[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29356]
[[Page Unknown]]
[Federal Register: November 29, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20723; 812-9064]
The Charles Schwab Family of Funds, et al.; Notice of Application
November 22, 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 Charles Schwab Family of Funds, Schwab Investments,
Schwab Capital Trust, and Schwab Annuity Portfolios, on behalf of
themselves and all subsequent registered open-end management investment
companies advised by Charles Schwab Investment Management, Inc.
(collectively, the ``Funds''), and Charles Schwab Investment
Management, Inc. (the ``Adviser'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
exempting the Funds from sections 13(a)(2), 18(f)(1), 22(f), 22(g), and
23(a), and rule 2a-7, and exempting certain existing money market Funds
from section 13(a)(3); under sections 6(c) and 17(b) exempting the
Funds from section 17(a)(1); and pursuant to section 17(d) and rule
17d-1.
SUMMARY OF APPLICATION: Applicants seek an order (a) to permit the
Funds to enter into deferred fee arrangements with their trustees, and
(b) to permit the Funds and their participating trustees to effect
transactions incident to such deferred fee arrangements.
FILING DATES: The application was filed on June 23, 1994, and amended
on September 20, 1994, and November 7, 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 December 19,
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 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.
Applicants, 101 Montgomery Street, San Francisco, California 94104.
FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or Barry D. Miller,
Senior Special Counsel, 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 at the
SEC's Public Reference Branch.
Applicants' Representations
1. Each existing Fund is a registered open-end management
investment company and organized as a Massachusetts business trust.
Each Fund offers shares in one or more series. The Adviser serves as
investment adviser for the Funds. Charles Schwab & Co., Inc., an
affiliate of the Adviser, serves as the principal underwriter of the
Funds.
2. The board of trustees\1\ of each Fund currently consists of
seven persons, four of whom are not ``interested persons'' of any of
the Funds within the meaning of section 2(a)(19) of the Act. The
disinterested trustees are entitled to receive fees for their services
as trustees and members of the Funds' compliance committees.
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\1\The term ``trustee,'' as used herein, also refers to
directors of a Fund that is organized as a corporation.
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3. Applicants propose to implement deferred fee arrangements by
means of a plan (the ``Plan'') entered into by each Fund. The Plan
would permit the individual trustees who are not interested persons of
the Funds to elect to defer receipt of all or a portion of their
meeting and/or retainer fees to enable the trustees to defer payment of
income taxes on such fees, or for other reasons.
4. Under the Plan, the deferred trustees' fees will be credited to
a book reserve account established by the Fund as of the date such fees
would have been paid to the trustee. The value of the account will
equal the value the account would have had if the amounts credited to
it had been invested and reinvested in certain securities (the
``Underlying Securities''). The Underlying Securities will be shares of
any of the Funds designated by the participating trustee on his or her
election form.\2\
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\2\The trustees, however, are not eligible to purchase shares of
Schwab Annuity Portfolios, because only certain tax-advantaged
investors may invest in such shares.
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5. The total fees paid to each trustee will be de minimis in
relation to the size of each Fund, and will have no effect on net
assets and net income per share. The obligations of a Fund to make
payments from the accounts will be general unsecured obligations of the
Fund, and payments made pursuant to the Plan will be made from the
Fund's general assets and property. The relationship of a trustee to
the Fund with respect to a Fund's obligation to make payments under the
Plan will be only that of a general unsecured creditor. As a matter of
risk management, each Fund intends and, with respect to any money
market Fund that values its assets by the amortized cost method,
undertakes, to purchase and maintain the Underlying Securities in
amounts equal to the deemed investment of the accounts of its trustees.
