[Federal Register Volume 59, Number 210 (Tuesday, November 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27041]
[[Page Unknown]]
[Federal Register: November 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No 20660; 812-8586]
The Galaxy Fund, et al.; Notice of Application
October 26, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANTS: The Galaxy Fund (the ``Trust''), Fleet Investment Advisors,
Inc. (the ``Advisers''), and Fleet Securities, Inc. (``Fleet
Securities'').
RELEVANT ACT SECTIONS: Exemption requested under sections 6(c), 10(f),
and 17(b) from sections 10(f) and 17(a).
SUMMARY OF APPLICATION: Applicants seek an order to let the Trust's
Rhode Island Municipal Bond Fund (the ``Portfolio'') purchase certain
debt securities issued by the State of Rhode Island from Fleet
Securities when such securities are underwritten solely by Fleet
Securities or when Fleet Securities is a member of the underwriting
syndicate. The order also would let the Portfolio purchase such
securities from a syndicate manager of an underwriting syndicate of
which Fleet Securities is a member when such securities are designated
as group sales.
FILING DATES: The application was filed on September 20, 1993, and
amended on February 10, 1994, May 6, 1994, and June 30, 1994.
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 November 21,
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 such notification by writing to
the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
The Trust, 440 Lincoln Street, Worcester, Massachusetts 01605-1959. The
Adviser, 45 East Avenue, Rochester, New York 14604. Fleet Securities,
14 Wall Street, 27th Floor, New York, New York 10005.
FOR FURTHER INFORMATION CONTACT: C. David Messman, Branch Chief, at
(202) 942-0564 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Trust is an open-end management investment company organized
as a Massachusetts business trust. The Portfolio is a series of the
Trust that has not yet commenced operations. The Adviser will act as
investment adviser to the Portfolio. The Adviser is a wholly-owned
subsidiary of Fleet Financial Group, Inc. (``Fleet Financial''), a
multi-bank holding company.
2. The Portfolio's investment objective is to seek as high a level
of current interest income exempt from federal income tax, and, to the
extent possible, from Rhode Island personal income tax, as is
consistent with relative stability of principal. To achieve this
objective, the Portfolio's assets will be invested in debt securities
of the State of Rhode Island, its political sub-divisions, authorities,
agencies, instrumentalities, and corporations, the interest on which is
exempt from Federal and Rhode Island personal income taxes (``Rhode
Island Tax-Exempt Securities''), and in debt securities of other
governmental issuers such as Puerto Rico, the interest on which is tax-
exempt.
3. Fleet Securities, a whooly-owned subsidiary of Fleet Financial,
is one of the top three underwriters in most types of Rhode Island Tax-
Exempt Securities based on both dollar volume and number of new issues.
From 1988 through 1993. Fleet Securities served as underwriter of
approximately $5.1 billion in principal amount of Rhode Island Tax-
Exempt Securities. This number represented approximately 57% of the
total dollar amount, and approximately 76% of the total number, of new
issues of Rhode Island Tax-Exempt Securities during those years.
4. Applicants assert that the supply of Rhode Island Tax-Exempt
Securities in the secondary market historically has been limited, both
as to the number of available issues and their size. Even when the
amount available in the secondary market is relatively high, many of
the issues available may be unsuitable for purchase by the Portfolio
due to their credit quality or other characteristics. Consequently,
applicants have an increased need to acquire Rhode Island Tax-Exempt
Securities in underwritten offerings.
5. Applicants request relief from: (a) section 17(a) to permit the
Portfolio to purchase Rhode Island Tax-Exempt Securities from Fleet
Securities when such securities are underwritten solely by Fleet
Securities; (b) sections 17(a) and 10(f) to permit the Portfolio to
purchase Rhode Island Tax-Exempt Securities from Fleet Securities when
Fleet Securities is a member of an underwriting syndicate; and (c)
sections 17(a) and 10(f) to permit the Portfolio to purchase Rhode
Island Tax-Exempt Securities from a syndicate manager when such
securities are designated as group sales. The requested order would not
permit principal transactions between Fleet Securities and the
Portfolio in other securities or for Rhode Island Tax-Exempt Securities
sold in the secondary market.
