[Federal Register Volume 59, Number 34 (Friday, February 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3763]
[[Page Unknown]]
[Federal Register: February 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20070; 812-8384]
IDS Bond Fund, Inc., et al.; Notice of Application
February 14, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: IDS Bond Fund, Inc., IDS California Tax-Exempt Trust, IDS
Discovery Fund, Inc., IDS Equity Plus Fund, Inc., IDS Extra Income
Fund, Inc., IDS Federal Income Fund, Inc., IDS Global Series, Inc., IDS
Growth Fund, Inc., IDS High Yield Tax-Exempt Fund, Inc., IDS
International Fund, Inc., IDS Investment Series, Inc., IDS Managed
Retirement Fund, Inc., IDS Market Advantage Series, Inc., IDS New
Dimensions Fund, Inc., IDS Precious Metals Fund, Inc., IDS Progressive
Fund, Inc., IDS Selective Fund, Inc., IDS Special Tax-Exempt Series
Trust, IDS Stock Fund, Inc., IDS Tax-Exempt Bond Fund, Inc., IDS
Utilities Income Fund, Inc. (each series is referred to as a ``Front-
End Load Fund''), IDS Money Market Series, Inc. and IDS Tax-Free Money
Fund, Inc. (each series is referred to as a ``Money Market Fund''), IDS
Strategy Fund, Inc. (each series is referred to as a ``Back-End Load
Fund'') (collectively, the ``Funds''), and IDS Financial Corporation
(``IDS'' or the ``Investment Manager'') and IDS Financial Services Inc.
(``IDS Financial'' or the ``Distributor'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption 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 request an order that would
supersede two prior orders that permit some of the Funds to assess and,
under certain circumstances, waive a contingent deferred sales charge
(``CDSC'') on certain redemptions of shares. The present order would
(1) expand the investment companies eligible to assess a CDSC, and (2)
permit the Funds to issue multiple classes of shares representing
interests in the same portfolio of securities.
FILING DATES: The application was filed on May 6, 1993, and amended on
October 1, 1993, and December 15, 1993. Applicants have agreed to file
an additional amendment, the substance of which is incorporated herein,
during the notice period.
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 14, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC
20549; Applicants, Laura M. Moret, IDS Financial Corporation, IDS Tower
10--Unit 52, Minneapolis, Minnesota 55440.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 272-3809 or Robert A.
Robertson, Branch Chief, at (202) 272-3030 (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. Each Fund is an open-end management investment company
registered under the Act. The Funds currently have different
distribution structures. Shares of the Back-End Load Funds are offered
to investors subject to a CDSC and distribution fees adopted pursuant
to rule 12b-1 under the Act. Shares of the Front-End Load Funds are
offered to investors subject to a front-end sales load and rule 12b-1
fees that are lower than those applicable to the Back-End Load Funds.
2. Each Fund has entered into or will enter into an investment
management agreement with IDS pursuant to which IDS provides investment
management services. Each Fund also has entered into or will enter into
a distribution agreement with IDS Financial pursuant to which IDS
Financial Acts as principal underwriter for the Fund.
3. Applicants request an exemption that would permit the Funds (a)
to issue multiple classes of shares representing interests in the same
portfolio of securities and (b) to assess and, under certain
circumstances, waive a CDSC on certain redemptions of shares. The order
would supersede two prior orders that permit some of the Funds to
assess and, under certain circumstances, waive a CDSC.\1\ Applicants
also request that any relief apply to any open-end management
investment company or series within those companies that are advised by
IDS and in the same ``group of investment companies'' with the Funds,
as defined in rule 11a-3, that operate in a manner identical in all
material respects to that of the Funds.
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\1\Investors Mutual, Inc. et al. Investment Company Act Releases
Nos. 13906 (April 26, 1984) (notice) and 13974 (May 31, 1984)
(order), and IDS Financial Corporation, et al. Investment Company
Act Releases Nos. 17059 (July 10, 1989) (notice) and 17099 (August
4, 1989) (order).