6. Under the Plan, a trustee may specify that the deferred fees be
distributed in whole or in part beginning on the date the trustee
ceases to be a trustee of the Fund or another date that is at least
five years after the election to defer fees but not later than the date
he or she ceases to be a trustee of the Fund. Notwithstanding a
trustee's election, deferred fees shall be distributed upon (a) the
death of the trustee, (b) the dissolution, liquidation, or winding up
of the Fund, or the disposition of all of or substantially all of the
Fund's assets (unless the Fund's obligations under the Plan have been
assumed by a financially responsible party purchasing such assets), or
(c) the merger or consolidation of the Fund (unless, prior to such
merger or consolidation, the board of trustees determines that the Plan
shall survive the merger or consolidation).\3\
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\3\Applicants acknowledge that the requested order would not
permit a party acquiring a Fund's assets to assume a Fund's
obligations under the Plan if such assumption of obligations would
violate the Act. Accordingly, such assumption would be permitted
only if the assuming party is (1) another Fund, (2) another
registered investment company that has received exemptive relief
similar to that sought by the application, or (3) not a registered
investment company.
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7. Payments shall be made in a lump sum or in a number of quarterly
installments, not to exceed 40, elected by the trustee at the time of
entering into the Plan. Each quarterly payment will be made as of the
first day of each calendar quarter. Upon a showing by the trustee of
severe financial hardship resulting from an unanticipated emergency
caused by an event beyond the control of the trustee, the trustee may
receive all or part of his or her deferred fees in a single lump sum.
The trustee's right to receive payments will be nontransferable, except
that, in the event of a trustee's death, amounts payable to him or her
thereafter will be payable to his or her designated beneficiary.
8. The Plan will not obligate a Fund to retain the services of a
trustee, nor will it obligate a Fund to pay any particular level of
fees to any trustee.
9. The board of trustees may amend the Plan from time to time. Such
amendments will be limited to immaterial amendments or amendments made
in order to conform to any applicable laws.
10. The Funds will disclose the existence of the deferred
compensation arrangement pursuant to exemptive relief and explain that,
for this limited purpose, the money market Funds will be permitted to
invest in Underlying Securities without shareholder approval in the
section of the Statement of Additional Information where investment
policies are described.
Applicants' Legal Analysis
1. Applicants believe that the deferred fee arrangements will
enhance the ability of the Funds to attract and retain qualified
trustees. Applicants further believe that the proposed Plans are in the
best interests of the Funds and their shareholders, consistent with the
purposes fairly intended by the policy and provisions of the Act,
necessary and appropriate in the public interest, and consistent with
the protection of investors.
2. Section 18(f)(1) generally prohibits a registered open-end
investment company from issuing senior securities. Section 13(a)(2)
requires that any registered investment company obtain shareholder
authorization before issuing any senior securities not contemplated by
the policy recitals in its registration statement. Applicants contend
that the Plan possesses none of the characteristics of senior
securities that led Congress to enact these sections. All liabilities
for deferred fees will be offset by equal amounts of assets that would
not otherwise exist if the fees were paid on a current basis. The Plan
would not induce speculative investments by a Fund, provide
opportunities for manipulative allocation of the expenses and profits
of a Fund, affect control of a Fund, confuse investors, or convey a
false impression of safety.
3. Section 22(f) prohibits undisclosed restrictions on
transferability or negotiability of redeemable securities issued by
open-end investment companies. Applicants contend that any restrictions
created under the Plan clearly will be set forth in the Plan, are
included primarily to benefit the trustees, and will not adversely
affect the interests of any Fund or its shareholders.
4. Section 22(g) generally prohibits registered open-end investment
companies from issuing any of their securities for services or for
property other than cash or securities. Applicants assert that the
section primarily is concerned with the dilutive effect on the equity
and voting power that can result when securities are issued for
consideration that is not readily valued. Applicants submit that the
Plan will not have such effect. Applicants further assert that, while a
trustee would receive fees for services, such fees would be payable
independent of the Plan.
5. Section 13(a)(3) prohibits registered investment companies from
deviating without a shareholder vote from any investment policy that is
changeable only if authorized by shareholder vote or from any policy
recited in its registration statement pursuant to section 8(b)(3).
