sales of securities for VP and the relevant funds of
KMF and maintains records relating to such purchases and sales.
KMFAI is a wholly owned subsidiary of KAMHI.
III. THE PROPOSED TRANSACTIONS
A. Proposed Structure
The Direct Funds invest their assets in shares of Underlying Portfolios
that are part of the same "group of investment companies" as the
Direct Funds, as defined in Section 12(d)(1)(G)(ii) of the 1940 Act.
The investment policies of the Direct Funds provide that any assets
that are not invested in such Underlying Portfolios may be invested in
Government securities, certain short-term obligations and in shares of
Other Portfolios to the extent permitted under Section 12(d)(1)(F) of
the 1940 Act, subject to the 20% limitation described above.
Some of the Underlying Portfolios might rely upon a "manager of
managers" exemptive order granted by the SEC, whereby the
Underlying Portfolios have the authority to select a sub-adviser
without the approval of the shareholders of the Underlying Portfolio,
subject to certain conditions. However, reliance upon such exemptive
order will not change the analysis with respect to the proposed
structure here, because the Underlying Portfolios would all be part of
the same "group of investment companies" as the Direct Funds,
regardless of the identity of their sub-advisers.
B. Investment Allocations
The Direct Funds allocate their assets among the Underlying
Portfolios as noted above. The Direct Funds also may allocate assets
among Government securities, certain short-term obligations and,
subject to receipt of the Requested Order, shares of Other Portfolios,
subject to the limitations described above.
C. Direct Fund and Underlying Portfolio Expenses
1. Operational Expenses
The Underlying Portfolios pay investment advisory fees to KMFAI
and/or SBS&F. Additionally, the Underlying Portfolios pay fees to
their various service providers for all other services relating to their
operations. The Direct Funds' shareholders, therefore, indirectly pay
their proportionate share of any Underlying Portfolio fees and
expenses. Similarly, the Direct Funds' shareholders indirectly pay
their proportionate share of any Other Portfolio fees and expenses.
The Direct Funds also pay investment advisory fees to their
investment adviser(s). The services provided by the adviser(s) to the
Direct Funds will be in addition to and not duplicative of those
provided by the adviser(s) to the Underlying Portfolios and the Other
Portfolios. Additionally, the Direct Funds pay fees to their various
service providers for all other services relating to their operations.
Duplicative expenses are expected to be minimal and are, to some
extent, expected to be offset by cost savings at the Underlying
Portfolio/Other Portfolio level.
2. Sales-Related Expenses
The Direct Funds will pay no front-end sales loads or contingent
deferred sales charges in connection with the purchase or redemption
of shares of either Underlying Portfolios or Other Portfolios. In
addition, consistent with Section 12(d)(1)(G)(i)(III)(bb), the sales
charges or distribution-related fees, if any, charged in connection with
shares of the Direct Funds will not exceed the limits set forth in Rule
2830 of the Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD") when aggregated with any sales charges
or distribution-related fees that the Direct Funds pay relating to
Underlying Portfolio or Other Portfolio shares. Similarly, any service
fees relating to the shares of the Direct Funds will not exceed the
limits set forth in Rule 2830 of the Conduct Rules of the NASD, when
aggregated with any service fees that the Direct Funds may pay
relating to shares of the Underlying Portfolios and Other Portfolios.
D. Purpose of the Direct Funds
The Direct Funds are intended as an efficient and cost-effective
method of allowing investors to structure and modify a
comprehensive allocation program in investments throughout the
Underlying Portfolios. The structure of the Direct Funds recognizes
that differing investment products do not move in tandem. For
example, when stocks perform poorly, bonds may perform better.
Therefore, investing in different types of investment products can help
spread risk and even out swings in performance.
The risk/return balance in a portfolio can be varied by altering the
proportion of assets allocated to different types of investments. For
example, an investor seeking higher growth potential generally would
invest a larger portion of assets in stocks while an investor seeking
less volatility generally would invest a larger portion of assets in high-
quality bonds or cash equivalents. This asset allocation approach is
the fundamental principle behind the Direct Funds.
IV. APPLICABLE LAW AND ANALYSIS.
A. Section 12(d)(1)
Section 12(d)(1)(A) of the 1940 Act provides, in pertinent part: "It
shall be unlawful for any registered investment company (the
"acquiring company") . . . to purchase or otherwise acquire any
security issued by any other investment company (the "acquired
company") . . . if the acquiring company and any company or
companies controlled by it immediately after such purchase or
acquisition own in the aggregate
(I) more than 3 per centum of the total outstanding voting stock of
the acquired company;
(ii) securities issued by the acquired company having an aggregate
value in excess of 5 per centum of the value of the total assets of the
acquiring company; or
(iii) securities issued by the acquired company and all other
investment companies . . . having an aggregate value in excess of 10
per centum of the value of the total assets of the acquiring company."
Section 12(d)(1)(B) of the 1940 Act provides, in pertinent part: "It
shall be unlawful for any registered open-end investment company
(the "acquired company") . . . knowingly to sell or otherwise dispose
of any security issued by the acquired company to any other
investment company (the "acquiring company") . . . if immediately
after such sale or disposition
(I) more than 3 per centum of the total outstanding voting stock of
the acquired company is owned by the acquiring company and any
company or companies controlled by it; or
(ii) more than 10 per centum of the total outstanding voting stock of
the acquired company is owned by the acquiring company and other
investment companies and companies controlled by them."
Section 12(d)(1)(G)(i) of the 1940 Act provides, in pertinent part:
"This paragraph [1] does not apply to securities of a registered open-
end investment company . . . (hereafter in this subparagraph referred
to as the "acquired company") purchased or otherwise acquired by a
registered open-end investment company . . . (hereafter in this
subparagraph referred to as the "acquiring company") if
(I) the acquired company and the acquiring company are part of the
same group of investment companies;
(II) the securities of the acquired company, securities of other
registered open-end investment companies . . . that are part of the
same group of investment companies, Government securities, and
short-term paper are the only instruments held by the acquiring
company;
(III) with respect to . . .
(bb) securities of the acquiring company, any sales loads and other
distribution-related fees charged, when aggregated with any sales load
and distribution-related fees paid by the acquiring company with
respect to securities of the acquired fund, are not excessive under rules
adopted pursuant to section 22(b) or section 22(c) by a securities
association registered under section 15A of the Securities Exchange
Act of 1934, or the Commission;
(IV) the acquired company has a policy that prohibits it from
acquiring any securities of registered investment companies . . . in
reliance on this subparagraph or subparagraph (F); . . .
The Direct Funds may not invest in Other Portfolios in reliance on the
exemption provided by Section 12(d)(1)(G) for several reasons. First,
Section 12(d)(1)(G)(i)(I) requires that a fund of funds relying on
subparagraph (G), as well as all underlying funds, be part of the same
"group of investment companies," as defined in Section
12(d)(1)(G)(ii). As explained above, the Direct Funds propose to
invest not only in shares of (affiliated) Underlying Portfolios, but
also, subject to the limitations described above, in shares of
(unaffiliated) Other Portfolios. Second, Section 12(d)(1)(G)(i)(II)
limits the types of securities which a fund of funds relying on
subparagraph (G) may hold to securities of funds that are part of the
same "group of investment companies" as the fund of funds,
Government securities and short-term paper. The Direct Funds,
however, propose to invest not only in the types of securities that are
described in Section 12(d)(1)(G)(i)(II), but also in shares of
(unaffiliated) Other Portfolios. Finally, Section 12(d)(1)(G)(i)(IV)
provides that the funds underlying a fund of funds must have a policy
that prohibits such underlying funds from acquiring any securities in
reliance on subparagraphs (G) or (F) of Section 12(d)(1). The
Underlying Funds either have adopted, or are in the process of
adopting, such policies.
