[Federal Register Volume 59, Number 32 (Wednesday, February 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3552]
[[Page Unknown]]
[Federal Register: February 16, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20068; 812-8560]
The Seven Seas Series Fund, et al.; Application for Exemption
February 10, 1994
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS; The Seven Seas Series Fund (the ``Investment Company''),
State Street Bank and Trust Company (``State Street''), Russell Fund
Distributors, Inc. (``RFD``) and Frank Russell Investment Management
Company (``FRIMCo'').
RELEVANT ACT SECTIONS; Order requested under section 6(c) of the Act
for conditional 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 seek an order that would end the
Investment Company and all future open-end investment companies and
series thereof that are advised by State Street and that are in the
same group of investment companies, to issue an unlimited number of
separate classes of securities representing interests in some or all of
the existing and future series of the Investment Company, and to assess
a contingent deferred sales load (``CDSL'') on certain redemptions of
shares, and, under certain circumstances, to waive the CDSL.
FILING DATE: The application was filed on September 2, 1993, and
amended on December 15, 1993. Counsel, on behalf of 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 March 7, 1994,
and should be accompanied by proof of service on applicants, in the
form of an affidavit, or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
The Seven Seas Series Fund and Russell Fund Distributors, Inc., Two
International Place, 34th Floor, Boston, Massachusetts 02110; State
Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110; J. David Griswold, Frank Russell Investment
Management Company, 909 A Street, Tacoma, Washington 98402.
FOR FURTHER INFORMATION CONTACT:
Joseph G. Mari, Senior Special Counsel (202) 272-3030, or Barry D.
Miller, Senior Special Counsel, (202) 272-3018 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Investment Company is a Massachusetts business trust
registered under the Act as an open-end management investment company.
The Investment Company is a series company and consists of fourteen
separate funds, each of which has separate investment objectives and
policies (the ``Funds'').\1\ FRIMCo is the administrator, State Street
is the adviser, custodian, and transfer agent, and RFD is the
distributor of the Investment Company. The Funds consist of both money
market funds and funds with fluctuating net asset values, the shares of
which are sold and redeemed daily at net asset value without a sales or
redemption charge.
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\1\As used in the application, the term ``Fund'' includes funds
created by future investment companies.
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2. Applicants seek the requested relief on behalf of the Funds, and
all future investment companies that are advised by State Street and
that are in the same ``group of investment companies'' as defined in
rule 11a-3 under the Act.
A. Multi-Class System
1. Applicants propose to create a multi-class distribution system
(the ``Multi-Class System''). The Investment Company would be permitted
to offer an unlimited number of classes of additional classes of shares
(``New Shares'') in connection with (a) the existing distribution plan
adopted pursuant to section 12b-1 under the Act (the ``Distribution
Plan''); (b) a services plan adopted pursuant to rule 12b-1 under the
Act providing for certain shareholder services which may be in lieu of
or in addition to, the Distribution Plan (the ``Services Plan''); and/
or (c) a non-rule 12b-1 administrative plan (the ``Shareholder
Administrative Plan''); or (d) with No Distribution Plan, Services
Plan, or Shareholder Administrative Plan (collectively, the ``Plans'').
The New Shares would be subject to the same investment objective,
policies and limitations as the Investment Company's existing shares.
Applicants also propose to assess a CDSL on certain redemptions of
shares and to waive the CDSL under certain circumstances.
2. Regarding each class of New Shares, the Investment Company could
enter into a Services Plan agreement and/or a Shareholder
Administrative Plan agreement (the ``Plan Agreements'') with the
distributor and/or groups, organizations or institutions such as
banking organizations, broker-dealers, trade associations, membership
organizations, investment advisers and managers, financial planners and
pension plans (``Organizations'') concerning the provision of certain
services to the clients, members, or customers of such Organizations
who from time to time own New Shares which are offered in connection
with a particular class (``Class Shareholders'').
3. The services provided pursuant to the Plans will augment or
replace (and not be duplicative of) the services to be provided to the
Funds by FRIMCo, RFD and State Street. Applicants propose to
``unbundle'' the services to be provided to the Funds to permit
Organizations to select those services they wish to provide to their
Class Shareholders under the Plan Agreements, with the precise services
to be rendered to be tailored to their Class Shareholders' needs.