Applicants state that each existing money market Fund except Schwab
Value Advantage Money Fund has a fundamental restriction against
investing in securities of other investment companies, except in
connection with a merger, consolidation, reorganization, or acquisition
of assets. In addition, certain of the money market Funds have
fundamental investment policies or restrictions that limit (beyond the
requirements of rule 2a-7) the types of money market instruments
eligible for purchase. Applicants assert that these policies prevent
these money market Funds from achieving the matching of the Underlying
Securities with the deemed investments in the trustees' accounts.
Applicants submit that such matching is highly desirable because it
will ensure that the deferred fee arrangements will not affect the net
asset value of any Fund.\4\
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\4\The requested exemption from section 13(a)(3) would not be
available to any future money market Fund, and would be available
only to the following existing money market Funds: Schwab Money
Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury
Money Fund, Schwab Tax-Exempt Money Fund, Schwab California Tax-
Exempt Fund, Schwab Retirement Money Fund, Schwab Institutional
Advantage Money Fund, and Schwab Money Market Portfolio.
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6. Rule 2a-7 provides that the current price per share of any money
market Fund may be computed by using the amortized cost method or
penny-rounding method, provided that, among other things, the money
market Fund (a) limits its investments to securities with a remaining
maturity of 397 days or less and meet certain credit quality standards,
and (b) does not maintain a dollar-weighted average portfolio maturity
that exceeds 90 days. Applicants submit that exempting the money market
Funds from rule 2a-7 to permit them to invest in Underlying Securities
and exclude Underlying Securities in calculating the Fund's dollar-
weighted average maturity would permit the money market Funds in
question to achieve an exact matching of Underlying Securities with the
deemed investments of the accounts, thereby ensuring that the deferred
fee arrangements would not affect net asset value.
7. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company, or any affiliated person of such person,
from selling any security to such registered investment company.
Applicants assert that section 17(a)(1) was designed to prevent
sponsors of investment companies from using investment company assets
as capital for enterprises with which they were associated or to
acquire controlling interests in such enterprises. Applicants submit
that the sale of securities issued by the Funds pursuant to the Plan
does not implicate the concerns of Congress in enacting this section,
but merely would facilitate the matching of a series' liability for
deferred fees with the Underlying Securities that would determine the
amount of such liability.
8. Section 17(b) authorizes the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the 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, the transaction is consistent with the policies
of the registered investment company, and the transaction is consistent
with the general purposes of the Act. Applicants assert that the
proposed transaction satisfies the criteria of section 17(b).\5\
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\5\As described in paragraph 5 above, certain of the money
market Funds have policies that prevent them from purchasing shares
of other investment companies. The finding required by section
17(b)(2) is predicated on the assumption that relief is granted from
section 13(a)(3).
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9. Section 17(d) and rule 17d-1 generally prevent a registered
investment company's joint or joint and several participation with an
affiliated person in a transaction in connection with any joint
enterprise or other joint arrangement or profit-sharing plan on a basis
different from or less advantageous than that of the affiliated person.
Applicants assert that any adjustments made to the accounts to reflect
the income, gain, or loss on investments of the assets of a Fund would
be identical in amount to income, gain, and loss by other shareholders
in the Fund. A trustee would neither directly or indirectly receive a
benefit that otherwise would inure to the Funds or their shareholders.
Deferral of a trustee's fees in accordance with the Plan essentially
would maintain the parties, viewed both separately and in their
relationship to another, in the same position as if the fees were paid
on a current basis. When all payments have been made to a trustee, the
trustee will be, relative to the Funds, no better off than if he or she
had received deferred fees on a current basis and invested them in
share of the Underlying Securities.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. With respect to the requested relief from rule 2a-7, any money
market series that values its assets by the amortized cost method or
penny-rounding method will buy and hold Underlying Securities that
determine the performance of deferred fee accounts to achieve an exact
match between such series' liability to pay deferred fees and the
assets that offset that liability.
2. If a Fund purchases Underlying Securities issued by an
affiliated Fund, the purchasing Fund will vote such shares in
proportion to the votes of all other holders of shares of such
affiliated fund.
For the SEC, by the Division of Investment Management, under
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-29356 Filed 11-28-94; 8:45 am]
BILLING CODE 8010-01-M