In light of the foregoing, absent exemptive relief, Section 12(d)(1) of
the 1940 Act would prohibit the Direct Funds from investing in both
Underlying Portfolios and Other Portfolios. Therefore, Applicants
seek an exemption from the limitations of Sections 12(d)(1)(A) and
(B) to the extent necessary to permit: (a) the Direct Funds to purchase
an unlimited amount of the outstanding voting shares of each
Underlying Portfolio; (b) the securities of each Underlying Portfolio
to have an aggregate value of as much as 100% of the total assets of
the Direct Funds; (c) the Direct Funds to invest up to 100% of their
assets in the securities of the Underlying Portfolios; (d) each of the
Underlying Portfolios to sell more than 3% of its total outstanding
voting stock to the Direct Funds; and (e) each of the Underlying
Portfolios to sell more than 10% of its total outstanding voting stock
to a Direct Fund, other investment companies and companies
controlled by the Direct Fund and other investment companies.
Investments by the Direct Funds in Other Portfolios will be made in
accordance with Section 12(d)(1)(F) of the 1940 Act. Section
12(d)(1)(F) provides in pertinent part: "The provisions of this
paragraph (1) shall not apply to securities purchased or otherwise
acquired by a registered investment company if (i) immediately
after such purchase or acquisition, not more than 3 per centum of the
total outstanding stock of such issuer is owned by such registered
investment company and all affiliated persons of such registered
investment company; and (ii) such registered investment company has
not offered or sold . . . and is not proposing to offer or sell any
security issued by it through a principal underwriter or otherwise at a
public offering price which includes a sales load of more than 1 1/2
per centum."
Section 12(d)(1)(F) of the 1940 Act further provides that: "No issuer
of any security purchased or acquired by a registered investment
company . . . shall be obligated to redeem such security in an amount
exceeding 1 per centum of such issuer's total outstanding securities
during any period of less than thirty days . . . ."
1. Legislative Purpose
The express purpose of Section 12(d)(l) of the 1940 Act, as enacted
and amended by Congress in 1970, was to limit and address the
perceived adverse consequences of "pyramiding" of investment
companies in a "fund of funds" arrangement. These consequences are
discussed in a comprehensive Commission report on the subject2
("1966 Report") and include: the duplicative costs involved in such a
structure, the exercise of undue influence or control over the
underlying series and the potential adverse impact of large-scale
redemptions.
In September of 1996, however, in view of the recent and substantial
experience of the Commission in dealing with fund of funds
exemptive applications and the issues presented thereby,3 Congress
approved amendments to Section 12(d)(1), the primary purpose of
which was to remove the investment prohibitions of Section 12(d)(1)
with respect to certain fund of funds structures. These amendments
are contained in Section 203 of H.R. 3005, the "National Securities
Market Improvements Act of 1996" ("NSMIA"), which was passed by
Congress on September 28, 1996 and became law on October 11,
1996. Section 203 of NSMIA revises Section 12(d)(1) to establish a
statutory exemption for funds of funds which comply with certain
conditions set forth in new subparagraph 12(d)(1)(G). As explained
above, a fund of funds seeking to rely on Section 12(d)(1)(G) must
meet each of the requirements set forth in the subparagraph in order to
be entitled to rely on the self-executing exemption from the other
provisions of Section 12(d)(1).
Recognizing that Section 12(d)(1)(G) would not cover other equally
appropriate fund of funds structures, Congress, in new Section
12(d)(1)(J), vested the Commission with broad authority to
"conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions from any provision of [subsection 12(d)(1)], if and to the
extent that such exemption is consistent with the public interest and
the protection of investors."4
For the following reasons, Applicants assert that the structure of the
Direct Funds is consistent with the public interest and the protection
of investors, and request that the Commission approve the application
on that basis. 2. Layering of costs to investorsa. Advisory Fees
The 1966 Report states that "all fund holding companies . . . subject
their investors to two layers of advisory fees." Congress, however, in
the statutory fund of funds exemption provided in Section
12(d)(1)(G), did not specifically address this issue. Nevertheless, the
structure of Applicants' fund of funds will include safeguards
designed to address multiple layering of advisory fees. In this regard,
before approving any advisory contract under Section 15 of the 1940
Act, the Directors/Trustees of the Direct Funds, including a majority
of the Directors/Trustees who are not "interested persons," as defined
in Section 2(a)(19), will find that any advisory fees charged under the
contract are based on services provided that are in addition to, rather
than merely duplicative of, services provided under any Underlying
Portfolio advisory contract. This finding, and the basis upon which
the finding was made, will be fully documented in the minute books
of the Direct Funds. The Directors/Trustees of the Direct Funds will
make a similar finding with respect to the Other Portfolios as well,
which will be fully documented.
b. Sales Load
The 1966 Report also states that "all investors in load funds
including fund holding companies must pay a sales charge . . .
[I]nvestors in a holding company are in turn subjected to a second
layer of sales charges on their purchases of shares in the holding
company. The investor is subjected to the dual sales load only where
both the fund holding company and its portfolio investment
companies are open-end, load funds."5 In Section 12(d)(1)(G),
Congress addressed these concerns by setting certain limits on the
amount of sales loads and distribution-related fees that may be
imposed, directly and indirectly, on shares of a statutory fund of
funds. These limitations are set forth in subparagraph (G)(i)(III) of
Section 12(d)(1).
To address the issue of multiple layers of sales loads, the Direct Funds
commit that they will pay no front-end or contingent deferred sales
charge in connection with the purchase or redemption of shares of the
Underlying Portfolios. In addition, consistent with the limits imposed
on statutory funds of funds by Section 12(d)(1)(G)(i)(III)(bb), and as
a condition to the requested exemptive relief, any sales charges or
distribution-related fees relating to the shares of the Direct Funds will
not exceed the limits set forth in Rule 2830 of the Conduct Rules of
the NASD, when aggregated with any sales charges or distribution-
related fees that the Direct Funds may pay relating to acquisition,
holding or disposition of Underlying Portfolio and Other Portfolio
shares. Similarly, any service fees relating to the shares of the Direct
Funds will not exceed the limits set forth in Rule 2830 of the Conduct
Rules of the NASD, when aggregated with any service fees that the
Direct Funds may pay relating to shares of the Underlying Portfolios
and Other Portfolios. The aggregate sales charges, therefore, will not
exceed the amount that otherwise lawfully could be charged at either
fund level. Accordingly, the proposed structure of the Direct Funds
does not raise the sales charge layering concerns underlying Section
12(d)(1).
c. Administrative Expenses
The 1966 Report notes that "investors in fund holding companies also
are subjected to a layering of administrative expenses including stock
transfer, dividend disbursements and custodial fees and the cost of
shareholder communications."6 As with concerns relating to multiple
layering of advisory fees, Congress, in Section 12(d)(1)(G), did not
specifically address the issue of multiple layering of administrative
expenses. Nevertheless, the proposed structure of the Direct Funds
addresses this issue.
Administrative and similar fees will be charged at the Direct Fund and
Underlying Portfolio/Other Portfolio levels. However, Applicants
believe that the redundancy of administrative fees and expenses
between the Direct Funds and the Underlying Portfolios will be
minimal, because distinct services are being provided at each level.
Likewise, Applicants believe that distinct services will be provided at
each level of the Direct Funds' investment in Other Portfolios, thus
minimizing any concerns of redundancy of administrative fees and
expenses. In any event, Applicants believe that administrative and
other expenses may be reduced at both levels under the proposed
Direct Funds structure. Accordingly, an investment in the Direct
Funds should not be significantly more expensive than a direct
investment in an Underlying Portfolio or Other Portfolio.
