[Federal Register Volume 59, Number 26 (Tuesday, February 8, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-2829] [[Page Unknown]] [Federal Register: February 8, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Rel. No. IC-20049; 812-8516] Pilgrim Institutional Trust, et al.; Application February 1, 1994. AGENCY: Securities and Exchange Commission (``SEC''). ACTION: Notice of Application for Exemption under the Investment Company Act of 1940 (``Act''). ----------------------------------------------------------------------- APPLICANTS: Pilgrim Institutional Trust (formerly, Pilgrim State Tax- Free Trust (the ``Trust'')), Pilgrim Magnacap Fund, Pilgrim GNMA Fund, Pilgrim Global Investment Series (on behalf of Pilgrim Short-Term Multi-Market Income Fund and Pilgrim Short-Term Multi-Market Income Fund II), Pilgrim Corporate Utilities Fund, and Pilgrim Strategic Investment Series (on behalf of Pilgrim High Yield Trust) (collectively with the Trust, the ``Existing Pilgrim Funds''); Pilgrim Management Corporation (the ``Adviser''); and Pilgrim Distributors Corp. (the ``Distributor''). RELEVANT ACT SECTIONS: Amended order requested under section 6(c) for exemptions from sections 2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c), and 22(d) of the Act and rule 22c-1 thereunder. SUMMARY OF APPLICATION: Applicants previously received relief permitting the Trust and the Existing Pilgrim Funds to issue two classes of shares, and permitting the Trust to assess and, under certain circumstances, waive a contingent deferred sales charge (``CDSC'') on one of those classes (the ``Prior Order'').\1\ In addition, the Existing Pilgrim Funds previously received exemptive relief to assess and waive a CDSC under certain circumstances.\2\ Applicants request an amendment of the previous orders to permit applicants (a) to issue and sell multiple classes of shares representing interests in the same portfolio of investments, and (b) to assess and waive a CDSC on certain redemptions of shares not already covered by the previous orders. Applicants request that any relief granted pursuant to this application also apply to any open-end management investment company, including any series thereof, for which the Adviser or the Distributor may in the future become, respectively, the investment adviser or principal underwriter.\3\ The individual series of the Trust and of other registered open-end management investment companies that would rely on the requested order are referred to collectively, in whole or in part as the context requires, as the ``Funds.'' \1\Investment Company Act Release Nos. 19025 (Oct. 14, 1992) (notice) and 19087 (Nov. 10, 1992) (order). The relief requested by the application is in addition to that granted by the Prior Order, which remains in full force and effect. \2\Investment Company Act Release Nos. 17957 (Jan. 24, 1991) (notice) and 18007 (Feb. 20, 1991) (order). \3\All investment companies relying on any order granted in connection with the application will comply with the representations and conditions set forth in the application. --------------------------------------------------------------------------- FILING DATE: The application was filed on July 30, 1993 and amended on October 15, 1993 and December 13, 1993. Counsel, on behalf of the applicants, has agreed to file a further amendment during the notice period to make certain technical changes. This notice reflects the changes to be made to the application by such further amendment. HEARING OR NOTIFICATION OF HEARING: An order granting the application will be issued unless the SEC orders a hearing. Interested persons may request a hearing by writing to the SEC's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the SEC by 5:30 p.m. on February 24, 1994, and should be accompanied by proof of service on the applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request such notification by writing to the SEC's Secretary. ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. Applicants, 10100 Santa Monica Boulevard, Los Angeles, California 90067. FOR FURTHER INFORMATION CONTACT: Felicia Kung, Senior Attorney at (202) 504-2803 or Elizabeth G. Osterman, Branch Chief, at (202) 272-3016 (Division of Investment Management, Office of Investment Company Regulation). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee from the SEC's Public Reference Branch. Applicants' Representations 1. The Trust and the Existing Pilgrim Funds are registered open-end management investment companies. The Adviser, a wholly-owned subsidiary of Pilgrim Group, Inc., provides investment management services to the Trust and the Existing Pilgrim Funds. The Distributor, a wholly-owned subsidiary of Pilgrim Group, Inc. and a registered broker/dealer, acts as principal underwriter for the Trust and the Existing Pilgrim Funds. 