4 MAY 1994 

Our Ref. No. 94-256-CC 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Century Shares Trust 

DIVISION OF INVESTMENT MANAGEMENT File No. 811-19 

Your letter of May 3, 1994 requests assurances that we would 

riot recommend enforcement action to the Commission pursuant to 

Rule 17d-1 under the Investment Company Act of 1940 (the 

"Investment Company Act") if, as described in your letter, 

Century Shares Trust, a registered investment company (the 

"Trust"), externalizes its management and investment advisory 

services in reliance on the exception for investment advisory 

contracts contained in Rule 17d-1(c). 

You state that the Trust currently is internally managed 

under the direction of five trustees. The day-to-day decisions 

concerning operations and changes in the Trust's portfolio are 

made by two of the trustees, Mr. Allen W. Fulkerson, the 

Chairman, President, and Managing Trustee, and Mr. William W. 

Dyer, Jr., Vice President. The remaining three trustees are not 

interested persons of the Trust within the meaning of section 

2(a) (19) of the Investment Company Act. 

You state that, following the proposed externalization, 

Boston Insurance Investors, Inc., which will change its name to 

Century Capital Management, Inc., will serve as the Trust's 

investment adviser (the "Adviser").l./ Under the proposed 

advisory agreement (the "Agreement"), the Adviser will receive a 

fee, payable monthly, equal to 1/12 of the sum of 0.7% of the 

first $250 million, and 0.6% of amounts exceeding $250 million, 

of the net asset value of the Trust at the end of that month. 

You represent that the Adviser will not propose any change 

in the method of computing the advisory fee during the first 

three years after the effective date of the Agreement. In 

addition, you represent that the Adviser's initial stockholders 

have no present intention of selling any of their stock in the 

Adviser. Moreover, you represent that the Adviser will be 

obligated for a period of five years from the effective date of 

the Agreement to repurchase for book value (which would exclude 

any value attributable to the Agreement) all of the stock of any 

stockholder that is employed by the Adviser upon the voluntary 

termination of that stockholder's employment. 

You also represent that, if any stockholder of the Adviser 

sells any stock of the Adviser within three· years from the 

effective date of the Agreement, otherwise than as a result of 

1/ The Adviser is presently the investment adviser to a limited 

partnership. Mr. Fulkerson and Mr. Dyer will together own 

90% of the capital stock and all of the voting stock of the 

Adviser. Mr. Richard F. Cook, Jr., who is the Secretary of 

the Trust, will own the remaining 10% of the non-voting, 

capital stock. 
2
 

the death or disability of Mr. Fulkerson or Mr. Dyer, the selling 

stockholder will pay to the Trust a percentage of his "sale 

profit" in accordance with the following formula (the "Recapture 

Formula"): (a) 100% of any sale profit if the sale occurs during 

the first year of the Agreement; (b) 66 2/3% of any sale profit 

if the sale occurs in the second year; and (c) 25% of any sale 

profit if the sale occurs in the third year.2/ You state that 

the Recapture Formula would not apply to any merger, acquisition, 

affiliation, or other restructuring designed to expand or 

strengthen the Adviser's activities (collectively, a 

"Restructuring"), in which the Adviser's stockholders dispose of 

any of their shares of the Adviser, as long as the Adviser's 

stockholders do not receive cash or other readily marketable 

consideration. The Recapture Formula would apply, however, if, 

within three years of the effective date of the Agreement, the 

Adviser's stockholders receive cash or other readily marketable 

consideration in connection with a Restructuring, or if they 

receive non-cash or non-marketable consideration but subsequently 

exchange that consideration for cash or marketable consideration. 

You state that, after the proposed externalization, the 

Trust's trustees will retain control of the Trust's operations. 

The Trust will establish an audit committee and trustees' 

nominating committee, both to be composed exclusively of 

disinterested trustees. The trustees will continue to hold 

quarterly meetings to review the Trust's affairs, including the 

Adviser's monthly statements detailing transactions in shares of 

the Trust and changes in the Trust's portfolio. The proxy 

material of the Trust will be prepared under the supervision of 

the disinterested trustees. The disinterested trustees will also 

review from time to time the pOlicies and practices of the 

Adviser with respect to brokerage allocation. 