6. A ``group order'' is an order submitted to an underwriting
syndicate which benefits all members of the syndicate according to
their percentage participation in the syndicate. A group order may be
distinguished from a ``designated order,'' in which the investor
designates two or more members of the syndicate to retain that portion
of the commission not retained by the syndicate manger(s), and from a
``member order,'' in which an investor places an order directly with a
member of the syndicate that retains that portion of the commission not
retained by the manager. Group orders may be filled ``net'' (the
syndicate retains the entire commission) or ``less the concession'' (a
dealer who is not a member of the syndicate receives part of the
commission). An investor who places a ``group net order'' has no power
to designate particular members of the syndicate to receive that
portion of the commission not retained by the syndicate manager(s). If
an offering is oversubscribed, ``group net orders'' are the first
orders to be filled. Applicants believe that a significant portion of
all orders submitted for oversubscribed new issues of Rhode Island Tax-
Exempt Securities are submitted as group net orders. Consequently, the
Portfolio must be able to place group net orders to obtain its proper
share of oversubscribed new issues. ``Group sales'' result from group
orders.
7. Although the terms and conditions of a new issue of tax-exempt
securities may be negotiated between the issuer and the underwriters,
the market for Rhode Island Tax-Exempt Securities is very competitive
and the yield and price of the securities must be satisfactory to the
issuer as well as to potential purchasers to consummate an offering.
The issuer and the underwriters have access to current information
about comparable yields and prices commanded by contemporary new issues
of similar quality and maturity in Rhode Island and throughout the
country, and to information about yields and market prices of
outstanding Rhode Island Tax-Exempt Securities. Because the pricing of
each new issue is governed by the disciplines of yield and price that
exist in a competitive market, applicants believe that the pricing of
securities purchased in reliance on the requested order will be fair
notwithstanding the dominant position of Fleet Securities in the market
for Rhode Island Tax-Exempt Securities.
8. All the transactions conducted under the requested order will
comply with the provisions of rule 10f-3, other than paragraph (f). In
addition, the Adviser, Fleet Securities, Fleet Financial and any
affiliated persons thereof, and all other entities for which investment
decisions are made by the Adviser, Fleet Securities, Fleet Financial,
and/or affiliated persons thereof (``Related Purchasers'') will not in
the aggregate purchase more than the greater of 4% or $500,000, but in
no event more than 10%, of any class of an issue of Rhode Island Tax-
Exempt Securities purchased pursuant to the requested order. As a
result, any new issue of Rhode Island Tax-Exempt Securities will have
to be made on such terms and conditions, including the price, as are
acceptable in the new issue market.
Applicants' Legal Analysis
1. Section 2(a)(3) defines the term ``affiliated person of another
person'' to include, in relevant part, (a) any person directly or
indirectly controlling, controlled by, or under common control with
such other person; and (b) if such other person is an investment
company, any investment adviser thereof. Because Fleet Securities and
the Adviser are under the common control of Fleet Financial, they are
affiliated persons of each other within the meaning of section 2(a)(3).
2. Section 10(f), in relevant part, prohibits an investment company
from purchasing securities from an underwriting syndicate in which an
affiliate of the investment company's investment adviser acts as a
principal underwriter. Under section 10(f), the SEC may exempt any
transaction or class of transactions from the prohibitions of section
10(f) if such exemption is consistent with the protection of investors.
Rule 10f-3 permits purchases otherwise prohibited by section 10(f)
under certain conditions, including that the investment company does
not purchase the securities being offered directly from its affiliated
persons, and that as to municipal securities, purchases from a
syndicate manager are not designated as group sales or otherwise
allocated to the account of an affiliated person.
3. Section 17(a) provides, in relevant part, that it is unlawful
for any affiliated person of a registered investment company, or any
affiliated person of such person, acting as principal, knowingly to
sell any securities or other property to such registered investment
company. Section 17(b) provides that, notwithstanding section 17(a),
any person may file an application for an order exempting a proposed
transaction from the prohibitions of section 17(a). The SEC will grant
exemptive relief under section 17(b) if evidence establishes that the
terms of the proposed transaction, including the consideration to be
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned and that the proposed
transaction is consistent with the policy of each registered investment
company concerned and the general policies and purposes of the Act.
4. Under section 6(c), the SEC may exempt any person or transaction
from any provision of the Act or any rule thereunder 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 Act.
5. Applicants believe that the order will benefit the shareholders
of the Portfolio by providing the Portfolio with access to the new
issue market for Rhode Island Tax-Exempt Securities needed to insure
the availability of suitable portfolio securities. Applicants believe
that absent the requested relief, the Portfolio will not be able to
offer its shares to the public due to the limited availability of
suitable Rhode island Tax-Exempt Securities in the secondary market and
the substantial portion of new issues of Rhode Island Tax-Exempt
Securities which Fleet Securities alone underwrites or with respect to
which Fleet Securities participates as a member of the underwriting
syndicate.