4. Regarding each class of New Shares, the applicable Fund would
pay the distributor and/or an Organization for its services and
assistance in accordance with the terms of its particular Plan
Agreement (the ``Plan Payments'') and the expense of such payments
would be borne entirely by the owners of the class of shares of the
Fund to which each Plan Agreement relates. Plan Payments will not
exceed the limits imposed under article III, section 26 of the Rules of
Fair Practice of the National Association of Securities Dealers
(``NASD'') for the class. To assure that the limit is not exceeded,
each Plan Agreement would include a ``cap'' or other similar provision
limiting the amount of Plan Payments payable under each Plan and across
all Plans.
5. Expenses of the Investment Company that cannot be attributed
directly to any one Fund will be allocated to each Fund based on the
relative net assets of such Fund. Expenses that may be attributable to
a Fund but not to a particular class will be allocated to a class based
on the relative percentage of net assets of such class. Each class will
bear certain expenses attributable specifically to such class, as set
forth in condition 1 below (``Class Expenses'').
6. New Shares of certain classes (``Class B Shares'') could convert
automatically into New Shares of another second class (``Class A
Shares'') at the end of a fixed period following the purchase of Class
B Shares (the ``Conversion Period''). New Shares purchased through the
reinvestment of dividends and other distributions paid regarding Class
B shares also will be Class B Shares. Such Class B Shares will convert
to Class A Shares on the earlier of the end of the Conversion Period
from the date of such reinvestment purchase, or the conversion date of
the most recently purchased Class B Shares which were not acquired
through the reinvestment of dividends or other distributions.
7. The conversion of Class B Shares to Class A Shares is subject to
the availability of an opinion of counsel or Internal Revenue Service
private letter ruling that the conversion of the Class B Shares does
not constitute a taxable event under federal income tax law. The
conversion of Class B shares to Class A shares may be suspended if such
a ruling or opinion no longer is available.
8. Fund shareholders generally will be limited to exchanging shares
for a similar class of shares of another Fund of the Investment
Company. Any exceptions to this policy will be disclosed in the
appropriate prospectuses, and in all events, the Investment Company's
exchange policy will comply with rule 11a-3 under the Act.
B. The CDSL
1. Applicants also propose to assess a CDSL on certain redemptions
of shares and to waive the CDSL under certain circumstances. The amount
of the CDSL will vary, depending on the length of time the shares have
been held. The CDSL typically will be 1%, but can range up to 8.5% on
shares redeemed within the first year of purchase. Applicants will
comply with article III, section 26 of the NASD's Rules of Fair
Practice, regarding any sales charges and asset-based distribution
charges. The CDSL may be reduced during the applicable CDSL period, so
that redemptions of shares held after that period would not be subject
to any CDSL. A CDSL will not be imposed on any shares issued prior to
the date of the order granting exemptive relief.
2. The CDSL would not be imposed on redemptions of shares that were
purchased in connection with the reinvestment of dividends.
Furthermore, no CDSL would be imposed on an amount which represents an
increase in the value of the shareholder's account resulting from
capital appreciation above the amount paid for the shares purchased
during the CDSL period. In determining whether a CDSL is applicable, a
redemption would be made first of shares derived from reinvestment of
distributions, second of shares derived from reinvestment of
distributions, second of shares purchased prior to the CDSL period, and
third, of shares purchased during the CDSL period. The amount of the
CDSL will be calculated as the lesser of the amount that represents a
specified percentage of the net asset value of the shares at the time
of purchase, or the amount that represents the percentage of the net
asset value of the shares at the time of redemption.
3. The CDSL would be waived (a) on redemptions following the death
or disability, as defined in section 72(m)(7) of the Internal Revenue
Code, of a shareholder, (b) in connection with distributions from an
individual retirement account or other qualified retirement plan
following death, total or permanent disability or reaching retirement
age, (c) on redemptions effected pursuant to a Fund's right to
liquidate a shareholder's account if the aggregate net asset value of
shares held in the account is less than the minimum account size, and
(d) in connection with shares sold to customers of State Street,
Trustees and officers of Investment Company, and employees and retirees
of State Street, RFD, and the Administrator.
Applicants' Legal Analysis
1. Applicants request an exemptive order pursuant to section 6(c)
of the Act to the extent the proposed issuance and sale of New Shares
might be deemed: (a) To result in a ``senior security'' within the
meaning of section 18(g) of the Act and to be prohibited by section
18(f)(1) of the Act, and (b) to violate the equal voting provisions of
section 18(i) of the Act.
2. The proposed allocation of expenses and voting rights relating
to the Plans in the manner described is equitable and would not
discriminate against any group of shareholders. The proposed
arrangement does not involve borrowing and does not affect a Fund's
existing assets or reserves; nor will it increase the speculative
character of the shares of a Fund, since all shares will participate
pro rata in all of the Fund's income and expenses, except for the
proposed Plan Payments and Class Expenses.