You state that the Adviser will not undertake any other 

conflicting duties of loyalty that would affect its prior 

fiduciary duty to the Trust. For a period of five years from the 

effective date of the Agreement, the Adviser will give the Trust 

advance notice in writing of any proposed undertaking by it of 

2./ You state that "sale profit" is defined as an allocated 

portion of the excess of (A) the net proceeds derived from 

the sale, over (B) the book value of the Adviser 

attributable to the shares sold, less any cumulative 

operating loss incurred by the Adviser after the effective 

date of the Agreement. The "allocated portion" of the 

result obtained by applying the above formula would be that 

portion of the excess value that is fairly attributable to 

the Agreement with the Trust, as distinct from being 

attributable to income from other activities of the Adviser. 

The allocation would be proposed initially by the Adviser 

and approved by th~"9~sinterested trustees of the Trust. 
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material significance (including obtaining any new clients) and 

will provide to the Trust all information relevant to a 

determination of the effect of this undertaking on the Adviser's 

ability to carry out its obligations to the Trust under the 

Agreement. You also represent that the proposed externalization 

will not result in a material increase in the Trust's total 

operating expenses. 

You state that the externalization proposal and Agreement 

have been evaluated and recommended as being fair and reasonable 

and in the best interests of the Trust and its stockholders by 

two of the independent trustees, who were advised by independent 

legal counsel. On the basis of their recommendation, the 

trustees have unanimously voted to authorize the Agreement and to 

submit it to the Trust's stockholders for approval. 

You state that the principal reason for the proposed 

transaction is the trustees' belief that an external adviser will 

have greater success than the Trust in attracting and retaining 

talented personnel through the Adviser's ability to offer 

compensation incentives, including equity participation, in an 

independent entity. You also state that the trustees have been 

influenced by their belief that compliance by the Trust with 

Federal and state securities laws will involve less interpretive 

review and be less costly if the Trust is externally managed, 

because the regulatory framework governing investment companies 

has largely evolved in relation to externally managed funds. 

Rule 17d-1(a) generally prohibits an affiliated person of a 

registered investment company from participating in or effecting 

any transaction in connection with any joint enterprise or other 

joint arrangement in which the registered investment company is a 

participant, without the prior approval of the Commission. Rule 

17d-l(c), however, excepts from the definition of "joint 

enterprise or other joint arrangement" an "investment advisory 

contract sUbject to section 15 of the Act." The staff previously 

has taken the position that the externalization of the advisory 

and management functions of an internally managed investment 

company will qualify for the exception in Rule 17d-1(c) provided 

that there is no: (1) shift in control of the day-to-day 

management of investment company affairs from its board of 

directors to an external advisory entity; (2) transfer of value 

from the investment company to the new advisory entity; or (3) 

acquisition by an affiliate of the investment company of an 

ownership interest in, or an employment interest involving 

material compensation with, the new investment adviser that 

places upon the affiliate new fiduciary duties that may conflict 
4 

with existing fiduciary duties of loyalty to the investment 

company.J.../ 

We would not recommend enforcement action to the Commission 

if the Trust, in reliance on Rule 17d-1(c), externalizes its 

investment advisory and management services, as described in your 

letter. Because our position is based on the facts and 

representations in your letter, you should note that any 

different facts or representations might require a different 

conclusion. Further, this response expresses the Division's 

position on enforcement action only and does not express any 

legal conclusions on the questions presented. Finally, having 

stated the requirements for an internally managed investment 

company to externalize its investment advisory and management 

services in reliance on Rule 17d-1(c), we will no longer respond 

to requests for no-action relief in this area unless they present 

novel or unusual ·ssues. 

Edward J.
 

Attorney
 

J.../	 See National Aviation & Technology Corporation (pub. avail. 

Feb. 16, 1979). See also The California Muni Fund and the 

New York Muni Fund (pub. avail. Nov. 28, 1986); Equity 

strategies Fund, Inc. (pub. avail. Jun. 3, 1986). 
1940 Act/Rule 17d-l 

PALMER & DODGE 

One Beacon Street
 

Boston. Massachusetts 02108
 

Roben P. Moncreiff Telephone: (617) 573-0100 

(617) 573-0290 Facsimile: (617) 227-4420 

May 3, 1994 

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Division of Investment Management 

Securities and Exchange Commission 

... 

450 Fifth Street 

Washington, D.C. 20549 

Dear Sirs: (Century Shares Trust - File No. 811-19) 

We are acting as counsel for Century Shares Trust (the "Trust"), a business trust 

organized under the laws of Massachusetts pursuant to a Declaration of Trust dated March 1, 

1928, as amended, which operates as a diversified open-end management investment 

company under the Investment Company Act of 1940 (the "Act"). In that capacity, we 

respectfully request your confrrmation that you will not recommend action to the Securities 

and Exchange Commission if the Trust externalizes its management by entering into an 

Investment Advisory and Management Services Agreement (the "Agreement") with a 

Massachusetts corporation presently named Boston Insurance Investors, Inc., whose name 

will be changed to Century Capital Management, Inc. (the "Adviser"), without the filing of 

an application for an order pursuant to Rule 17d-l under the Act. 
In our opinion, based on the facts stated below, implementation of the Trust's plan of 

externalization does not require an application and order under Rule 17d-l because the 

proposed Agreement is an "investment advisory contract" within the meaning of subsection 

(c) of the Rule and thus exempt from the definition of "joint enterprise" contained in that 

subsection. 