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A. The Multiple Pricing System
1. Applicants propose to establish multiple distribution
arrangements (the ``Multiple Pricing System'') using different classes
of shares within the same Fund. Under the Multiple Pricing System, each
Fund, except the Money Market Funds, will offer investors the option of
purchasing shares with a front-end sales load and a rule 12b-1 service
fee of up to .25% of the average daily net asset value (``Class A
shares'' or the Front-End Load Option''). Certain large purchasers of
Class A shares and participants in qualified plans purchasing Class A
shares will not be subject to a front-end sales load but will be
subject to a CDSC not to exceed 4%. The CDSC will be eliminated in
plans with more than 100 participants or plan assets of more than $1
million. In addition, each Fund will offer investors the option of
purchasing shares with a CDSC, an annual distribution charge of up to
.75% of average daily net assets and an annual service fee of up to
.25% of average daily net assets under a rule 12b-1 plan (``Class B
shares'' or the ``Deferred Option''). Some Funds will offer Class C
shares that will be offered without imposition of either a sales load,
distribution charge, or service fee (``Class C shares''). Class C
shares will be offered exclusively to participants and trustees in
employee benefits plans which meet minimum requirements, and to certain
investors that will be specified in a Fund's prospectus. The Money
Market Funds will offer one class of shares, which may have a service
fee.
2. Applicants request the authority to create additional classes
that may differ from Class A, Class B, and Class C shares only in the
following respects: (a) the impact of the disproportionate payments
made under the rule 12b-1 distribution plan; (b) the impact of the
disproportionate payments made because of a non-rule 12b-1 service fee;
(c) any different expenses for each class of shares (``Class
Expenses''), which are set forth in condition 1 below; (d) the fact
that the classes will vote separately with respect to the Fund's rule
12b-1 distribution plan; (e) the different exchange privileges of the
classes; and (f) the designation of each class.
3. Class B shares will have a conversion feature providing for
automatic conversion to Class A shares after a certain holding period
of up to eight years. Upon the expiration of the holding period, Class
B shares (except those purchased through the reinvestment of dividends
and other distributions paid in respect of Class B shares of that Fund)
will automatically convert to Class A shares of the Fund at the
relative net asset values of each of the classes. Shares purchased
through the reinvestment of dividends and other distributions paid in
respect of Class B shares are also Class B shares. However, for
purposes of conversion to Class A, all Class B shares in a
shareholder's Fund account that were purchased through the reinvestment
of dividends and other distributions paid in respect of Class B shares
(and that have not converted to Class A shares as provided in the
following sentence) will be considered to be held in a separate sub-
account. Each time any Class B shares in the shareholder's Fund account
(other than those in the sub-account referred to in the preceding
sentence) convert to Class A, a pro-rata portion of Class B shares then
in the sub-account will also convert to Class A. The portion will be
determined by the ratio that the shareholder's Class B shares
converting to Class A bears to the shareholder's total Class B shares
not acquired through dividends and distributions.
4. Applicants contemplate that Class A shares of a Fund will be
exchangeable only for Class A shares of the other Funds, except for
Class A shares of the Money Market Funds which may be exchanged for
Class B shares at the request of the shareholder. Class B shares of a
Fund will be exchangeable only for Class B shares of the other Funds.
Class C shares of a Fund will be exchangeable only for Class C shares
of the other Funds. The exchange privileges will comply with rule 11a-3
under the Act.
5. Under the Multiple Pricing System, the net asset value of each
class will reflect the expenses allocated to it. All expenses incurred
by a Fund will be allocated based on the relative net asset values of
each class, except to the extent that each class's net asset value and
expenses will reflect the expenses of rule 12b-1 plans and any Class
Expenses.
