24 FEB 1994
 -

Our Ref. No. 94-73-CC
 

The Capitol Mutual
 

Funds and Nations
 

Fund Trust
 

F CHIEF COUNSEL File Nos. S11-6030;


INVESTMENT MAAGEMENT S11-4305 

Solely with respect to the availability of Rule 17a-S under
 

the Investment Company Act of 1940 (the "1940 Act"), and without
 

expressing any opinion on any other aspect of the proposed
 

reorganization, we would not recommend any enforcement action to
 

the Commission under Section 17 (a) of the 1940 Act if the Capitol
 

Mutual Funds and the Nations Fund Trust implement the proposed
 

reorganization described in your letter. 1/ Having stated our
 

views with respect to the availability of Rule 17a-S in
 

transactions involving registered investment companies that are
 

affiliated persons solely by reason of having investment advisers


.. that are under common control, we will no longer respond to 

.;reguestsfor no-action relief in this area unless they present


';nov:el .'Orunus al issues. 

Edward J. Rubenstein
 

Attorney 

on Small Capitalization Fund (pub.
 

avail. Oct. 4, 1993); MFS Family of Funds (pub. avail. May
 1/ See Smith Barney Shears 


24, 1993); Shears 
 on Lehman Hutton Group of Funds (pub.
 

avail. Oct. 7, 19S5).
 
1 

:' ~ ,,';1.. MORRISON & FOERSTER ~. ~~. 't-:
 

SAN .tNCISCO ATTORNEYS AT LAW DENR LOS ANGELES , /....~: 

SAqW~. 

ORAGE coti 

\;. .:l":' ',' 

tl. 

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200 PESYVANIA AVENU, N.W. 

WASHIGIN, D.C. 200188 

NEW YORK 

LONDON 

BRUSSELS 

WALNU CRK TELEHONE (202) 88-150 HONG KONG 

PALO ALro TELEACSIM (202) 88-D63 roKYO 

TE 9030 MRN FOER WSH 

DIRCT DIAL NUER 

February 9, 1994
 (202 LB87-1UO-""...,. ~. .......,.."";~ ..r
 

_.-....,.. ~ CIr-'lO
 V.ct_... 

L:~ect 1Qn 

Thomas S. Harman, Esq.
 Associate Director ¡~'ùCl (1 l( g .... .
 Di vis~oi: of Investment Manag7m~r¡(' :ko a Secur7ties and Exchange commiss;iqPnnttyd- d-, l!"...,.,."_'.d..... 450 Fifth Street, N. W. . ....__._~"'~L=---- . 

Washington, D. C. 20549
 

Re: The Capitol Mutual Funds and
 

Nations Fund Trust
 

Dear Mr. Harman:
 

We are writing with respect to the proposed 

reorganization of certain investment companies, the 

investment advisers of which are dire~t or indirect wholly 

owned subsidiaries of NationsBank Corporation, and the implications of these transactions under Section 17 (a) of 

the Investment Company Act of 1940, as amended (the

"1940 Act") i and Rule 17a-8 under the 1940 Act. The 

proposed reorganization (the "Reorganization") will consist
 

of a transfer of substantially all of the assets and
 

liabilities of certain portfolios (the "Acquired Funds") of
 

The Capitol Mutual Funds (the "Capitol Funds") to certain
 

portfolios (the "Acquiring Funds") of Nations Fund Trust
 

(the "Trust") which have substantially similar investment
 

objectives and policies, as indicated below:
 

Portfolio of the Corresponding Fund
 

CaDi tol Funds of the Trust
 

Equity Portfolio.............. Nations Value Fund
 

Special Equity Portfolio...... Nations Special Equity Fund


Fixed Income Portfolio........ Nations Strategic Fixed
 

Income Fund
 

Maryland Tax Free Securities


Portfolio. . . . . . . . . . . . . . . . . .. Nations Maryland Intermediate 

Municipal Bond Fund
 
MORRISON & FOERSTER
 

Thomas S. Harman i Esq. 