6. The procedures to be followed with respect to the proposed
transactions are structured in such a way as to insure that the
transactions in all instances will be reasonable and fair and will not
involve overreaching on the part of any person concerned and that the
requested exemption is 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
Applicant's Conditions
Applicants agree to the following as conditions to the requested
order:
1. Principal transactions effected pursuant to the order will be
effected in accordance with all of the provisions of rule 10f-3 (other
than paragraph (f) thereof). Related Purchasers will not in the
aggregate purchase more than the greater of 4% or $500,000, but in no
event more than 10%, of any class of an issue of Rhode Island Tax-
Exempt Securities purchased pursuant to the requested order. If the
aggregate number of securities the Related Purchasers wish to acquire
exceeds this limit, the securities acquired will be allocated to each
Related Purchaser in the proportion that the number of securities that
such Related Purchaser wishes to acquire bears to the total number of
securities that all Related Purchasers wish to acquire.
2. Principal transactions may be effected only in Rhode-Island Tax-
Exempt Securities which at the time of purchase have one of the
following investment grade ratings from at least one nationally
recognized rating agency: (a) one of the two highest investment grade
ratings in the case of securities with remaining maturities of one year
or less; and (b) one of the top three investment grade ratings in the
case of securities with remaining maturities greater than one year.
3. Principal transactions effected pursuant to the order will be
limited so that no such transaction will be effected if, as a result,
the value of securities held by the Portfolio acquired pursuant to the
order would exceed 50% of the total net assets of the Portfolio.
4. Principal transactions will be effected pursuant to the order
only when the Rhode Island Tax-Exempt Securities acquired are otherwise
unavailable for purchase. If Fleet Securities is the sole underwriter
of the securities, this condition is automatically fulfilled because
there is no other potential seller. When Fleet Securities is a member
of an underwriting syndicate, the Adviser will observe the following
procedures to determine when the securities are unavailable from other
members of the syndicate. Initially, the Adviser will determine the
aggregate number of securities which the Related Purchasers wish to
acquire. Next, the Adviser will attempt to purchase as much of this
number as possible from members of the syndicate other than Fleet
Securities. After acquiring as many securities as possible from such
other members, the Adviser will attempt to purchase from Fleet
Securities the number of securities which the Related Purchasers wish
to acquire and have been unable to obtain from such other members. The
securities acquired from such other members will be allocated first to
the Portfolio to the extent of the number of securities it wishes to
acquire, or the number of securities it is entitled to acquire based
upon the relative needs of the Related Purchasers and the total number
of securities purchased from such other members and from Fleet
Securities, whichever is less.
5. When the Portfolio purchases Rhode Island Tax-Exempt Securities
from a syndicate manager of an underwriting syndicate of which Fleet
Securities is a member, the Portfolio will not (a) submit designated
orders to a syndicate manager which are allocated to Fleet Securities,
(b) submit group orders to a syndicate manager which designate Fleet
Securities to receive any portion of the commission, or (c) otherwise
allocate orders to Fleet Securities.
6. The personnel of Fleet Financial will not have any involvement
with respect to proposed transactions between the Portfolio and Fleet
Securities and will not attempt to influence or control in any way the
Adviser's placement of orders with Fleet Securities.
7. The exemption will be valid only so long as the Adviser and
Fleet Securities operate as separate entities within the holding
company framework of Fleet Financial with their own separate officers
and employees, separate capitalizations and separate books and records.
8. The legal departments of Fleet Securities and the Adviser will
prepare guidelines for personnel of Fleet Securities and the Adviser to
make certain that transactions conducted pursuant to the order comply
with the conditions set forth in the application and that the parties
generally maintain arm's length relationships. The legal departments
will periodically monitor the activities of Fleet Securities and the
Adviser to make certain that such guidelines and the conditions set
forth in the application are adhered to.
9. The trustees, including a majority of the independent trustees
of the Trust who are not ``interested persons'' of the Trust and have
no direct or indirect financial interest in the transaction, will
review no less frequently than quarterly each transaction conducted
pursuant to the order since the last review and will determine that the
terms of such transaction were reasonable and fair to the shareholders
of the Portfolio and did not involve overreaching of the Portfolio of
its shareholders on the part of any person concerned. In considering
whether the price paid for the security was reasonable and fair, the
price of the security will be analyzed with respect to comparable
transactions involving similar securities being purchased or sold
during a comparable period of time.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27041 Filed 10-31-94; 8:45 am]
BILLING CODE 8010-01-M