B. The CDSC
1. Applicants also request an exemption to permit the Funds to
assess a CDSC on certain redemptions of Class B shares, and waive the
CDSC with respect to certain types of redemptions. The CDSC will be
imposed by each Fund on a redemption of Class B shares during a
specified period up to eight years. In determining the applicability
and rate of any CDSC, it will be assumed that a redemption is made
first of amounts representing capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions,
and finally of other shares held for the longest period of time. This
will result in the charge, if any, being imposed at the lowest possible
rate.
2. The amount of the CDSC charged to a Class B shareholder of a
Fund will depend on the number of years that have elapsed since the
shareholder made the purchase payment from which an amount is being
redeemed. Any changes in CDSC amounts, rates of reduction or the CDSC
period will be reflected in the prospectus of the affected Fund, and
the change will not adversely affect shares that were issued prior to
the date of the change. The sum of any front-end sales charge, asset
based sales charge, and CDSC will not exceed the maximum sales charge
provided for in Article III, Section 26 of the Rules of Fair Practice
of the NASD.
3. The CDSC for Class B will be waived on redemptions of shares:
(1) In the event of the shareholder's death; (2) held in IRAs and
qualified plans for which IDS Acts as custodian, such as Keogh plans,
tax-sheltered custodial accounts or corporate pension plans if the
shareholder is at least 59\1/2\ years old, and the redemption is not
part of a custodian-to-custodian transfer (unless a taxable retirement
distribution), or if the redemption is part of an approved
``substantially equal periodic payment'' arrangement; or (3) held in a
trusteed employee benefit plan.
4. Class A shareholders who are participants in qualified plans
with the daily transfer recordkeeping service also maybe charged a CDSC
on certain redemptions. In no event will the CDSC exceed 4% of the
purchase payments made by the shareholder. The CDSC for Class A will be
eliminated for plans with more than $1 million in plan assets or more
than 100 participants.
5. Class A shareholders who invest or who have aggregate
investments in the Funds of $1 million or more may purchase Class A
shares without paying a front-end sales load. If that investment is
redeemed in the first two years after purchase, a CDSC of 1% may be
imposed on the redemption.
6. The CDSC for Class A shares will be waived: (1) In the event of
the shareholder's death; (2) in connection with lump-sum or other
distributions following retirement or attaining age 59\1/2\, and the
redemption is not part of a custodian-to-custodian transfer (unless a
taxable retirement distribution), or if the redemption is part of an
approved ``substantially equal periodic payment'' agreement; or (3)
with respect to loans or hardship withdrawals.
7. The CDSC for the additional classes of shares may be different
than the one described for Classes A and B, but will be calculated in
the same manner.
Applicants' Legal Analysis
1. Applicants request an exemption under section 6(c) of the Act
from sections 18(f)(1), 18(g), and 18(i) to the extent the Multiple
Pricing System may result in a senior security, as defined by section
18(g), the issuance and sale of which would be prohibited by section
18(f)(1), and to the extent the allocation of voting rights under the
Multiple Pricing System may violate the provisions of 18(i). Applicants
believe that the Multiple Pricing System does not raise any of the
legislative concerns that section 18 was designed to ameliorate. The
proposal does not involve borrowings and does not affect the Funds'
existing assets or reserves. Applicants believe that the proposed
allocation of expenses and voting rights relating to the rule 12b-1
plans in the manner described above is equitable and would not
discriminate against any group of shareholders.
2. Applicants also request an exemption under section 6(c) from
sections 2(a)(32), 2(a)(35), 22(c), and 22(d) of the Act and rule 22c-1
thereunder to assess and, under certain circumstances, waive a CDSC on
redemptions of shares. Applicants believe that the imposition of the
CDSC is fair and in the best interests of their shareholders because it
applies only to amounts representing purchase payments and does not
apply to amounts representing increases in the value of an investor's
account through capital appreciation or to amounts representing
reinvestment of distributions.