February 9, 1994
 

Page Two
 

Following the transfer of assets and liabilities by each
 

Acquired Fund in exchange for shares of the corresponding
 

Acquiring Fund, the Acquired Fund will be dissolved and
 

liquidated and the shares of the Acquiring Fund received by
 

the Acquired Fund will be distributed to the shareholders of
 

the Acquired Fund. On behalf of the Acquired Funds and the


Acquiring Funds (eachi a "Fund" and collectively i the 

"Funds"), we respectfully request your assurance that the
 

staff (the "Staff") of the Securities and Exchange
 

Commission (the "SEC") will not recommend that the SEC
 insti tute enforcement proceedings if the Reorganization is

:ef:fected under the circumstances described below. As noted 

ê';beJ:OW.,;. the circumstances described below are virtually

':identical to those supporting the no-action position 

recently taken by the Staff in Smith Barney Shearson SDecial
 

Equities Fund: Smith Barney Shears on Small CaDitalization
 

Fund (pub. avail. October 4, 1993).
 

BACKGROUN 

Description of the Funds and Their Servicing Relationships
 

The Acquired Funds are part of the Capitol Funds,
 

an open-end, diversified, management investment company
 

organized as a Massachusetts business trust. The Capitol
 

Funds currently consists of nine separate portfolios. The
 

Acquired Funds offer Class A Shares at net asset value to
 

Security Trust Company 
 i N .A., its affiliates and
 

correspondents for the investment of assets for which they
 

act in a fiduciary capacity. Class B Shares are offered to
 

individual and institutional investors.
 

The Acquiring Funds are part of the Trust, an
 

open-endi diversified, management investment company
 

organized as a Massachusetts business trust. The Trust
 

currently consists of thirty- four separate investment
 

portfolios. In addition, the Trust is a part of the Nations
 

Fund Family i which consists of all funds of the Trust and
 

Nations Fundi Inc. i a separate investment company registered
 

under the 1940 Act. Trust A Shares of the Acquiring Funds
 

are offered at net asset value to bank trust departments and
 

other financial institutions acting on behalf of customers
 

having a qualified trust account at or a relationship with
 

the institution. Purchases of Investor A Shares of the
 

Acquiring Funds, which are subject to initial sales charges 


may be made through banks i broker/dealers and other
 

financial institutions that have entered into agreements
 

i 
\
 

MORRISON & FOERSTER 

Thomas S. Harman i Esq.
 

February 9, 1994


Page Three 

wi th the Trust. i/ Holders of Investor Shares of a fund of 

the Nations Fund Family can exchange their shares for shares
 

of another fund within the Nations Fund Family, subject to
 

certain restrictions described in the prospectuses of each


fund. 

The Acquired Funds are advised by ASB Capital
 

Management Inc. ("ASBCM") and the Acquiring Funds are


advised by NationsBank of North Carolinai N .A. 

("NationsBank"). NationsBank is a wholly-owned subsidiary
 

of NationsBank Corporation. In connection with the merger
 

'o£iMNCFinancial, Inc. with and into NationsBank
 

":3:Corporati:on,'!;ASBCM, which was formerly an indirect wholly­ cowned subsidiary of MNC Financial, Inc. i became an indirect
 

wholly-owned subsidiary of NationsBank Corporation.
 

Accordingly i NationsBank and ASBCM are under the common
 

control of NationsBank Corporation.
 

SEI Financial Services Company serves as the
 

distributor of the Acquired Funds and SEI Financial
 

Management Company provides administrative services and
 transfer agency services to the Acquired Funds. Security 

Trust Company 
 i N .A. provides custodial services to the Acquired Funds. Stephens Inc. serves as the sponsor i 

distributor and administrator of the Acquiring Funds and The
 

Boston Company Advisors Inc. serves as the Acquiring Funds'
 

co-administrator. NationsBank of Texas, N .A. is the
 

custodian of the Acquiring Funds.
 

Currently, the Acquired Funds and the Acquiring
 

Funds have no trustees or officers in common. However i at a
 

special meeting of shareholders of the Capitol Funds (the
 

"Special Meeting of Shareholders") held for the purpose of
 

considering the Plani it is anticipated that a new slate of


trustees i comprised of the persons who currently serve as 

the trustees to the Trust, will be proposed for the Capitol
 

Funds i and that i if approved 
 i the new trustees will in turn
 elect new officers for the Capitol Funds 
 i comprised of the
 persons who currently serve as the Trust's officers.
 