Reduced expenses for each Underlying Portfolio/Other Portfolio may
result from the following: (1) the addition of assets from the Direct
Funds may reduce the expense ratios for each Underlying
Portfolio/Other Portfolio to the extent economies of scale are achieved
or fixed expenses are spread across a larger asset base; (2) to the
extent that shareholders of the Direct Funds otherwise would have
opened direct accounts with each of the Underlying Portfolios/Other
Portfolios, the number of accounts maintained by the Direct Funds in
the aggregate, and the resulting transfer agency and other shareholder
servicing fees for the Underlying Portfolios/Other Portfolios, may be
reduced; and (3) the redemption rates for the Underlying
Portfolios/Other Portfolios may be lower due to the long-term asset
allocation approach employed by the Direct Funds. Custodial
expenses and fund accounting fees for the Direct Funds will be
minimized to the extent that the Direct Funds hold mutual fund shares
rather than individual portfolio securities.
d. Value of Services Analysis
The 1966 Report states that "an investor in a fund of funds incurs
more expenses than he would incur simply by investing directly in
any one, some or all of its portfolio funds."7 Again, in Section
12(d)(1)(G), Congress does not specifically address this concern.
Applicants believe, however, that any additional incremental cost
incurred by investing in the Direct Funds is in return for a substantial
investment management service, namely the initial and ongoing asset
allocation of investments made in the Underlying Portfolios.
Investors in the Direct Funds likewise will receive such services with
respect to investments made by the Direct Funds in Other Portfolios.
In addition, Applicants note that the financial media carefully
monitors and reports the performance of mutual funds, including
"funds of funds." Accordingly, Applicants expect that expense
information about the Direct Funds will be readily available to the
public. Applicants will have to price these products in a manner that
is competitive with the market to attract and retain investors.
3. Diversification
The 1966 Report expresses some skepticism that increased
diversification results from fund of funds arrangements, calling the
"added value of diversification . . . largely illusory. . . ."8 It
further notes that "[a] fund holding company vehicle so duplicates and
reduplicates the diversification achieved by the investment in a single
fund that the expenses incurred defeat the investor's objectives."9
That this view of diversification is dated could not be more clearly
evidenced than by Congress' recent approval of the amendments to
Section 12(d)(1) liberalizing the formation of funds of funds.
Unlike the fund holding companies in the 1966 Report, the Direct
Funds will provide meaningful additional diversification benefits
since the Underlying Portfolios pursue different investment strategies.
And, any concerns as to diversification are minimal with respect to the
Other Portfolios since Section 12(d)(1)(F) limits the Direct Funds'
investment in the Other Portfolios (together with investments by
affiliated persons of the Direct Funds) to no more than 3% of the total
outstanding stock of any Other Portfolio. Nevertheless, the Direct
Funds also commit to employ a meaningful diversification strategy
with respect to the Other Portfolios by investing in Other Portfolios
that pursue different investment strategies.
The 1966 Report also expressed concern over "wash transactions"10
which achieve no true investment purpose. These transactions occur
where "management of one portfolio fund will be buying for its
portfolio the same securities the management of another will be
selling."11 Again, this concern is not addressed in the context of
Section 12(d)(1)(G). Equally, however, this concern is not raised by
the Direct Funds. Wash transactions will be rare in the case of the
Direct Funds since the Underlying Portfolios will, as a general matter,
pursue different investment strategies, and therefore, invest in
different types of securities. Wash transactions similarly are not a
concern with respect to the Other Portfolios as they will likewise
pursue different investment strategies.
4. Control
The 1966 Report criticizes the potential for "pyramiding control in the
hands of an individual or group of individuals whose financial stake in
all of the constituent companies of the group is comparatively
nominal."12 It focuses on fund holding companies because of their
"potential for the exercise of undue influence or control over the
activities of portfolio funds."13 Again, this concern was not
specifically addressed by Congress in Section 12(d)(1)(G). It is,
however, addressed by the structure of the Direct Funds in that there
is little risk that the Direct Funds' adviser(s) will exercise
inappropriate control over the Underlying Portfolios, as they are part
of the same "group of investment companies." Moreover, it should be
noted that the Other Portfolios, which are not within the same "group
of investment companies" as the Direct Funds, cannot be controlled in
any meaningful way by the Direct Funds because Section 12(d)(1)(F)
limits them, together with their affiliates, to acquiring no more than
3% of the total outstanding stock of any Other Portfolio.
5. Impact of Large Scale Redemptions
On a related point, the 1966 Report notes that the management of the
underlying fund "must be continually aware that a possible large
redemption carries with it a loss of advisory fees in approximate
proportion to the percentage of the fund redeemed."14 An entity
owning such a large share may attempt to exert influence over the
underlying fund.
Applicants believe that concern over this potential abuse is not
relevant to the proposed arrangements. There is little risk that the
Direct Funds' adviser(s) will exercise inappropriate control over the
Underlying Portfolios, which are part of the same "group of
investment companies." In this connection, Applicants note that
Section 12(d)(1)(G) does not impose any express limitations on
statutory funds of funds with respect to redemptions of shares of
underlying funds.
With respect to investments by the Direct Funds in shares of Other
Portfolios, the Direct Funds, together with their affiliates, will be
limited by Section 12(d)(1)(F) to acquiring no more than 3% of the
total outstanding stock of any Other Portfolio. For this reason, there
is little risk that the Direct Funds' adviser(s) will be in a position to
exercise inappropriate control over any Other Portfolio. In addition,
Applicants note that Section 12(d)(1)(F) permits the Other Portfolios
to reject redemption requests by a Direct Fund that exceed 1% of the
Other Portfolio's total outstanding securities during any period of less
than 30 days.
The 1966 Report also expresses concern about the impact that the
threat of large scale redemptions might have on the "orderly
management of an underlying fund."15 For example, to address the
threat of large scale redemptions, an underlying fund may be forced to
maintain excessive cash balances. Otherwise, it might have to sell off
a substantial portion of its assets, thereby saddling the fund's
remaining shareholders with capital gains and a greater pro rata
portion of fixed costs. Again, Section 12(d)(1)(G) does not impose
any conditions designed to address this concern.
Nevertheless, to reduce the possibility of the Direct Funds being used
as short-term trading vehicles and further protect the Direct Funds,
Underlying Portfolios and Other Portfolios from unexpected large
redemptions, the Direct Funds generally will be designed for
intermediate and long-term investors.
6. Conflicting Interests
The Direct Funds' investment adviser is subject to a conflict of interest
to the extent it has the authority to allocate the Direct Funds' assets
across unaffiliated Other Portfolios as well as affiliated Underlying
Portfolios. Applicants submit that this conflict is analogous to the
conflict faced by an adviser in deciding among various affiliated
Underlying Portfolios that pay different rates for advisory and other
services that are provided by the same adviser (or its affiliates). This
conflict will be addressed, in part, by limiting the adviser to a range
of allocations to unaffiliated Other Portfolios (e.g., no less than 15%
and no more than 20% of a Direct Fund's total assets may be invested
in shares of Other Portfolios, at the time of purchase). Any departure
from the prescribed range must be approved by the Board of
Directors/Trustees of the Direct Fund.