I. Facts 

The Trust 

The Trust has operated continuously since 1928 as a diversified open-end management 

company with the investment objective of achieving long-term growth of principal and 

income through investment in a diversified portfolio of common stocks, or securities 

convertible into common stocks, of insurance companies and banks. As of April 29, 1994, 

the Trust had approximately 16,100 stockholders of record and net assets of approximately 

$215 million. At the same date, approximately 92 % of the value of its equity portfolio was 

represented by stocks of insurance companies and the balance by bank stocks. 

The Trust is currently managed under the direction of five Trustees. New trustees are 

elected by the Trustees in accordance with the Declaration of Trust without shareholder 

approval as permitted by Section 16(c) of the Act for a common-law trust existing on the 

date of enactment of the Act. The day-to-day decisions concerning operations and changes in 

the Trust's portfolio are made by two of the Trustees: Allan W. Fulkerson, the Chairman, 

President and Managing Trustee, and William W. Dyer, Jr., Vice President. The other three 

Trustees, William O. Bailey, a director and fonner Chief Executive Officer of MBIA, Inc., a 

publicly owned company engaged through a subsidiary in writing municipal bond insurance; 

John E. Beard, a partner in the Boston law fmn of Ropes & Gray; and Ernest E. Monrad, 

Chairman of the Trustees of Northeast Investors Trust, a registered investment company, are 

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not interested persons of the Trust. No Trustee or officer of the Trust or the Adviser owns 

as much as 1% of the outstanding shares of the Trust. 

The Trust acts as distributor of its own shares and will continue to do so under the 

plan of externalization. Distribution expenses will be paid by the Adviser from its own 

resources. 

The Plan of Externalization 

1. Reasons for externalizing. The principal reason which has caused the Trustees to 

propose that the Trust henceforth obtain investment advisory and management services from 

an external investment advisory firm is their belief that such a fum will have greater success 

than the Trust in attracting and retaining talented personnel through its ability to offer 

compensation incentives, including equity participation, in an independent entity. The 

attractiveness of such incentives will be enhanced by the possibility of growth in the size of 

assets under management through additional efforts to increase the Trust's assets and 

development and promotion of additional investment company products, which might be 

) 

offered as new Trust series. The Advisor is presently the investment adviser to a limited 

partnership with a net asset value as of December 31, 1993 of approximately $47,700,000. 

The Trustees have also been influenced by their belief that compliance by the Trust 

with federal and state securities laws will involve less interpretive review and be less costly if 

the Trust is externally managed, because the established regulatory framework governing 

. investment companies has largely evolved in relation to externally managed funds. 

2. The Adviser and the Agreement. In externalizing the Trust's investment advisory 

and management functions, the Trustees wish to retain the services of Mr. Fulkerson and 

Mr. Dyer because of their specialized experience as analysts of insurance company and bank 

stocks and their performance in managing the Trust over a long period. Mr. Fulkerson and 

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Mr. Dyer will, on the effective date of the Agreement, together own 90% of the capital stock 

and all of the voting stock of the Adviser. The remaining 10% of the capital stock of the 

Adviser, represented by non-voting stock, will be owned by Richard F. Cook, Jr., who is the 

Secretary of the Trust. The Agreement provides that the Adviser will (i) act as investment 

adviser to the Trust and in that capacity, subject to the supervision of the Trustees of the 

Trust, direct the investments of the Trust in accordance with its investment objectives, and 

(ii) provide certain management services to the Trust, all for a monthly fee equal to onetwelfth of the sum of seven-tenths of one percent (0.7 %) of the flIst $250 million, and six- . 

tenths of one percent (0.6%) of amounts exceeding $250 million, of the net asset value of the 

Trust at the end of the month. The Agreement also contains the provisions required in an 

investment advisory contract under Section 15 of the Act and certain other provisions, 

described below, designed to insure that the criteria developed by the Commission's staff for 

taking a no-action position under Rule 17d-l on plans of extemalization have been met. The 

Agreement will be effective on the flIst business day of the month following its approval by 

the Trust's shareholders, but not prior to July 1, 1994. 