Accordingly, assuming shareholder approval i the Acquired
 

Funds and the Acquiring Funds will have common trustees and
 

officers prior to the Reorganization.
 

i/ Besides offering Trust A and Investor A Shares i the


Acquiring Funds also offer Trust B, Investor Band
 

Investor C Shares.
 
MORRISON & FOERSTER 

Thomas S. Harman, Esq.
 

February 9, 1994


Page Four 

Proposed Reorganization
 

The Board of Trustees of the Capitol Funds and the
 

Board of Trustees of the Trust, including a majority of the
 

members of each of the Boards who are not "interested
 

persons," as such term is defined in Section 2 (a) (19) of the 

1940 Act, of any Fundi have approved an Agreement and Plan
 

of Reorganization (the "Plan") with respect to the Funds.
 

The Board of Trustees of the Capitol Funds has determined to
 

recommend that each Acquired Fund's shareholders also
 

approve the Plan at. the Special Meeting of Shareholders.
 

The Plan need not be approved by the shareholders of the
 

Acquiring Funds.
 

The Reorganization will consist of the transfer of
 

substantially all of the assets and liabilities of each
 

Acquired Fund in exchange for shares of the corresponding
 

Acquiring Fund and the distribution, pursuant to the Plan,
 

of such shares to the shareholders of the Acquired Funds in
 

liquidation of the Acquired Funds. Shareholders of each
 

Acquired Fund will receive shares of the corresponding
 

Acquiring Fund equal in value to the shares of the class of
 

the Acquired Fund owned by such shareholder immediately
 

prior to the transaction. Holders of Class A Shares of each
 

Acquired Fund will receive Trust A Shares of the
 

corresponding Acquiring Fund and holders of Class B Shares
 

of each Acquired Fund will receive Investor A Shares of the


corresponding Acquiring Fund. Any front -end sales charge 

which would otherwise be applicable upon the acquisition of
 

shares of an Acquiring Fund will be waived with respect to
 

shares acquired in the Reorganization. No commission or
 

sales loads will be charged in connection with the
 

Reorganization. The result of the transfer of assets will
 

be that each Acquiring Fund will add to its portfolio
 

substantially all of the assets held by the corresponding
 

Acquired Fund on the date of consummation of the
 

Reorganization, and shareholders of each Acquired Fund will
 

become shareholders of the corresponding Acquiring Fund.
 

The management of the Acquired Funds intends to dissolve the
 

Acquired Funds following the Reorganization.
 

Reasons for the Reorganization
 

In determining whether to approve the
 

Reorganization and, in the case of the Acquired Funds,
 

whether to recommend approval of the Reorganization to
 

shareholders, the Boards of the Capitol Funds and the Trust
 

(including the independent Board members) inquired into a
 

.
 
MORRISON & FOERSTER 

Thomas S. Harman, Esq.
 

February 9, 1994
 

Page Five
 

number of matters and considered the following factors,
 

among others: (i) the terms and conditions of the
 

Reorganization and whether it would result in a dilution of
 

the existing shareholders' interests; (ii) the comparability
 

of each Acquired Fund's investment objective, strategy and
 

policies with those of its corresponding Acquiring Fund, as
 

well as the views of the investment advisers to the Acquired
 

Funds and the Acquiring Funds that any differences between
 

the investment policies and restrictions of each Acquired
 

Fund and its corresponding Acquiring Fund should not
 

appreciably increase investment risks; (iii) the experience
 

\~and "resources of NationsBank with respect to providing
 

"inv:estment"~management services, and the similarity between


the Acquired Funds', and the Acquiring Funds' respective 

distribution, administrative, transfer agency, shareholder
 

service and custody arrangements; (iv) the projec.ted expense
 

ratios, and information regarding fees and expenses of the
 

Acquired Funds, the Acquiring Funds and other similar funds;
 

(v) the absence of federal tax consequences to the Funds or
 

their shareholders resulting from the Reorganization; and
 

(vi) other factors deemed relevant.
 