7. Complexity
Finally, the 1966 Report expresses concern that the popularity of
funds of funds could lead to the creation of more complex vehicles
that would not serve any meaningful purpose. Specifically, the 1966
Report states that, "[i]f funds of funds are permitted to proliferate,
how could an investor decide among the many such companies
seeking his investment dollar? Would he not need a fund of funds of
funds to make the decision?"16 To address this concern with respect
to Section 12(d)(1)(G) funds of funds, Congress, in Section
12(d)(1)(G)(i)(IV), required that the funds underlying a statutory fund
of funds have a policy prohibiting such underlying funds from
acquiring any securities in reliance on subparagraphs (G) or (F) of
Section 12(d)(1). As noted above, the Underlying Portfolios have
adopted, or are in the process of adopting, such a policy.
Nevertheless, insofar as these concerns relate to the Direct Funds, they
are addressed by virtue of the fact that no Underlying Portfolio or
Other 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 to the extent that such Underlying Portfolio or
Other Portfolio (a) receives securities of another investment company
as a dividend or as a result of a plan of reorganization of a company
(other than a plan devised for the purpose of evading Section 12(d)(1)
of the 1940 Act); or (b) acquires (or is deemed to have acquired)
securities of another investment company pursuant to exemptive relief
from the Commission permitting such Underlying Portfolio or Other
Portfolio to (i) acquire securities of one or more affiliated investment
companies for short-term cash management purposes; or (ii) engage in
interfund borrowing and lending transactions.
8. Authority
As part of the 1996 amendments to Section 12(d)(1), Congress vested
the Commission with broad authority to "conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities or transactions from any
provision of [subsection 12(d)(1)], if and to the extent that such
exemption is consistent with the public interest and the protection of
investors."17 The authority granted to the Commission in Section
12(d)(1)(J) is not only broad enough to encompass the relief requested
by the Applicants, but also was intended to address situations similar
to that presented by the Applicants. In this regard, Applicants note
that the June 17, 1996 Committee Report to the House of
Representatives on H.R. 3005 (which contained versions of
Subsections 12(d)(1)(G) and (J) that are substantially similar to those
ultimately included in NSMIA) provides that:
[Section 12(d)(1)(J)] makes explicit the authority of the Commission
to grant exemptions for funds of funds that might not meet the
conditions of new subparagraph 12(d)(1)(G), for example, fund of
fund arrangements that involve investment companies that are not part
of the same group of investment companies . . . The Committee notes
that many investment company fund complexes may not include a
sufficient number or variety of fund types to permit the creation of a
workable affiliated fund of funds. The Committee intends the
rulemaking and exemptive authority in new Section 12(d)(1)(J) to be
used by the Commission so that the benefits of funds are not limited
only to investors in the largest fund complexes, but, in appropriate
circumstances, are available to investors through a variety of different
types and sizes of investment company complexes. (emphasis
supplied).18
In light of this clear statement of legislative intent, there is little
question that the Commission has been empowered, and indeed
encouraged, by Congress to grant the relief requested by the
Applicants.
9. Conclusion
Section 12(d)(1) is designed to prohibit arrangements and practices
that bear practically no relation to the purpose and structure of the
Direct Funds. Unlike the fund holding companies that troubled
Congress 30 years ago, the Direct Funds will provide a simple answer
to investor demand for a diversified, professionally managed fund of
funds. Moreover, Congress, through the amendments to Section
12(d)(1) has expressly recognized not only that, subject to certain
limitations, funds of funds are in the public interest, but also that the
Commission is uniquely qualified to evaluate variations on Section
12(d)(1)(G) statutory funds of funds. In this regard, Section
12(d)(1)(J) vests the Commission with the authority to permit the
establishment and operation of funds of funds which, although not
meeting the requirements of Section 12(d)(1)(G), represent a variation
that is in the public interest and consistent with the protection of
investors. Applicants believe that the Direct Funds present such a
case. Accordingly, Applicants believe that this is an appropriate
instance for the Commission to exercise its authority under Section
12(d)(1)(J) to exempt Applicants from the restrictions of Section
12(d)(1) to the extent requested in this Application.
B. Section 17(a)
Section 17(a) of the 1940 Act prohibits an affiliated person of a
registered investment company or an affiliated person of such
affiliated person from: (1) knowingly selling any security or other
property to the registered investment company or (2) knowingly
purchasing any security or other property from the company. Section
17(b) authorizes the Commission to exempt a proposed transaction
from the restrictions of Section 17(a) if the evidence establishes that
(1) the terms of the proposed transaction, including the consideration
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned; (2) the proposed
transaction is consistent with the policies of each registered
investment company concerned; and (3) the proposed transaction is
consistent with the general purposes of the 1940 Act.
The Direct Funds and the Underlying Portfolios will be advised by the
Advisers or their affiliates and, therefore, may be deemed to be
"affiliated persons" of one another by virtue of being under the
common control of their adviser(s).19 They also may be deemed to
be affiliated persons of one another to the extent that Direct Funds
own 5% or more of the shares of an Underlying Portfolio.20
Purchases by the Direct Funds of shares of the Underlying Portfolios
and sales by the Underlying Portfolios of their shares to the Direct
Funds could be deemed to be principal transactions between affiliated
persons under Section 17(a). Applicants seek an exemption under
Sections 17(b) and 6(c) from the prohibitions of Section 17(a) to
allow the transactions described in this application to the extent that
such prohibition would apply.
Applicants believe that relief under Section 6(c) is appropriate for
many of the reasons discussed above. Applicants also believe that
relief is appropriate under Section 17(b) because the proposed
arrangement meets the requirements of that section.
First, the terms of the proposed arrangement are fair and reasonable
and do not involve overreaching. The consideration paid for the sale
and redemption of shares of the Underlying Portfolios will be based
on the net asset values of the Underlying Portfolios.
Second, the proposed arrangement will be specifically contemplated
by and consistent with the policies of the Direct Funds. The
investment of assets of the Direct Funds in shares of the Underlying
Portfolios and the issuance of shares of the Underlying Portfolios to
the Direct Funds will be effected in accordance with the investment
restrictions of the Direct Funds and will be consistent with the policies
as set forth in the registration statement of the Direct Funds.
Finally, the proposed arrangement is consistent with the general
purposes of the 1940 Act. Section 17(a) is intended to prohibit
affiliated persons in a position of influence or control over an
investment company from furthering their own interests by selling
property that they own to an investment company at an inflated price,
purchasing property from an investment company at less than its fair
value, or selling or purchasing property on terms that involve any self-
dealing or overreaching by the affiliated person. The proposed
arrangement does not involve any such wrongful conduct by the
Applicants.
V. AUTHORITY
Except with respect to the authority to invest in Other Portfolios, the
relief requested by this application is substantially similar to that
recently granted by the Commission to Daily Money Fund, et al.,
Investment Company Act Release Nos. 22107 (July 29, 1996) (notice)
and 22171 (August 26, 1996) (order); Qualivest Funds, et al.,
Investment Company Act Release Nos. 21874 (Apr. 5, 1996) (notice)
and 21933 (May 1, 1996) (order); Twentieth Century Blended
Portfolios, Inc., et al., Investment Company Act Release Nos. 21813
(Mar. 11, 1996) (notice) and 21875 (Apr. 8, 1996) (order), Schwab
Capital Trust, et al., Investment Company Act Release Nos. 21726
(Jan. 31, 1996) (notice) and 21788 (Feb. 27, 1996) (order), DFA
Investment Dimensions Group, Inc., et al., Investment Company Act
Release Nos. 21642 (Dec. 29, 1995) (notice) and 21701 (Jan. 24,
1996) (order), The Diversified Investors Funds Group, et al.,
Investment Company Act Release Nos. 21597 (Dec. 13, 1995)
(notice) and 21669 (Jan. 11, 1996) (order), SEI Institutional Managed
Trust, et al., Investment Company Act Release Nos. 21539 (Nov. 22,
1995) (notice) and 21615 (Dec. 20, 1995) (order), Smith Barney, Inc.,
et al., Investment Company Act Release Nos. 21537 (Nov. 21, 1995)
(notice) and 21613 (Dec. 19, 1995) (order), Vanguard STAR Fund, et
al., Investment Company Act Release Nos. 21372 (Sept. 22, 1995)
(notice) and 21426 (Oct. 18, 1995) (order), T. Rowe Price Spectrum
Fund, Inc., et al., Investment Company Act Release Nos. 21371 (Sept.