2. Under the Prior Order, the Existing Pilgrim Funds currently offer two classes of shares (``Class A'' shares and ``Class B'' shares). Class A (or the ``Front-End Load Option'') shares are subject to a front-end sales load and an annual fee of up to .25% of the average daily net asset value of such shares under a distribution plan adopted under rule 12b-1 of the Act (``12b-1 Plan''). Class B shares are subject to a CDSC ranging from 3% to 5% (but which may be higher or lower) for a period of up to six years. Class B shares also are subject to an annual fee of up to 1% of the average daily net asset value of such shares under a 12b-1 Plan. All references to Class A shares and Class B shares are to such classes of shares currently offered under the Prior Order. 3. Applicants propose to amend the Prior Order to enable the Funds to offer a multiple class distribution system as described below (the ``Multi-Class System''). Under the Multi-Class System, in addition to the Class A and Class B shares, applicants will offer a third class of shares (``Class C''). Class C shares would have a higher minimum initial purchase amount, and would be subject to a CDSC expected to be equal to 1% during the first year after the initial purchase, and no CDSC thereafter. Class C shares also would be subject to an annual fee of up to 1% of the average daily net asset value of such shares under a 12b-1 Plan (collectively with Class B, the ``Deferred Option''). 4. The 1% distribution fee applicable to Deferred Option shares is a combination of asset-based sales charges and service fees assessed under a 12b-1 Plan. In all cases applicants will comply with Article III, Section 26 of the National Association of Securities Dealers, Inc. Rules of Fair Practice as it relates to the maximum amount of asset- based sales charges and service fees that may be imposed. See Securities Exchange Act Release No. 30897 (July 7, 1992). 5. Under the Multi-Class System, applicants also from time to time may create one or more additional classes of shares, the terms of which may differ from the Class A shares, Class B shares, and Class C shares only in the following respects: (a) Each class may bear different fees payable under the applicable 12b-1 Plans, or different fees payable under a non-rule 12b-1 shareholder services plan (``Shareholder Services Plan''), (b) each class may bear different Class Expenses, as defined below, (c) each class will vote separately with respect to a Fund's 12b-1 Plan, (d) each class may have different exchange privileges, and (e) each class may have a different designation. Shares of different classes may be sold under different sales arrangements (including, for example, subject to a front-end sales charge, a CDSC, or no sales load). 6. Each class of shares of the Funds will bear, pro rata based on the relative net asset value of the respective classes, all of the expenses of the Funds except that each class will bear different Class Expenses and the holders of Deferred Option shares will bear a proportionately higher share of the distribution fee than the holders of the Front-End Load Option shares. Class Expenses shall be limited to: (i) Transfer agency fees (including the incremental cost of monitoring a CDSC applicable to a specific class of shares), (ii) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, and proxies to current shareholders of a specific class, (iii) SEC and blue sky registration fees incurred by a class of shares, (iv) the expenses of administrative personnel and services as required to support the shareholders of a specific class, (v) litigation or other legal expenses relating to a specific class of shares, (vi) trustees'/ directors' fees incurred or expenses incurred as a result of issues relating to a specific class of shares, (vii) accounting fees and expenses relating to a specific class of shares, and (viii) any other incremental expenses subsequently identified that should be properly allocated to one class which shall be approved by the SEC pursuant to an amended order. 7. Because of the additional expenses that will be borne solely by the Deferred Option shares, the net income attributable to and the dividends payable on the Deferred Option shares for financial statement reporting purposes is expected to be lower than the net income attributable to and the dividends payable on Class A shares. For tax purposes, however, the difference between the distribution fees payable by Deferred Option shares and the distribution fees payable by Class A shares (i.e., up to .75%) is not deductible and will be charged to the Deferred Option shares' paid-in-capital. As a result, Deferred Option shares will be receiving dividends which in part can be considered return of capital under the SEC's financial reporting rules. It is therefore expected that the net asset value per share of the multiple classes will diverge over time. Assuming no change in existing tax laws or relevant interpretations of the SEC's financial reporting rules, any Fund that issues two or more classes of shares similarly will capitalize rule 12b-1 fees for tax purposes. 