In reaching the decision to approve the
 

Reorganization, the respective Board of each of the Capitol
 

Funds and the Trust concluded that the Reorganization is in
 

the best interests of each Fund's shareholders and would not
 

resul t in the dilution of the shareholders' interests. Each
 

Board's conclusion was based on a number of factors,
 

including the following: (1) the Reorganization should
 

eliminate any duplication of services that currently exists
 

as a result of the Funds' separate operations; (2) combining
 

the assets of the Acquired Funds with the assets of the
 

Acquiring Funds should lead to reduced expenses, on a per-


shares basis, by allowing fixed and relatively fixed costs
 

to be spread over a larger asset base; ~/ and (3) higher
 

asset levels should enable the Acquiring Funds to purchase
 

larger individual portfolio investments or other quantities
 

~/ Because the Nations Special Equity Fund is a newly
 

organized fund which will have minimal assets at the time of
 

the Reorganization, combining the assets of this fund with
 

the Special Equity Portfolio will not immediately result in
 

higher asset levels. However, it is anticipated that higher
 

asset levels will result over time because the Nations
 

Special Equity Fund is part of a broader overall family of
 

portfolios and because its asset-based fee levels are lower
 

in the aggregate than those of the Special Equity Portfolio.
 
l 

MORRISON & FOERSTER 

Thomas S. Harman, Esq.
 

February 9, 1994
 

Page Six
 

that may result in reduced transaction costs and provide the
 

opportunity for greater portfolio diversity.
 

LEGAL ANALYSIS
 

Section 17 (a) of the 1940 Act generally prohibits 

an affiliated person, or an affiliated person of an
 

affiliated person, of a registered investment company from
 

knowingly purchasing securities or other property from, or
 selling securities or other property to, the investment . 

company or a company controlled by it. This section was
 

includeddin the 1940 Act largely to protect shareholders by


prohibi ting a purchase or sale transaction when a party to 

the transaction has both the ability and the pecuniary
 

incentive to influence the actions of the investment
 

company. See Hearings on S. 3580 Before a Subcomm. of the
 

Senate Comm. on Banking and Currency, 76th Cong., 3d Sess.,
 

17 (1940). Where two investment companies have in common an
 

investment adviser, directors, and/or officers, the
 

companies may be considered to be under common control and,
 

therefore, affiliated persons of each other; thus, their
 

merging, consolidating or combining could be considered to


be a prohibited purchase or sale under Section 17 (a) of the 

1940 Act. See Investment Company Act Release No. 10886
 

(Oct. 2, 1979) (proposing rule 17a-8 ("Proposing Release"))
 

at n. 5.
 

Rule 17a-8 under the 1940 Act excepts from the
 

prohibitions of Section 17 (a) mergers or consolidations of
 

registered investment companies that are affiliated persons
 

solely by reason of having a common investment adviser,
 

common directors, and/or common officers, provided that
 

certain conditions are satisfied. Rule 17a-8 is based on
 

the rationale that "when a merger involves investment
 

companies which are affiliated persons exclusively by virtue
 

of sharing common officers, directors and/or an investment
 

adviser, no person who is responsible for evaluating and
 

approving the terms of the transaction on behalf of the
 

various participating investment companies would have a
 

significant financial interest in improperly influencing
 

these terms." Id., at text accompanying note 9.
 

Because NationsBank and ASBCM are not a single
 

entity, but instead are affiliates, the express terms of the
 

exemption provided by Rule 17a-8 might appear to be
 

inapplicable to the Reorganization. Nevertheless, because
 

ASBCM and NationsBank are under common control, the
 

condition of Rule 17a-8 that reorganizing funds have a
 
"
 

MORRISON & FOERSTER 

Thomas S. Harman, Esq.
 

February 9, 1994
 

Page Seven
 

"common" investment adviser should be deemed to have been
 

met. In this regard, the application of Rule 17a-8 to a
 

si tuation involving the merger of funds having investment
 

advisers under common control would appear to be wholly
 

consistent with the policy of Rule 17a-8, as expressed by
 

the SEC in the Proposing Release, that "no person who is
 

responsible for evaluating and approving the terms of the
 

transaction on behalf of the various participating
 

investment companies would have a significant financial
 

interest in improperly influencing these terms." See
 

Investment Company Act Release No. 10886 (Oct. 2, 1979), at
 

text accompanying note 9.
 