22, 1995) (notice) and 21425 (Oct. 18, 1995) (order).
VI. CONDITIONS TO RELIEF
Applicants expressly consent to the imposition of the following
conditions in connection with this request for exemptive relief.
All Underlying Portfolios will be part of the same "group of
investment companies," as defined in Section 12(d)(1)(G)(ii) of the
1940 Act, as the Direct Funds.
No Underlying Portfolio or Other 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 to the extent that such
Underlying Portfolio or Other Portfolio (a) receives securities of
another investment company as a dividend or as a result of a plan of
reorganization of a company (other than a plan devised for the
purpose of evading Section 12(d)(1) of the 1940 Act); or (b) acquires
(or is deemed to have acquired) securities of another investment
company pursuant to exemptive relief from the Commission
permitting such Underlying Portfolio or Other Portfolio to (i) acquire
securities of one or more affiliated investment companies for short-
term cash management purposes; or (ii) engage in interfund
borrowing and lending transactions.
Any sales charges, distribution-related fees and service fees relating to
the shares of the Direct Funds, when aggregated with any sales
charges, distribution-related fees and service fees paid by the Direct
Funds relating to its acquisition, holding or disposition of shares of
the Underlying Portfolios and Other Portfolios, will not exceed the
limits set forth in Rule 2830 of the NASD's Conduct Rules.
Before approving any advisory contract under Section 15 of the 1940
Act, the boards of Directors/Trustees of the Direct Funds, including a
majority of the Directors/ Trustees 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 or Other Portfolio advisory contract. This finding, and the
basis upon which the finding was made, will be recorded fully in the
minute books of the Direct Funds.
VII. PROCEDURAL MATTERS
1. Pursuant to Rule 0-2(f) under the Act, Applicants hereby state
that their addresses are as stated on the first page of this
Application. Applicants further state that all communications or
questions should be directed to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W., Suite 5500
Washington, D.C. 20006-1888
(202) 887-1500
2. Pursuant to Rule 0-2(c)(1) under the Act, each Applicant hereby
states that the officer signing and filing this Application on behalf of
each Applicant is fully authorized to do so. Authorizations filed as
Exhibits A-1 through A-4 with the Application filed May 20, 1996
remain in effect. Under the provisions of each Applicant's
Declaration of Trust and/or Articles of Incorporation and/or By-Laws,
responsibility for the management of the affairs and business of the
Applicant is vested in its Board of Trustees or Directors. Each
Applicant has complied with all requirements for the execution and
filing of this Application in the name and on behalf of each Applicant.
3. The verifications required by Rule 0-2(d) under the 1940 Act are
attached hereto as Exhibits B-1 through B-4. The notice of the
proceeding initiated by the filing of this Application required by Rule
0-2(g) under the 1940 Act is attached as Exhibit C to this Application.
IN WITNESS WHEREOF, each Applicant has caused this Second
Amendment and Restatement to Application to be duly executed as of
the date set forth below.
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
February __, 1997 By: /s/
Name: Robert L. Tuch
Title: Assistant Secretary
THE VICTORY PORTFOLIOS
February __, 1997 By: /s/
Name: George O. Martinez
Title: Assistant Secretary
KEYCORP MUTUAL FUND ADVISERS, INC.
February __, 1997 By: /s/
Name: William J. Blake
Title: Secretary
SPEARS, BENZAK, SALOMON & FARRELL, INC.
February __, 1997 By: /s/
Name: Christopher J. Brown
Title: Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibits
Sequential Page Number
A-1Certification of SBSF Funds, Inc. d/b/a Key Mutual Funds
Pursuant to Rule 0-2(c)(1)A-1A-2
Certification of The Victory Portfolios
Pursuant to Rule 0-2(c)(1)A-2A-3
Certification of Spears, Benzak, Salomon & Farrell, Inc.
Pursuant to Rule 0-2(c)(1)A-3A-4
Certification of Keycorp Mutual Fund Advisers, Inc.
Pursuant to Rule 0-2(c)(1)
A-4B-1
Verification of SBSF Funds, Inc. d/b/a Key Mutual Funds
Pursuant to Rule 0-2(d)B-1B-2
Verification of The Victory Portfolios
Pursuant to Rule 0-2(d)B-2B-3
Verification of Spears, Benzak, Salomon & Farrell Inc.
Pursuant to Rule 0-2(d)B-3B-4
Verification of Keycorp Mutual Fund Advisers, Inc.
Pursuant to Rule 0-2(d) B-4C
Notice of ApplicationC-1
Exhibit A-1
Authorization
Rule 0-2(c)(1)SBSF Funds, Inc. d/b/a Key Mutual Funds
CERTIFICATE
I, Robert L. Tuch, of SBSF Funds, Inc. (d/b/a Key Mutual Funds) (the
"Company") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, mo
dified or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c) and 17(b) of the 1940 Act, for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder,
and any amendments or supplements thereto, if the same shall be
necessary or appropriate; and
FURTHER RESOLVED, that the appropriate Officers of the
Company be, and each hereby is, authorized and directed to take such
additional actions, and to execute and deliver on behalf of the
Company such other documents or instruments as they deem
necessary or appropriate in furtherance of the above resolution, his or
her authority therefor to be conclusively evidenced by the taking of
any such actions or the execution or delivery of any such document.
IN WITNESS WHEREOF, I have executed this Certificate this 15th
day of May, 1996.
/s/ Robert L. Tuch
Name: Robert L. Tuch
Title: Assistant Secretary
SBSF Funds, Inc. (d/b/a Key Mutual Funds)
EXHIBIT A-2
AUTHORIZATION
RULE 0-2(C)(1)
THE VICTORY PORTFOLIOS
CERTIFICATE
I, George O. Martinez, of The Victory Portfolios (the "Trust") hereby
certify that the following resolutions authorizing the filing with the
Securities and Exchange Commission (the "SEC") of an application
for an order pursuant to Sections 6(c) and 17(b) of the Investment
Company Act of 1940 (the "1940 Act"), for an order exempting the
Company from the provisions of Sections 12(d) and 17(a) and for an
order pursuant to Section 17(d) of the 1940 Act and Rule 17d-1
thereunder, and any amendments or other documents related thereto,
were duly adopted by the Trust's Board of Trustees and that such
resolutions have not been amended, modified or rescinded:
VOTED, that the Officers of the Trust be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Trust, an
exemptive application to the SEC for an order pursuant to Sections
6(c) and 17(b) of the 1940 Act, for an order exempting the Company
from the provisions of Sections 12(d) and 17(a) and for an order
pursuant to Section 17(d) of the 1940 Act and Rule 17d-1 thereunder,
and any amendments or supplements thereto, if the same shall be
necessary or appropriate; and
FURTHER VOTED, that the appropriate Officers of the Trust be, and
each hereby is, authorized and directed to take such additional actions,
and to execute and deliver on behalf of the Trust such other
documents or instruments as they deem necessary or appropriate in
furtherance of the above resolution, his or her authority therefor to be
conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have executed this Certificate this 15th
day of May, 1996.