3. Since all shares of a Fund will be redeemable at all times;
since no class of shares will have any preference or priority over any
other class in the Fund in that no class will have distribution or
liquidation preferences regarding particular assets and no class will
be protected by any reserve or other account; and since the
similarities and differences of the shares will be disclosed fully in
the prospectus for each class of the Fund, investors will not be given
misleading impressions regarding the safety or risk of the shares, and
the nature of the shares will not be rendered speculative.
4. Applicants request an exemption from sections 2(a)(32),
2(a)(35), 22(c), and 22(d) of the Act and rule 22c-1 thereunder, to the
extent necessary to permit the Funds to assess a CDSL on certain
redemptions of shares, and waive the CDSL in certain instances.
5. Applicants submit that the proposed CDSL arrangement is fair,
consistent with the policy and provisions of the Act, and is in the
best interests of the shareholders upon whom it will be imposed. The
imposition of the CDSL will not prevent a redeeming shareholder from
receiving its proportionate share of the current net assets of fund or
class, but merely will defer the deduction of a sales charge and make
it contingent upon an event which may never occur. Additionally, the
deferral of the sales charge and its contingency upon the occurrence of
an event which may not occur, does not change the basis nature of this
charge, which is in every other respect a sales charge.
Applicants' Conditions
Applicants agree that the order of the Commission granting the
requested relief shall be subject to the following conditions.
A. Multi-Class System
1. Each class of shares of a Fund representing interests in the
same portfolio of investments of the Fund will be identical in all
respects, except for the differences related to: (a) The designation of
each class of shares of the Fund; (b) expenses assessed to a class
pursuant to the Plans; (c) certain Class Expenses for each class of
shares, which would be limited to: (i) transfer agent fees identified
by the transfer agent as being attributable 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) blue sky
registration fees incurred by a class of shares; (iv) SEC registration
fees incurred by a class of shares; (v) the expenses of the Investment
Company's administrator and other administrative personnel for services
required to support the shareholders of a specific class; (vi)
litigation or other legal expenses relating solely to a specific class
of shares (vii) trustees' fees incurred as a result of issues relating
to a specific class of shares; (viii) organizational expenses incurred
to establish a specific class of shares; and (ix) independent
accountants' fees related solely to a specific class of shares; (d)
voting rights as to matters exclusively affecting the class except as
provided in condition 15; (e) exchange privileges; and (f) the
conversion features of certain classes of New Shares. Any additional
incremental expenses not specifically identified above that are
subsequently identified and determined to be properly allocated to one
class of shares shall not be so allocated until approved by the SEC
pursuant to an amended order.
2. The trustees of the Investment Company, including a majority of
the trustees who are not interested persons of the Investment Company
(``independent trustees''), will approve the Multi-Class System. The
minutes of the meetings of the trustees regarding the deliberations of
he trustees with respect to the approvals 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 the Investment Company, the Funds, and shareholders.
3. The initial determination of the Class Expenses, if any, 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 of the Investment Company, including a majority of the
independent trustees. Any person authorized to direct the allocation
and disposition of monies paid or payable by a 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.
4. On an ongoing basis, the trustees, pursuant to their fiduciary
responsibilities under the Act and otherwise, will monitor the Funds
for the existence of any material conflicts among the interests of the
various 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 investment
adviser and distributor of the Investment Company will be responsible
for reporting any potential or existing conflicts to the trustees. If a
conflict arises, the investment adviser and the distributor, at their
own cost, will remedy such conflict, up to and including establishing a
new registered management investment company.
5. The Investment Company's distributor will adopt compliance
standards as to when each class of shares may be sold to particular
investors. Applicants will require all person selling shares of the
Investment Company to agree to conform to such standards.
6. The Shareholder Administrative 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.
7. The trustees will receive quarterly and annual statements
concerning the amounts expended under the Plans and the related Plan
Agreements 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 servicing of a particular class of
shares will be used to justify any distribution or servicing fee
charged to that class. Expenditures not related to the sale or
servicing of a particular class will not be presented to the trustees
to justify any fee attributable to that class. The statements,
including the allocation upon which they are based, will be subject to
the review and approval of the independent trustees in the exercise of
their fiduciary duties.
8. Dividends paid by a Fund regarding a class of shares will be
calculated in the same manner, at the same time, on the same day and
will be in the same amount as dividends paid by that Fund, except that
Plan Payments made by a class under its Plan and any Class Expenses
will be borne exclusively by the affected class.