8. The Funds will offer exchange privileges to shareholders in each of their classes as described in the application and in each Fund's prospectus. All exchanges will comply with section 11(a) of the Act or rule 11a-3 thereunder. 9. The Funds may offer classes of shares to one or more of the following five limited categories of investors (``Institutional Investors''): (a) Unaffiliated benefit plans such as qualified retirement plans, other than individual retirement accounts (``IRA''s) and self-employed retirement plans, with total assets in excess of $10 million or such other amounts as the Funds may establish and with such other characteristics as the Funds may establish; (b) tax-exempt retirement plans of the Adviser and its affiliates, including the retirement plans of the Adviser's affiliated brokers; (c) banks and insurance companies purchasing for their own accounts; (d) investment companies not affiliated with the Adviser; and (e) endowment funds of non-profit organizations. These shares (``Institutional Shares'') may be offered under a variation of the Front-End Load Option, the Deferred Option or a no-load option, and may be subject to shareholder services fees under a Shareholder Services Plan. 10. In addition, the Funds may offer classes of shares to institutions not included in the categories of Institutional Investors, such as corporations, foundations, and financial institutions, designed to meet the needs of such institutions (``Financial Shares''). Class A, Class B, and Class C shares and any future classes of shares which are not Institutional Shares or Financial Shares are referred to collectively as ``Non-Institutional Shares.'' 11. The unaffiliated benefit plans in category (a) of paragraph 9 above will have several common features. Such plans will have total assets in excess of $10 million or such other amounts as applicants may establish, a separate trustee for the plan who is vested with investment discretion as to plan assets, certain limitations on the ability of plan beneficiaries to access their plan investments without incurring adverse tax consequences, and such other characteristics as the Funds may establish. Applicants will exclude self-directed plans from this category. 12. The tax-exempt retirement plans in category (b) of paragraph 9 above will consist of qualified defined contribution plans maintained, pursuant to Section 401(a) of the Internal Revenue Code of 1986, as amended (the ``Code''), by the Adviser or its affiliates for the benefit of employees. Under such plans, the assets are held in trust by a trustee and employees have limited pre-retirement access to the assets. 13. The entities included in categories (c), (d), and (e) of paragraph 9 above will not be affiliated with the Adviser. These offerees will have in common the essential features of substantial assets under management and investment decisionmaking by institutional management on behalf of the entity with respect to the purchase of Institutional Shares of a Fund. Banks and insurance companies typically employ professional staff to manage the investment of cash assets, and portfolio managers make investment decisions on behalf of investment companies. Likewise, an endowment fund of a non-profit organization is professionally managed and individual donors to such endowment funds exercise no investment discretion on behalf of the endowment fund, nor would such an individual donor consider a direct investment in shares of a Fund as an investment alternative in lieu of a donation. Thus, no possibility exists that an individual investor would be able to use these entities as a conduit for individual investing in the Institutional Shares. 14. Only Institutional Investors will be eligible to invest in Institutional Shares. All other investors will be eligible to invest solely in Non-Institutional Shares and/or Financial Shares. There will be no overlap between the investors eligible to invest in Institutional Shares and investors eligible to invest in Non-Institutional Shares and Financial Shares of any Fund. 15. Pursuant to the existing orders, applicants may assess and under certain circumstances, waive a CDSC on certain redemptions of shares. Applicants seek exemptive relief to the extent necessary to permit the Funds to assess a CDSC on certain redemptions of any class of Deferred Option shares of the Funds, and to waive or reduce the CDSC with respect to certain types of redemptions. 16. The amount of any CDSC will depend on the number of years since the investor made the purchase payment from which an amount is being redeemed and the net asset value of the shares at the time of redemption as set forth in a Fund's prospectus.