By: /s/ George O. Martinez
Name: George O. Martinez
Title: Assistant Secretary
The Victory Portfolios
EXHIBIT A-3
AUTHORIZATION
RULE 0-2(C)(1)
SPEARS, BENZAK, SALOMON & FARRELL, INC.
CERTIFICATE
I, Michael R. Parker, of Spears, Benzak, Salomon & Farrell, Inc. (the
"Company") hereby certify that the following resolutions authorizing
the filing with the Securities and Exchange Commission of an
application for an order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Company's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the Officers of the Company be, and each hereby is,
authorized to prepare, execute and submit, on behalf of the Company,
an exemptive application to the SEC for an order pursuant to Sections
6(c), 17(b) and (d) of the 1940 Act and Rule 17d-1 thereunder, and
any amendments or supplements thereto, if the same shall be
necessary or appropriate; and
FURTHER RESOLVED, that the appropriate Officers of Spears, the
Company be, and each hereby is, authorized and directed to take such
additional actions, and to execute and deliver on behalf of the
Company such other documents or instruments as they deem
necessary or appropriate in furtherance of the above resolution, his or
her authority therefor to be conclusively evidenced by the taking of
any such actions or the execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 20th day
of May, 1996.
/s/ Michael R. Parker
Name: Michael R. Parker
Title: Vice President & General Counsel
Spears, Benzak, Salomon & Farrell, Inc.
EXHIBIT A-4
AUTHORIZATION
RULE 0-2(C)(1)
KEYCORP MUTUAL FUND ADVISERS, INC.
CERTIFICATE
I, William J. Blake, Secretary of KeyCorp Mutual Advisers, Inc. (the
"Corporation") hereby certify that the following resolutions
authorizing the filing with the Securities and Exchange Commission
of an application for an order pursuant to Sections 6(c) and 17(b) of
the Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Corporation from the provisions of Sections 12(d) and
17(a) and for an order pursuant to Section 17(d) of the 1940 Act and
Rule 17d-1 thereunder, and any amendments or other documents
related thereto, were duly adopted by the Corporation's Board of
Directors and that such resolutions have not been amended, modified
or rescinded:
RESOLVED, that the officers of the Corporation be, and each hereby
is, authorized to prepare, execute and submit, on behalf of the
Corporation, an exemptive application to the Securities and Exchange
Commission for an order pursuant to Sections 6(c), 17(b) and (d) of
the 1940 Act and Rule 17d-1 thereunder, and any amendments or
supplements thereto, if the same shall be necessary or appropriate; and
FURTHER RESOLVED, that the officers of the Corporation be, and
each hereby is, authorized and directed to take such additional actions,
and to execute and deliver on behalf of the Corporation such other
documents or instruments as they deem necessary or appropriate in
furtherance of the above vote, his or her authority therefor to be
conclusively evidenced by the taking of any such actions or the
execution or delivery of any such document.
IN WITNESS WHEREOF, I have hereunto set my hand this 10th day
of May, 1996.
/s/ William J. Blake
William J. Blake
Secretary
KeyCorp Mutual Fund Advisers, Inc.
EXHIBIT B-1
VERIFICATION
RULE 0-2(d)
SBSF FUNDS, INC. d/b/a KEY MUTUAL FUNDS
VERIFICATION
STATE OF OHIO )
) ss:
COUNTY OF FRANKLIN )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Second Amendment and Restatement to
Application for an Order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) for and on behalf of SBSF Funds, Inc. (the "Company"); that he
is the Assistant Secretary of such Company; and that all action by
stockholders, directors and other bodies necessary to authorize
deponent to execute and file such instrument on behalf of the
Company has been taken. Deponent further says that he is familiar
with such instrument, and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and
belief.
/s/
Name: Robert L. Tuch
Title: Assistant Secretary
SBSF Funds, Inc. (d/b/a Key Mutual Funds)
Subscribed and sworn to before me, a Notary Public, this ___ day of
February, 1997.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-2
VERIFICATION
RULE 0-2(d)
THE VICTORY PORTFOLIOS
VERIFICATION
STATE OF _____________ )
) ss:
COUNTY OF ___________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Second Amendment and Restatement to
Application for an Order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) for and on behalf of The Victory Portfolios (the "Trust"); that he
is the Assistant Secretary of such Trust; and that all action by interest
holders, trustees and other bodies necessary to authorize deponent to
execute and file such instrument on behalf of the Trust has been taken.
Deponent further says that he is familiar with such instrument, and the
contents thereof, and that the facts therein set forth are true to the
best of his knowledge, information and belief.
/s/
Name: George O. Martinez
Title: Assistant Secretary
The Victory Portfolios
Subscribed and sworn to before me, a Notary Public, this ___ day of
February, 1997.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-3
VERIFICATION
RULE 0-2(d)
SPEARS, BENZAK, SALOMON & FARRELL, INC.
VERIFICATION
STATE OF _______________ )
) ss:
COUNTY OF _____________ )
The undersigned being duly sworn deposes and states that he has
duly executed the attached Second Amendment and Restatement to
Application for an Order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) for and on behalf of Spears, Benzak, Salomon & Farrell, Inc.
(the "Company"); that he is the Vice President and Chief Financial
Officer of such Company; and that all action by shareholders,
directors and other bodies necessary to authorize deponent to execute
and file such instrument on behalf of the Company has been taken.
Deponent further says that he is familiar with such instrument, and the
contents thereof, and that the facts therein set forth are true to the
best of his knowledge, information and belief.
/s/
Name: Christopher J. Brown
Title: Vice President and Chief Financial Officer
Spears, Benzak, Salomon & Farrell, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
February, 1997.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT B-4
VERIFICATION
RULE 0-2(d)
KEYCORP MUTUAL FUND ADVISERS, INC.
VERIFICATION
STATE OF OHIO )
) ss:
COUNTY OF CUYAHOGA)
The undersigned being duly sworn deposes and states that he has
duly executed the attached Second Amendment and Restatement to
Application for an Order pursuant to Sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the "1940 Act"), for an order
exempting the Company from the provisions of Sections 12(d) and
17(a) for and on behalf of KeyCorp Mutual Fund Advisers, Inc. (the
"Corporation"); that he is the Secretary of such Corporation; and that
all action by shareholders, directors and other bodies necessary to
authorize deponent to execute and file such instrument on behalf of
the Corporation has been taken. Deponent further says that he is
familiar with such instrument, and the contents thereof, and that the
facts therein set forth are true to the best of his knowledge,
information and belief.
/s/
Name: William J. Blake
Title: Secretary
KeyCorp Mutual Fund Advisers, Inc.
Subscribed and sworn to before me, a Notary Public, this ___ day of
February, 1997.
My commission expires:
/s/
Notary Public
Notarial Seal:
EXHIBIT C
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT COMPANY ACT OF 1940, Release No. ______
SBSF Funds, Inc. d/b/a Key Mutual Funds et al.
January 30, 1997
Agency: Securities and Exchange Commission ("Commission").
Action: Notice of Application for an Order under the Investment
Company Act of 1940 (the "1940 Act").
Applicants: SBSF Funds, Inc. d/b/a Key Mutual Funds ("KMF"), The
Victory Portfolios ("VP"), Spears, Benzak, Salomon & Farrell, Inc.
("SBS&F") and KeyCorp Mutual Fund Advisers, Inc. ("KMFAI").
Relevant 1940 Act Sections: Order requested under section
12(d)(1)(J) of the 1940 Act from section 12(d)(1) of the Act, under
sections 6(c) and 17(b) of the 1940 Act from section 17(a) of the Act.