Applicant's Conditions
Applicants agree that any order 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 the Fund, and be identical in all respects,
except as set forth below. The only differences among the classes of
shares of the Fund will relate solely to: (a) the impact of the
disproportionate payments made under the rule 12b-1 distribution plan;
(b) the impact of the disproportionate payments made because of a non-
rule 12b-1 service fee; (c) any different Class Expenses which are
limited to: (i) Any transfer agency fees identified by the transfer
agent as being attributable to a specific class; (ii) printing and
postage expenses related to preparing and distributing materials such
as shareholder reports, prospectuses, and proxies to current
shareholders; (iii) Blue Sky registration fees incurred by a class of
shares; (iv) Commission registration fees incurred by a class of
shares; (v) the expenses of administrative personnel and services as
required to support the shareholders of a specific class; (vi)
litigation or other legal expenses relating solely to one class of
shares; (vii) fees and expenses of members of boards incurred as a
result of issues relating to one class of shares; (viii) costs relating
to obtaining shareholder approval of a rule 12b-1 plan for a class or
an amendment to a rule 12b-1 plan; (ix) and any other incremental
expenses subsequently identified that should be properly allocated to
one class which shall be approved by the Commission pursuant to an
amended order; (d) the fact that the classes will vote separately with
respect to the Fund's rule 12b-1 distribution plan, except as provided
in condition 15 below; (e) the different exchange privileges of the
classes of shares; and (f) the designation of each class of shares of
the Fund.
2. The members of the board of each Fund, including a majority of
the independent board members, shall have approved the Multiple Pricing
System. The minutes of the meetings of the board of the Fund regarding
the deliberation of the board with respect to the approvals necessary
to implement the Multiple Pricing System will reflect in detail the
reasons for determining that the proposed Multiple Pricing System is in
the best interests of the Fund and its shareholders.
3. The initial determination of the Class Expenses that will be
allocated to a particular class of a Fund and any subsequent changes
thereto will be reviewed and approved by a vote of the board of the
affected Fund, including a majority of the independent board members.
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, and the board shall review, at least quarterly, a written
report of the amounts so expended and the purpose for which the
expenditures were made.
4. On an ongoing basis, the members of the boards of each of the
Funds, pursuant to their fiduciary responsibilities under the Act and
otherwise, will monitor each Fund for the existence of any material
conflicts among the interests of the various classes of shares. The
members of the boards of each Fund, including a majority of the
independent board members, shall take such action as is reasonably
necessary to eliminate any conflicts that may develop. The Investment
Manager and the Distributor will be responsible for reporting any
potential or existing conflicts to the members of the boards. If a
conflict arises the Investment Manager and the Distributor at their own
costs will remedy the conflict up to and including establishing a new
registered management investment company.
5. The shareholders 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.
6. The members of the boards of the Funds will receive quarterly
and annual Statements concerning distribution 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 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 specific class
of shares will not be presented to the members of the boards to support
rule 12b-1 fees charged to shareholders of that class of shares. The
Statements, including the methods of allocations upon which they are
based, will be subject to the review and approval of the independent
board members in the exercise of their fiduciary duties.
7. Dividends paid by a Fund with respect to each class of shares,
to the extent any dividends are paid, will be calculated in the same
manner, at the same time and on the same day and will be in the same
amount, except for fee payments made under the rule 12b-1 plans and any
Class Expenses.
8. 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 various classes has been reviewed by
an independent examiner. The independent examiner has rendered a report
to applicants which has been provided to the staff of the Commission,
filed as exhibit E to the application stating that the methodology and
procedures are adequate to ensure that the calculations and allocations
will be made in an appropriate manner. On an ongoing basis, the
independent examiner, or an appropriate substitute independent
examiner, will monitor the manner in which the calculations and
allocations are being made and, based upon this review, will render at
least annually a report to the Funds that the calculations and
allocations are being made properly. The reports of the independent
examiner shall be filed as part of the periodic reports filed with the
Commission pursuant to sections 30(a) and 30(b)(1) of the Act. The work
papers of the independent examiner with respect to these reports,
following a request by the Funds that the Funds agree to make, will be
available for inspection by the Commission's staff upon the written
request for these work papers by a senior member of the Division of
Investment Management, 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 independent examiner is a
``report on policies and procedures placed in operation'' and ongoing
reports will be ``reports on policies and procedures placed in
operation and tests of operating effectiveness'' as defined and
described in SAS No. 70 of 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.