\4\ --------------------------------------------------------------------------- \4\Under proposed rule 6c-10 (Investment Company Act Release No. 16619 (Nov. 2, 19988)), a CDSC payable upon redemption is based on the lesser of the amount that represents a specified percentage of net asset value of the shares at the time of purchase or the amount that represents the same or a lower percentage of the net asset value of the shares at the time of redemption. --------------------------------------------------------------------------- 17. No CDSC will be imposed on (a) redemptions of shares purchased more than a specified period prior to their redemption or (b) Deferred Option shares derived from reinvestment of distributions. Further, no CDSC will be imposed on any amount representing an increase in the value of a shareholder's account due to capital appreciation. In determining the applicability and rate of any CDSC, it will be assumed that a redemption is made first of shares representing capital appreciation, next of shares representing reinvestment of dividends and capital gain distributions, and finally of shares held by the shareholder for the longest period of time. 18. The Funds request the ability to waive or reduce the CDSC in the following instances: (a) On redemptions following the death or disability of a shareholder, as defined in Section 72(m)(7) of the Code; (b) in connection with mandatory distributions from an IRA or other qualified retirement plan; (c) on redemptions pursuant to the Funds' right to liquidate accounts or charge an annual small account fee; and (d) upon the liquidation or dissolution of a Fund. If the Funds waive or reduce the CDSC, such waiver or reduction will be uniformly applied to all offerees in the class specified. 19. If a Fund discontinues any waiver described above, the disclosure in the Fund's prospectus will be appropriately revised. Any Deferred Option shares purchased prior to the termination of such waiver would be able to have the CDSC waived as provided in such Fund's prospectus at the time of the purchase of such shares. Applicants' Legal Analysis 1. Applicants request an exemptive order to the extent that the proposed issuance and sale of multiple classes of shares representing interests in the Funds might be deemed: (a) To result in the issuance of a ``senior security'' within the meaning of section 18(g) and thus be prohibited by section 18(f)(1); and (b) to violate the equal voting provisions of section 18(i). 2. Applicants believe that the proposed Multi-Class System would better enable the Funds to meet the competitive demands of today's financial services industry. Applicants assert that the proposed arrangement would permit the Funds to facilitate both the distribution of their securities and provide investors with a broader choice as to the method of purchasing shares without assuming excessive accounting and bookkeeping costs or unnecessary investment risks. Moreover, applicants state that owners of shares may be relieved under the Multi- Class System of a portion of the fixed costs normally associated with mutual funds since such costs would, potentially, be spread over a greater number of shares than would otherwise be the case. 3. Applicants believe that the proposed Multi-Class System does not raise any of the legislative concerns that section 18 of the Act was designed to address. The Multi-Class System will not increase the speculative character of the shares of the Funds. The proposed arrangement does not involve borrowing, nor will it affect the Funds' existing assets or reserves. Applicants' Conditions Applicants agree that any order of the SEC granting the requested relief shall be subject to the following conditions: 1. Each class of shares will represent interests in the same portfolio of investments of a Fund, and be identical in all respects, except as set forth below. The only differences among the classes of shares of the same Fund will relate solely to: (a) the differences in the distribution fees payable by a Fund to the Distributor attributable to each class pursuant to the 12b-1 Plans adopted and proposed to be adopted by the Fund, or differences in fees payable by each class under a Shareholder Services Plan that may be adopted and operated in the future in the manner prescribed by condition 16 below; (b) each class may bear different Class Expenses which shall be limited to: (i) Transfer agency fees (including the incremental cost of monitoring a CDSC applicable to a specific class of shares), (ii) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, and proxies to current shareholders of a specific class, (iii) SEC and blue sky registration fees incurred by a class of shares, (iv) the expenses of administrative personnel and services as required to support the shareholders of a specific class, (v) litigation or other legal expenses relating to a specific class of share, (vi) trustees'/directors' fees or expenses incurred as a result of issues relating to a specific class of shares, (vii) accounting fees and expenses relating to a specific class of shares, and (viii) any other incremental expenses subsequently identified that should be properly allocated to one class which shall be approved by the SEC pursuant to an amended order; (c) each class will vote separately with respect to a Fund's 12b-1 Plan; (d) each class may have different exchange privileges; and (e) the designation of each class of shares of a Fund. 2. The initial determination of the Class Expenses that will be allocated to a particular class and any subsequent changes thereto will be reviewed and approved by a vote of the Board of Trustees, including a majority of the Trustees which are not interested persons of the Fund. Any person authorized to direct the allocation and disposition of monies paid or payable by the Fund to meet Class Expenses shall provide to the Board of Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. 