9. The methodology and procedures for calculating the net asset
value and dividends/distributions of the various classes and the proper
allocation of expenses among the classes has been reviewed by an expert
(the ``Expert'') who has rendered a report to the applicants, which
report has been provided to the staff of the SEC, that such methodology
and procedures are adequate to ensure that such calculations and
allocations would 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 Investment Company that the calculations and allocations are being
made properly. The reports of the Expert will be filed as part of the
periodic reports filed with the SEC pursuant to sections 30(a) and
30(b)(1) of the Act and the work papers of the Expert with respect to
such reports, following a request by the Investment Company (which the
Investment Company agrees to provide), will be available for inspection
by the SEC staff upon the written request by a senior member of the
SEC's Division of Investment Management or a Regional Office of the
SEC. Authorized staff members would be 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 policies and procedures placed in
operation and tests of operating effectiveness'' as defined and
described in Statement of Auditing Standards No. 70 of the American
Institute of Certified Public Accountants (``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.
10. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends/distributions of the classes of shares
and the proper allocation of expenses among the classes of shares, and
this representation has been concurred with by the Expert in the
initial report referred to in condition 9 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 that
condition. Applicants will take immediate corrective action if the
Exert, or appropriate substitute Expert, does not so concur in the
ongoing reports.
11. The prospectuses of each class of a Fund will include 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.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the trustees with respect to the
Multi-Class System will be set forth in guidelines to be furnished to
the trustees.
13. A Fund will disclose the respective expenses, performance data,
distribution arrangements, services, fees, sales loads, CDSLs, and
exchange privileges (if any) applicable to each class of shares in
every prospectus, regardless of whether all classes of shares are
offered through each prospectus. A Fund will disclose the respective
expenses and performance data applicable to all classes 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 the Fund. To
the extent that any advertisement or sales literature describes the
expenses or performance data applicable to any class of shares of a
Fund, it will also disclose the respective expenses and/or performance
data applicable to all classes of shares of a Fund. The information
provided by applicants for publication in any newspaper, or similar
listing of a Fund's net asset value or public offering price, will
present each class of shares separately.
14. Any class of shares with a conversion feature will convert into
another class of shares on the basis of the relative net asset value of
the two classes, without the imposition of any sales load, fee or other
charge. After conversion, the converted shares will be subject to an
asset-based sales charge and/or service fee (as those terms are defined
in article III, section 26 of the NASD's Rules of Fair Practice), if
any, that in the aggregate are lower than the asset-based sales charge
and service fee to which they were subject prior to the conversion.
15. If a Fund implements any amendment to its rule 12b-1 plan with
respect to any class of shares (or, if presented to shareholders,
adopts or implements any amendment of a Shareholder Administrative
Plan) that would increase materially the amount that may be borne by
that class under the Plan (``Class A Shares'' for purposes of this
section), existing shares of another class (``Class B Shares'' for
purposes of this section) convertible into Class A Shares will stop
converting into Class A Shares unless the Class B shareholders, voting
separately as a class, approve the proposal. The trustees shall take
such action as is necessary to ensure that existing Class B Shares are
exchanged or converted into a new class of shares (``New Class A'' for
purposes of this section), identical in all material respects to Class
A as it existed prior to implementation of the proposal, no later than
such shares previously were scheduled to convert into Class A. If
deemed advisable by the trustees to implement the foregoing, such
action may include the exchange of all existing Class B Shares for a
new class (``New Class B'' for purposes of this section), identical to
existing Class B Shares in all material respects except that New Class
B will convert into New Class A. New Class A or New Class B may be
formed without further exemptive relief. Exchanges or conversions
described in this condition shall be effected in a manner that the
trustees reasonably believe will not be subject to federal taxation. In
accordance with condition 4 of this application, any additional cost
associated with the creation, exchange, or conversion of New Class A or
New Class B shares shall be borne solely by the adviser and the
distributor of the Investment Company. Class B Shares sold after the
implementation of the proposal may convert to Class A Shares subject to
the higher maximum amount, provided that the material features of the
Class A plan and the relationship of such plan to the Class B Shares
are disclosed in an effective registration statement.
16. Applicants acknowledge that the grant of the requested
exemptive order does not imply SEC approval, authorization of or
acquiescence in any particular level of payments that a Fund may make
pursuant to any Plan in reliance on the exemptive order.
B. The CDSL
Applicants expressly agree that they will comply with proposed rule
6c-10 under the Act, Investment Company Act Release No. 16619 (Nov. 2,
1988, as such rule is currently proposed and as it may be reproposed,
adopted or amended in the future.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-3552 Filed 2-15-94; 8:45 am]
BILLING CODE 8010-01-M