Summary of Application: The requested order would permit the use
of existing funds or the creation of new funds (the "Direct Funds")
that will acquire shares of investment companies or series thereof,
now existing or created in the future, that are part of the same "group
of investment companies," as defined in section 12(d)(1)(G)(ii) of the
1940 Act (the "Underlying Portfolios"), as the Direct Funds, and to
permit the Underlying Portfolios to sell such shares to the Direct
Funds.
Filing Dates: The application was filed on May 20, 1996 and
amended on January 22, 1997 and February ___, 1997.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission
by 5:30 p.m. on February 24, 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
Commission's Secretary.
Addresses: Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. Applicants: KMF and
VP, 3435 Stelzer Road, Columbus, OH 43219; KMFAI, 127 Public
Square, Cleveland, OH 44114; SBS&F, 45 Rockefeller Plaza, New
York, NY 10111.
For Further Information Contact: David W. Grim, Staff Attorney, at
(202) 942-____, or , Mercer E. Bullard, Branch Chief at (202) 942-
____ (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 from
the Commission's Public Reference Branch.
Applicants' Representations:
1. KMF is a Maryland corporation registered under the 1940 Act as
an open-end management investment company consisting of eight
operating portfolios and one inactive portfolio. VP is a Delaware
business trust registered under the 1940 Act as an open-end
diversified management investment company consisting of 24
operating and four inactive portfolios.
2. The initial Direct Funds are newly established portfolios of KMF.
The Direct Funds are structured as "funds of funds" that invest their
assets in shares of various Underlying Portfolios. The Underlying
Portfolios are existing and future investment portfolios of KMF and
VP. The investment policies of the Direct Funds also permit each
Fund to invest a portion of its assets in Government securities, certain
short-term obligations and, subject to receipt of the exemptive order
requested hereby (the "Requested Order"), shares of investment
companies that are not part of the same "group of investment
companies," as defined in Section 12(d)(1)(G)(ii) of the 1940 Act
("Other Portfolios"). Investments in Other Portfolios will not exceed
the percentage limitations imposed by Section 12(d)(1)(F) of the 1940
Act and also will be limited to an aggregate value not in excess of
20% of the total assets of each Direct Fund at the time of purchase.
Because investments in Other Portfolios will not exceed the
percentage limitations imposed by Section 12(d)(1)(F), no exemptive
relief therefrom is sought with respect to investments by the Direct
Funds in shares of Other Portfolios.
3. The Direct Funds seek to provide diversification among major
asset categories and stock sub-categories. The mix of investments for
each of the Direct Funds is established and varied using an asset
allocation approach. Initial and subsequent allocation decisions are
made as a result of investment analyses undertaken by the Direct
Fund's adviser, subject to supervision by the Board of Directors of the
Direct Fund. The prospectus and statement of additional information
for each Direct Fund describe the Direct Fund's permissible
investments in Underlying Portfolios, as well as Government
securities, certain short-term obligations and shares of Other
Portfolios.
4. SBS&F currently serves as investment adviser to four of the
operating funds of KMF. Subject to the general supervision of KMF's
Board of Directors, in accordance with each advised entity's
investment policies, SBS&F formulates guidelines and lists of
approved investments, makes decisions with respect to and places
orders for the KMF operating funds' purchases and sales of securities
and maintains records relating to such purchases and sales. SBS&F is
a wholly owned subsidiary of KeyCorp Asset Management Holdings,
Inc. ("KAMHI"), which is a wholly owned subsidiary of KeyBank
National Association, a national banking association, and KeyCorp, a
bank holding company. KMFAI serves as investment adviser to VP
and to four funds of KMF, including the initial Direct Funds. In
addition, KMFAI has been retained to act as investment adviser to a
fund of KMF that has yet to commence operations. Subject to the
general supervision of VP's Board of Trustees and KMF's Board of
Directors, respectively, in accordance with each advised entity's
investment policies, KMFAI formulates guidelines and lists of
approved investments, makes decisions with respect to and places
orders for purchases and sales of securities for VP and the relevant
funds of KMF and maintains records relating to such purchases and
sales. KMFAI also is a wholly owned subsidiary of KAMHI.
Applicants' Legal Analysis:
1. Section 12(d)(1)(A) 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.
Section 12(d)(1)(G) of the 1940 Act states that the provisions of
section 12(d)(1) do not apply to securities of a registered open-end
investment company purchased or otherwise acquired by another
registered open-end investment company if (a) the acquired company
and the acquiring company are part of the same group of investment
companies; (b) the securities of the acquired company, securities of
other registered open-end investment companies that are part of the
same group of investment companies, Government securities, and
short-term paper are the only instruments held by the acquiring
company; (c) with respect to (i) securities of the acquired company,
the acquiring company does not pay and is not assessed any charges
or fees for distribution-related activities, unless the acquiring
company does not charge a sales load or other fees or charges for
distribution-related activities; or (ii) securities of the acquiring
company, any sales loads and other distribution-related fees charged,
when aggregated with any sales load and distribution-related fees paid
by the acquiring company with respect to securities of the acquired
fund, are not excessive under rules adopted pursuant to section 22(b)
or section 22(c) by a securities association registered under section
15A of the Securities Exchange Act of 1934, or the Commission; and
(d) the acquired company has a policy that prohibits it from acquiring
any securities of registered investment companies in reliance on
section 12(d)(1)(G) or (F). Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of section 12(d)(1) shall not apply to
securities purchased or otherwise acquired by a registered investment
company if immediately after such purchase or acquisition, not more
than 3 per centum of the total outstanding stock of such issuer is
owned by such registered investment company and all affiliated
persons of such registered investment company; and such registered
investment company has not offered or sold and is not proposing to
offer or sell any security issued by it through a principal underwriter
or otherwise at a public offering price which includes a sales load of
more than 1 1/2 per centum. Further, no issuer of shares purchased
under section 12(d)(1)(F) shall be obligated to redeem such security in
an amount exceeding 1 per centum of such issuer's total outstanding
securities during any period of less than thirty days.
2. The Direct Funds may not invest in Other Portfolios in reliance on
the exemption provided by section 12(d)(1)(G) for several reasons.
First, Section 12(d)(1)(G)(i)(I) requires that a fund of funds relying on
subparagraph (G), as well as all underlying funds, be part of the same
"group of investment companies," as defined in section
12(d)(1)(G)(ii). As explained above, the Direct Funds propose to
invest not only in shares of (affiliated) Underlying Portfolios, but
also, subject to the limitations described above, in shares of
(unaffiliated) Other Portfolios. Second, section 12(d)(1)(G)(i)(II)
limits the types of securities which a fund of funds relying on
subparagraph (G) may hold to securities of funds that are part of the
same "group of investment companies" as the fund of funds,
Government securities and short-term paper. The Direct Funds,
however, propose to invest not only in the types of securities that are
described in section 12(d)(1)(G)(i)(II), but also in shares of
(unaffiliated) Other Portfolios. Finally, section 12(d)(1)(G)(i)(IV)
provides that the funds underlying a fund of funds must have a policy
that prohibits such underlying funds from acquiring any securities in
reliance on subparagraphs (G) or (F) of Section 12(d)(1). The
Underlying Funds either have adopted, or are in the process of
adopting, such policies.