3. The Trustees of each of the Funds, including a majority of the independent Trustees, will approve the subsequent creation of any additional class of shares. The minutes of the meetings of the Trustees of the Fund regarding the deliberations of the Trustees with respect to the approval necessary to implement the Multi-Class system will reflect in detail the reasons for the Trustees' determination that the proposed Multi-Class System is in the best interests of both the Funds and their respective shareholders. 4. On an ongoing basis, the Trustees of the Funds, pursuant to their fiduciary responsibilities under the Act and otherwise, will monitor each Fund for the existence of any material conflicts of interest among any outstanding classes of shares. The Trustees, including a majority of the independent Trustees, shall take such action as is reasonably necessary to eliminate any such conflicts that may develop. The Adviser and the Distributor will be responsible for reporting any potential or existing conflicts to the Trustees. If a conflict arises, the Adviser and the Distributor at their own costs will remedy such conflict up to and including establishing a new registered management investment company. 5. The Trustees of the Funds will receive quarterly and annual statements concerning distribution and shareholder servicing expenditures complying with paragraph (b)(3)(ii) of rule 12b-1, as it may be amended from time to time. In the statements, only expenditures properly attributable to the sale or service of a particular class of shares will be used to justify any distribution or service fee charged to that class. Expenditures not related to the sale or service of a particular class will not be presented to the Trustees to justify any fee attributable to that class. The statements, including the allocations upon which they are based, will be subject to the review and approval of the independent Trustees in the exercise of their fiduciary duties. 6. Dividends paid by a Fund with respect to each class of its shares, to the extent any dividends are paid, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except that distribution and service payments relating to any particular class of shares will be borne exclusively by that class and except that any Class Expenses will be borne exclusively by the applicable classes of shares. 7. The methodology and procedures for calculating the net asset value and dividends and distributions of the various classes and the proper allocation of expenses among the various classes have been reviewed by an expert (the ``Expert''). The Expert has rendered a report to the applicants, which has been provided to the staff of the SEC, stating that such methodology and procedures are adequate to ensure that such calculations and allocations will be made in an appropriate manner. On an ongoing basis, the Expert, or an appropriate substitute Expert, will monitor the manner in which the calculations and allocations are being made and, based upon such review, will render at least annually a report to the Funds that the calculations and allocations are being made properly. The reports of the Expert shall be filed as part of the periodic reports filed with the SEC pursuant to sections 39(a) and 30(b)(1) of the Act. The work papers of the Expert with respect to such reports, following request by the Funds (which the Funds agree to make), will be available for inspection by the SEC staff upon the written request to the Fund for such work papers by a senior member of the Division of Investment Management or of a Regional Office of the SEC, limited to the Director, an Associate Director, the Chief Accountant, the Chief Financial Analyst, an Assistant Director and any Regional Administrators or Associate and Assistant Administrators. The initial report of the Expert is a ``report on policies and procedures placed in operation,'' and the ongoing reports will be ``reports on the policies and procedures placed in operation and test of operating effectiveness'' as defined and described in SAS No. 70 of the American Institute of Certified Public Accountants (the ``AICPA''), as it may be amended from time to time, or in similar auditing standards as may be adopted by the AICPA from time to time. 8. Applicants have adequate facilities in place to ensure implementation of the methodology and procedures for calculating the net asset value and dividends and distributions of the various classes of shares and the proper allocation of expenses among such classes of shares, and this representation has been concurred with by the Expert in the initial report referred to in condition 7 above and will be concurred with by the Expert, or an appropriate substitute Expert, on an ongoing basis at least annually in the ongoing reports referred to in condition 7 above. Applicants will take immediate corrective measures if this representation is not concurred in by the Expert or appropriate substitute Expert. 