The Reorganization complies with the other
 

conditions for reliance on Rule 17a-8 because the Board of
 

Trustees of the Capitol Funds and the Board of Trustees of
 

the Trust, including a majority of the members of each Board
 

who are not interested persons of any Fund, have determined
 

that the Reorganization would be in the best interests of
 

the Acquired Funds' shareholders and the Acquiring Funds'
 

shareholders , respectively, and that no dilution of
 

shareholders' financial interests would result from the
 Reorganization. In addition, these findings and the bases 

therefor have been or will be recorded fully in the minutes
 

of each respective Fund. Finally, if, as expected, the
 

Capitol Funds have elected new Trustees (identical to the
 

Trust's current group of Trustees), who have, in turn,
 

elected new officers (identical to the Trust's current group
 

of officers) prior to the date of the Reorganization, the
 

Acquired Funds and the Acquiring Funds would have common
 

directors and officers, thereby satisfying the two other
 

conditions for reliance on Rule 1 7a-8 .¿i
 

As noted above, the Staff has recently issued a
 

favorable no-action response under Section 17 (a) of the 1940
 

Act in circumstances virtually identical to those described
 

in this letter. Specifically, in Smith Barney Shearson
 

SDecial Equities Fund: Smith Barney Shears 
 on Small
 

CaDitalization Fund (pub. avail. October 4, 1993), the Staff
 

stated that it would not recommend enforcement action under
 

¿I If the new Trustees and officers are not in place prior
 

to such time, the other two conditions for reliance on
 

Rule 17a-8 would be irrelevant because the affiliation
 

between the Acquired Funds and Acquiring Funds would not
 

have been caused by the existence of common directors or
 officers. 
4 

MORRISON & FOERSTER 

Thomas S. Harman, Esq.
 

February 9, 1994


Page Eight 

Section 17 (a) with respect to a reorganization between two
 

funds where the advisers to the funds were under common
 

control and the funds otherwise complied with the provisions
 

of Rule 1 7a-8. This position is also consistent with
 

positions taken by the Staff previously in similar
 

circumstances. See, ~.g., Shearson Lehman Hutton GrouD of
 

Funds (pub. avail. October 7, 1988) (Staff stated that it


would not recommend enforcement action under Section 17 (a) 

of the 1940 Act with respect to a reorganization between two
 

funds where the investment adviser of one fund was the sub-


investment adviser of the other fund, and the investment
 

advisers of both funds were under common control); ~ also,
 

MSF Family of Funds; MSF Lifetime Investment Program (pub.


.:iavai'l'. . May 24, 1993) (Staff stated that it would not 

recommend enforcement action under Section 17 (a) of the 1940
 

Act with respect to a reorganization between two funds where
 

the investment adviser of one fund was a wholly-owned
 subsidiary of the investment adviser of other fund) . 

CONCLUSION 

In view of the foregoing, we believe that the
 

Reorganization would be fully consistent with both the terms
 

of and the polic~es underlying Rule 1 7a-8. Accordingly, we
 

respectfully request your assurance that the Staff will not
 

recommend that the SEC institute enforcement proceedings if
 

the Funds proceed to consummate the Reorganization under the
 

circumstances described above.
 

A registration statement on Form N-14 (File No. 33­

74334) relating to the Reorganization was filed on
 

January 24, 1994 and is expected to become effective on or
 

about February 23, 1994. Accordingly, we would very much
 

appreciate your earliest consideration of this matter.
 
'\' 

MORRISON & FOERSTER 

Thomas S. Harman, Esq.
 

February 9, 1994


Page Nine 

Pursuant to Release No. 33-6269 (Dec. 5, 1980), we
 

enclose the original and seven copies of this letter. If
 

further clarification or amplification of any of the facts
 

or issues discussed in this letter is required, please do
 

not hesitate to call Robert Kurucza, at (202) 887-1515, or
 

me, at the number indicated above.
 

Very truly yours,
 

cc: Robert M. Kurucza
 

Mark Williamson
 

Steven W. Duff 

Theodore o. Johnson
 

Robert M. Kurucza
 

Q15321