3. Approval of the Agreement. On June 11, 1993, Mr. Bailey and Mr. Beard were 

authorized by the Trustees to evaluate the proposed externalization of the Trust's 

management on behalf of the Trust and its shareholders. In evaluating the plan of 

extemalization, Mr. Bailey and Mr. Beard were advised by independent legal counsel 

retained by them. On the basis of their evaluation, Mr. Bailey and Mr. Beard advised the 

other Trustees that in their opinion the proposed Agreement is fair and reasonable and in the 

best interests of the Trust and its shareholders, and on September 16, 1993, the Trustees 

unanimously voted to authorize the Agreement and to recommend to the Trust's shareholders 

that they approve it. The proposed Agreement was reviewed by the Adviser in 1994 on the 

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• 
basis of 1993 operating expenses and the current net asset value of the Trust, and a 

modification was made in the formula for determining the advisory fee. The effect of the 

modification was to reduce the originally proposed advisory fee at net asset values up to 

$410 million and to increase the fee at net asset values higher than $410 million. The 

average net asset value of the Trust in 1993 was approximately $278 million, the highest in 

the Trust's history. Net asset value at April 29, 1994 was approximately $215 ~illion. The 

proposed Agreement as so revised was reviewed by the disinterested Trustees and found by 

them to be fair and reasonable and in the best interests of the Trust and its shareholders, and 

on April 21, 1994 the Trustees again unanimously approved the Agreement and the 

recommendation to the Trust's shareholders that they approve it. Written approval of the 

Agreement by the holders of a majority of the outstanding shares of beneficial interest of the 

Trust will be solicited on the basis of proxy material filed with and cleared by the staff. 

The Trust's expense ratio for 1993 was 0.82%, as compared to 0.85% on a pro forma 

basis had the proposed new investment advisory and management arrangements been in effect 

in that year. This represents a difference of $69,878, or 3.05% of the actual 1993 expenses, 

which would have been eliminated entirely if a senior analyst who joined the Trust in the fall 

of 1993 had served for the full year. The proposed arrangement will thus not result in a 

material increase in the Trust's operating expenses. 

II.	 Applicability of Rule 17d-l to the 

Plan of Extemalization 

No assets of the Trust will be· transferred to the Adviser in connection with the plan 

of extemalization; thus no issue is presented under Section 17(a) of the Act. The Trust 

presently makes rental payments for office space ~o an unaffiliated landlord as a permitted 

occupant under a lease to Massachusetts Fiduciary Advisors, Inc., a Massachusetts 

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corporation whose sole stockholder is Mr. Fulkerson. The furniture and equipment located 

at these premises is (except for certain equipment recently purchased by and owned by the 

Adviser) owned by Massachusetts Fiduciary Advisors, Inc. It is substantially fully 

depreciated and is now being made available for use without charge to the Trust. The office 

space. furniture and equipment will be made available to the Adviser on the same basis when 

the Agreement becomes effective. Under the Agreement the Adviser is obligated to provide 

to the Trust office space. equipment and facilities needed for its operations. 

Section 17(d) of the Act and Rule 17d-1 thereunder will, however, require the filing 

of an application for, and the grant by the Commission of, an exemptive order approving the 

plan as a "joint enterprise or ... joint arrangement" unless the Agreement is an "investment 

advisory contract" under subsection (c) of the Rule. In earlier no-action letters (see National 

Aviation & Technology COfj?oration (available 2/16/79); Equity Strategies Fund. Inc. 

(available 7/3/86); The California Muni Fund and New York Muni Fund (available 

12/29/86» the staff has required, as a condition to taking a no-action position as to the 

applicability of Rule 17d-l to plans of externalization, satisfactory assurances that the 

following areas of concern are satisfied under the plan: 

1. The governing board (in this case the Trustees) of the investment company must 

remain in control of the company in fact; 

2. The new external investment adviser must not obtain undue value from 

exterilalization; and 

3. The new external adviser must not undertake any conflicting duties of loyalty 

which would affect its prior fiduciary duty to the company. 

These concerns are addressed separately below. 

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1. The Trustees will remain in control of the Trust. The Trust will continue to be 

controlled by five Trustees, a majority of whom will not be interested persons of the Trust 

under the Act. Mr. Fulkerson will be Chainnan of the Trustees, but the office will carry 

with it no special powers. The Trustees, as in the past, will hold formal quarterly meetings 

to review the Trust's affairs and will receive from the Adviser monthly statements detailing 

transactions in shares of the Trust and changes in the Trust's portfolio of investments. 