9. The prospectus for each Fund will contain a statement to the effect that a salesperson and any other person entitled to receive compensation for selling or servicing Fund shares may receive different compensation with respect to one particular class of shares over another in the Fund. 10. The Distributor will adopt compliance standards as to when shares of each class may appropriately be sold to particular investors. Applicants will require all persons selling shares of a Fund to agree to conform to such standards. Such compliance standards will require that all investors eligible to purchase Institutional Shares will be sold only Institutional Shares, and all investors eligible to purchase Non-Institutional Shares or Financial Shares will be sold only Non- Institutional Shares or Financial Shares. 11. The conditions pursuant to which the exemptive order is granted and the duties and responsibilities of the Trustees of the Funds with respect to the Multi-Class System will be set forth in guidelines which will be furnished to the Trustees. 12. Each Fund will disclose the respective expenses, performance data, distribution arrangements, services, fees, sales loads, deferred sales loads, and exchange privileges applicable to each class of shares other than Institutional Shares in every prospectus, regardless of whether all classes of shares are offered through each prospectus. Institutional Shares will be offered solely pursuant to a separate prospectus. The prospectus for Institutional Shares will disclose the existence of the Fund's other classes, and the prospectus for the Fund's other classes will disclose the existence of Institutional Shares and will identify the persons eligible to purchase Institutional Shares. Each Fund will disclose the respective expenses and performance data applicable to each class of shares in every shareholder report. The shareholder reports will contain, in the statement of assets and liabilities and statement of operations, information related to the Fund as a whole generally and not on a per class basis. Each Fund's per share data, however, will be prepared on a per class basis with respect to all classes of shares of such Fund. To the extent any advertisement or sales literature describes the expenses or performance data applicable to any class of shares, it will also disclose the respective expenses and/or performance data applicable to all classes of shares, except Institutional Shares. Advertising materials reflecting the expenses or performance data for Institutional Shares will be available only to those persons eligible to purchase Institutional Shares. The information provided by applicants for publication in any newspaper or similar listing of a Fund's net asset value and public offering price will present each class of shares, except Institutional Shares, separately. 13. Applicants acknowledge that the grant of the exemptive order requested by the application will not imply SEC approval, authorization, or acquiescence in any particular level of payments that the Funds may make pursuant to their 12b-1 Plans or any Shareholder Services Plans in reliance on the exemptive order. 14. Applicants will comply with the provisions of proposed rule 6c- 10 under the Act (see Investment Company Act Release No. 16619 (Nov. 2, 1988)), as such rule is currently proposed and as it may be reproposed, adopted or amended. 15. Applicants will comply with section 19(a) and rule 19a-1 under the Act, including the provisions requiring dividend payments that include a return of capital to be accompanied by a written statement clearly indicating that investors are receiving a return of capital and identifying what portion of the payment is a return of capital. 16. If in the future any investment company adopts a shareholder services plan that is not a 12b-1 Plan, such shareholder services plan will be adopted and operated in accordance with the procedures set forth in rule 12b-1 (b) through (f) as if the expenditures made thereunder were subject to rule 12b-1, except that shareholders need not enjoy the voting rights specified in rule 12b-1. For the SEC, by the Division of Investment Management under delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-2829 Filed 2-7-94; 8:45 am] BILLING CODE 8010-01-M