9. The applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends/distributions among the several classes
of shares and the proper allocation of expenses among the several
classes of shares and the independent examiner has concurred with this
representation in the initial report referred to in condition (7) above
and the Funds will be concurred with by the independent examiner, or an
appropriate substitute independent examiner, 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 independent examiner, or
appropriate substitute independent examiner.
10. The prospectuses of the Funds will include a statement to the
effect that a financial planner and any other person entitled to
receive compensation for selling or servicing shares of the Funds may
receive a different amount of compensation for selling one particular
class of shares of the Fund over another.
11. The Distributor will adopt compliance standards as to when
shares of a particular class may be sold to particular investors. The
applicants will require all persons selling shares of the Funds to
agree to conform to these standards.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the members of the Boards of the
Funds with respect to the Multiple Pricing System will be furnished to
the members of the Boards.
13. Each Fund will disclose in its prospectus the respective
expenses, performance data, distribution arrangements, services, fees,
sales loads, deferred sales loads, conversion features and exchange
privileges applicable to each class of shares in every prospectus,
regardless of whether all classes of shares are offered through each
prospectus. The 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 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 any advertisement or sales literature describes the expenses or
performance data applicable to any class of shares, it will disclose
the expenses and/or performance data applicable to all classes of
shares. The information provided by applicants for publication in any
newspaper or similar listing of the Funds' net asset values and public
offering prices will separately present each class of shares.
14. Applicants acknowledge that the grant of the exemptive order
requested by this application will not imply Commission approval,
authorization or acquiescence in any particular level of payments that
the Funds may make pursuant to rule 12b-1 plans in reliance on the
exemptive order.
15. Any class of shares with a conversion feature will convert into
another class of shares on the basis of the relative net asset values
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 ART III Sec. 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.
16. If a Fund implements any amendment to its rule 12b-1 plan or,
if presented to shareholders, adopts or implements any amendment of a
non-rule 12b-1 shareholder services plan that would increase materially
the amount that may be borne by the Target Class (the class into which
the shares of another class convert) shares under the plan, existing
Purchase Class (the class from which shares convert) will stop
converting into Target Class shares unless the Purchase Class
shareholders, voting separately as a class, approve the proposal. The
members of the board shall take such action as is necessary to ensure
that existing Purchase Class shares are exchanged or converted into a
new class of shares (``New Target Class''), identical in all material
respects to Target Class shares as they existed prior to implementation
of the proposal, no later than such shares previously were scheduled to
convert into Target Class shares. If deemed advisable by the members of
the board to implement the foregoing, such action may include the
exchange of all existing Purchase Class shares for a new class (``New
Purchase Class''), identical to existing Purchase Class shares in all
material respects except that New Purchase Class shares will convert
into New Target Class shares. New Target Class or New Purchase Class
shares may be formed without further exemptive relief. Exchanges or
conversions described in this condition shall be effected in a manner
that the members of the board reasonably believe will not be subject to
federal taxation. In accordance with Condition 4, any additional cost
associated with the creation, exchange, or conversion of New Target
Class or New Purchase Class shares shall be borne solely by the
Investment Manager and the Distributor. Purchase Class shares sold
after the implementation of the proposal may convert into Target Class
shares subject to the higher maximum payment provided that the material
features of the Target Class plan and the relationship of such plan to
the Purchase Class shares are disclosed in an effective registration
statement.
17. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act (see Investment Company Release No. 16619) (Nov. 2,
1988), as such rule is currently proposed and as it may be reproposed,
adopted or amended.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-3763 Filed 2-17-94; 8:45 am]
BILLING CODE 8010-01-M