Informal discussions between Messrs. Fulkerson and Dyer and the other Trustees will 

continue. Further, to assure that the disinterested Trustees exercise primary responsibility 

over important areas of management, the Trustees will establish two new standing 

committees made up exclusively of the disinterested Trustees: an Audit Committee to 

recommend the selection of auditors, and to meet separately with the auditors to discuss the 

Trust's fmancial affairs and review audit procedures; and a Nominating Committee to recruit 

and recommend new trustees when vacancies occur. The proxy material of the Trust will be 

prepared under the supervision of the disinterested Trustees, who will also on behalf of the 

Trust review from time to time the policies and practices of the Adviser with respect to 

brokerage allocation. Thus the plan of externalization will not affect the control which the 

Trustees have heretofore exercised over the affairs of the Trust, and will strengthen the role 

of the disinterested Trustees in certain respects. 

2. The Adviser will not obtain undue value from the plan of extemalization. The 

cost to the Trust of obtaining investment advisory and management services under the 

Agreement will not be materially greater than the cost of such services provided internally 

and will be in line with industry norms. The Adviser will not propose any change in the 

method of computing the advisory fee during the first three years after the effective date of 

the Agreement. The initial compensation levels to be fixed by the Adviser for Messrs. 

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Fulkerson, Dyer and Cook and other key personnel heretofore employed by the Trust will 

not exceed the levels in effect for them in 1993. Moreover, the Adviser has advised the 

Trust that increases in fee revenue due to growth in the levels of the Trust's assets will be 

applied in part to strengthening the Adviser's professional staff and to the costs of 

promotional efforts on behalf of the Trust. 

The earlier no-action letters referred to above reflect a concern of the Division of 

Investment Management as to a possible windfall to the stockholders of a new adviser to an 

investment company created under a plan of extemalization as the result of the sale of the 

adviser at a profit shortly after implementation of the plan. To meet this concern, Messrs. 

Fulkerson, Dyer and Cook, who will be the Adviser's initial stockholders, will represent to 

the Trust that they have no present intention of selling any of their stock in the Adviser. 

Moreover, the Adviser will be obligated for a period of five years from the effective date of 

the Agreement to repurchase for its book value (which would exclude any value attributable 

to the Agreement) all of the stock of any stockholder upon the voluntary termination of such 

stockholder's employment. In the event of any sale of stock of the Adviser within three 

years from the effective date of the Agreement (otherwise than as the result of the death or 

disability of Mr. Fulkerson or Mr. Dyer), the selling stockholder will pay over to the Trust: 

(i) 100% of his "sale profit" (as defined below) if the sale occurs during the first year, 

(ii) 66 2/3% of his "sale profit" if the sale occurs in the second year, or (iii) 25% of his 

"sale profit" if the sale occurs in the third year. This undertaking would not apply to any 

merger, acquisition, affiliation or ·other restructuring designed to expand or strengthen the 

Adviser's activities and not involving the receipt by the Adviser's stockholders of cash or 

other readily marketable consideration, but any "sale profit" derived from the disposition of 

other consideration received by the Adviser's stockholders in such a transaction within three 

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years of the effective date of the Agreement would be subject to recapture by the Trust in 

accordance with the preceding sentence. For purposes of this undertaking, "sale profit" is an 

allocated portion of the excess of (A) the net proceeds derived from the sale, over (B) the 

book value of the Adviser attributable to the sold shares, but after reducing such excess by 

any cumulative operating loss incurred by the Adviser after the effective date of the 

Agreement. The"allocated portion" of the result obtained by applying the above formula 

would be that portion of such excess value which is fairly attributable to the Agreement with 

the Trust, as distinct from being attributable to income from other activities of the Adviser. 

The allocation would be proposed initially by the Adviser and approved by the disinterested 

Trustees of the Trust. 

3. The Adviser will not undertake any other conflicting duties of loyalty which would 

affect its prior fiduciary duty to the Trust. The Adviser has given an undertaking to this 

effect in the proposed Agreement. To implement this undertaking, the Adviser has agreed 

for a period of five years from the effective date of the Agreement to give the Trust advance 

,: 

notice in writing of any proposed undertaking by it of material significance (including the 

taking on of any new clients) and to provide to the Trust all information relevant to a 

determination of the effect of such undertaking on the Adviser's ability to carry out its 

obligations to the Trust under the Agreement. 

Questions, if any, concerning this request should be directed to the undersigned at 

(617) 573-0290. 

Very truly yours, 

<Z<.> \... t,.-. t- e ."\0 "'-L..('t-, 

Robert P. Moncreiff 

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