3. Section 12(d)(1)(J) provides that the Commission is authorized to
exempt any person, security, or transaction, or any class or classes of
persons, securities or transactions from any provision of subsection
12(d)(1), if and to the extent that such exemption is consistent with
the public interest and the protection of investors. Applicants request
an order under section 12(d)(1)(J) exempting them from the
limitations of section 12(d)(1)(A) and (B) to the extent necessary to
permit each Direct Fund to purchase an unlimited amount of the
outstanding voting shares of each Underlying Portfolio; the securities
of each Underlying Portfolio to have an aggregate value of as much as
100% of the total assets of a Direct Fund; the Direct Funds to invest
up to 100% of their assets in the securities of the Underlying
Portfolios; each of the Underlying Portfolios to sell more than 3% of
its total outstanding voting stock to a Direct Fund; and each of the
Underlying Portfolios to sell more than 10% of its total outstanding
voting stock to a Direct Fund, other investment companies and
companies controlled by the Direct Fund and other investment
companies.
4. The purpose of section 12(d)(l) of the 1940 Act was to limit and
address the perceived adverse consequences of "pyramiding" of
investment companies in a "fund of funds" arrangement. These
include the duplicative costs involved in such a structure, the exercise
of undue influence or control over the underlying series and the
potential adverse impact of large-scale redemptions.
5. The proposed arrangement will not raise the fee layering concerns
contemplated by section 12(d)(1). The proposed arrangement will not
involve the layering of advisory fees, as before approving any
advisory contract under section 15 of the 1940 Act, the
directors/trustees of the Direct Funds, including a majority of the
directors/trustees who are not "interested persons," as defined in
section 2(a)(19), 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. The directors/trustees of the Direct Funds will
make a similar finding with respect to the Other Portfolios as well,
which will be fully documented. The structure of the Direct Funds
will not involve the layering of sales charges as the Direct Funds will
pay no front-end or contingent deferred sales charges in connection
with the purchase or redemption of shares of the Underlying
Portfolios. In addition, as a condition to the requested exemptive
relief, any sales charges or distribution-related fees relating to the
shares of the Direct Funds will not exceed the limits set forth in Rule
2830 of the Conduct Rules of the NASD, when aggregated with any
sales charges or distribution-related fees that the Direct Funds may
pay relating to acquisition, holding or disposition of Underlying
Portfolio and Other Portfolio shares. Similarly, any service fees
relating to the shares of the Direct Funds will not exceed the limits set
forth in Rule 2830 of the Conduct Rules of the NASD, when
aggregated with any service fees that the Direct Funds may pay
relating to shares of the Underlying Portfolios and Other Portfolios.
The aggregate sales charges, therefore, will not exceed the amount
that otherwise lawfully could be charged at either fund level.
6. The proposed arrangement will be structured to minimize large
scale redemption concerns. There is little risk that the Direct Funds'
adviser(s) will exercise inappropriate control over the Underlying
Portfolios, which are part of the same "group of investment
companies." Similarly, because the Direct Funds, together with their
affiliates, will be limited by section 12(d)(1)(F) to acquiring no more
than 3% of the total outstanding stock of any Other Portfolio, there is
little risk that the Direct Funds' adviser(s) will be in a position to
exercise inappropriate control over any Other Portfolio.
7. The Direct Funds and the Underlying Portfolios will be advised by
the Advisers or their affiliates and, therefore, may be deemed to be
"affiliated persons" of one another by virtue of being under the
common control of their adviser(s). They also may be deemed to be
affiliated persons of one another to the extent that Direct Funds own
5% or more of the shares of an Underlying Portfolio. Purchases by
the Direct Funds of shares of the Underlying Portfolios and the sale by
the Underlying Portfolios of their shares to the Direct Funds could be
deemed to be principal transactions between affiliated persons under
section 17(a). Applicants seek an exemption under sections 17(b) and
6(c) from the prohibitions of section 17(a) to allow the transactions
described in this application to the extent that such prohibition would
apply. The Applicants believe that relief under section 6(c) is
appropriate for many of the reasons discussed above. Applicants also
believe that relief is appropriate under section 17(b) because the
proposed arrangement meets the requirements of that section.
8. Section 17(b) provides that the Commission shall exempt a
proposed transaction from section 17(a) if evidence establishes that
the terms of the proposed transaction are reasonable and fair and do
not involve overreaching, the proposed transaction is consistent with
the policies of the registered investment company involved, and the
proposed transaction is consistent with the general provisions of the
1940 Act. Section 6(c) permits the Commission to exempt any
person, security, or transaction, or any class or classes of persons,
securities, or transactions, from any provisions of the 1940 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. Applicants believe
that the proposed transactions meet the standards of sections 6(c) and
17(b). Applicants believe that their proposal is structured to assure
that neither the Direct Funds nor the Underlying Portfolios will
participate on a basis that is different or less advantageous than any
other participant.
Applicants' Conditions:
Applicants agree that the order granting the requested relief
shall be subject to the following conditions:
All Underlying Portfolios will be part of the same "group of
investment companies," as defined in section 12(d)(1)(G)(ii) of the
1940 Act, as the Direct Funds.
No Underlying Portfolio or Other 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 to the extent that such
Underlying Portfolio or Other Portfolio (a) receives securities of
another investment company as a dividend or as a result of a plan of
reorganization of a company (other than a plan devised for the
purpose of evading Section 12(d)(1) of the 1940 Act); or (b) acquires
(or is deemed to have acquired) securities of another investment
company pursuant to exemptive relief from the Commission
permitting such Underlying Portfolio or Other Portfolio to (i) acquire
securities of one or more affiliated investment companies for short-
term cash management purposes; or (ii) engage in interfund
borrowing and lending transactions.
Any sales charges, distribution-related fees and service fees relating to
the shares of the Direct Funds, when aggregated with any sales
charges, distribution-related fees and service fees paid by the Direct
Funds relating to its acquisition, holding or disposition of shares of
the Underlying Portfolios and Other Portfolios, will not exceed the
limits set forth in Rule 2830 of the NASD's Conduct Rules.
Before approving any advisory contract under Section 15 of the 1940
Act, the boards of Directors/Trustees of the Direct Funds, including a
majority of the Directors/Trustees 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 or Other Portfolio advisory contract. This finding, and the
basis upon which the finding was made, will be recorded fully in the
minute books of the Direct Funds.
For the Commission, by the Division of Investment Management,
under delegated authority.
dc-52782v3
1 On January 1, 1997, in reliance only on Section 12(d)(1)(G) of the
1940 Act, KeyChoice Growth Fund, KeyChoice Moderate Growth
Fund and KeyChoice Income and Growth Fund, the initial Direct
Funds, commenced operations with investments limited to (affiliated)
Underlying Portfolios.
2 Report of the Securities and Exchange Commission on the Public
Policy Implications of Investment Company Growth: Report of the
Committee on Interstate and Foreign Commerce, H.R. Doc. No. 2337,
89th Cong., 2d Sess., 314 (l966).
3 See, e.g., orders and notices referenced below under V. Authority.
4 Section 12(d)(1)(J) of the 1940 Act.
5 Report of the Securities and Exchange Commission on the Public
Policy Implications of Investment Company Growth: Report of the
Committee on Interstate and Foreign Commerce, H.R. Doc. No. 2337,
89th Cong., 2d Sess., 319 (l966).
6 Id.
7 Id.
8 Id. at 320.
9 Id.
10 Id.
11 Id.
12 Id. at 314-315.
13 Id. at 315.
14 Id.
15 Id. at 316.
16 Id. at 321 (emphasis in original).
17 Section 12(d)(1)(J) of the 1940 Act.
18 House Comm. on Commerce, 104th Cong., 2D Sess., Report on
Securities Amendments of 1996, (Comm. Print 1996).
19 See Section 2(a)(3)(C) of the 1940 Act.
20 See Section 2(a)(3)(A) and 2(a)(3)(B) of the 1940 Act.
