[Federal Register Volume 62, Number 25 (Thursday, February 6, 1997)]
[Notices]
[Pages 5659-5661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2905]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22486; 812-10164]


SBSF Funds, Inc. d/b/a Key Mutual Funds, et al.; Notice of 
Application

January 30, 1997.
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: SBSF Funds, Inc. d/b/a Key Mutual Funds (``KMF''), The 
Victory Portfolios (``VP''), KeyCorp Mutual Fund Advisers, Inc. 
(``KMFAI''), and Spears, Benzak, Salomon & Farrell, Inc. (``SBS&F'').

RELEVANT ACT SECTIONS: Order requested under section 12(d)(1)(J) of the 
Act for an exemption from sections 12(d)(1)(A) and (B) of the Act, and 
under sections 6(c) and 17(b) of the Act for an exemption from section 
17(a) of the Act.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
them to implement a ``fund of funds'' arrangement. In addition to the 
fund of funds investing in other funds in the same group of investment 
companies, such fund of funds also may invest a portion of its assets 
in funds that are not part of the same group of investment companies in 
reliance on Section 12(d)(1)(F) of the Act.

FILING DATES: The application was filed on May 20, 1996, and amended on 
January 22, 1997. Applicants have agreed to file an 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 February 24, 
1997, 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 notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. KMF and VP, 3435 Stelzer Road, Columbus, OH 43219; KMFAI, 127 
Public Square, Cleveland, OH 44114; SBS&F, 45 Rockefeller Plaza, New 
York, NY 10111.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard, 
Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

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. KMF is a Maryland corporation registered under the Act as an 
open-end management investment company currently consisting of eight 
operating portfolios and one inactive portfolio. VP is a Delaware 
business trust registered under the Act as an open-end management 
investment company currently consisting of 24 operating and four 
inactive portfolios.
    2. Applicants request relief to permit the series of KMF, VP, and 
any other investment company created in the future that is part of the 
same ``group of investment companies'' as KMF or VP, as defined in 
section 12(d)(1)(G)(ii) of the Act (the ``Direct Funds''), to purchase 
shares of investment companies or series thereof, existing or created 
in the future, that are part of the same ``group of investment 
companies'' (the ``Underlying Portfolios'') as the Direct Funds, and to 
permit the Underlying Portfolios to sell such shares to, and redeem 
such shares from, the Direct Funds. Some of the Underlying Portfolios 
may rely upon a ``manager of managers'' exemptive order granted by the 
SEC that permits the Underlying Portfolios to select a sub-adviser 
without the approval of their shareholders, subject to certain 
conditions.\1\
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    \1\ The Victory Portfolios, Investment Company Act Release Nos. 
22366 (Dec. 3, 1996) (notice) and 22432 (Dec. 31, 1996) (order).
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    3. The investment policies of the Direct Funds also permit each 
Fund to invest a portion of its assets in government securities, 
certain short-term obligations, and, subject to receipt of the request 
exemptive relief, shares of other investment companies that are not 
part of the same ``group of investment companies'' as KMF and VP 
(``Other Portfolios''). Investments in Other Portfolios will conform to 
the requirements of section 12(d)(1)(F) of the Act.\2\
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    \2\ On January 1, 1997, in reliance only on section 12(d)(1)(G) 
of the Act, KeyChoice Growth Fund, KeyChoice Moderate Growth Fund, 
and KeyChoice Income and Growth Fund, the initial Direct Funds, 
commenced operations with investments limited to Underlying 
Portfolios.
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    4. SBS&F currently serves as investment adviser to four of the 
operating funds of KMF. SBS&F is a wholly-owned subsidiary of KeyCorp 
Asset Management Holdings, Inc. (``KAMHI''), which is a wholly-owned 
subsidiary of KeyBank National Association, a national banking 
association, which, in turn, is a wholly-owned subsidiary of KeyCorp, a 
bank holding company. KMFAI currently serves as investment adviser to 
VP and to four funds of KMF, including the Direct Funds. In addition, 
KMFAI has been retained to act as investment adviser to a fund of KMF 
that has yet to commence operations. KMFAI is a wholly-owned subsidiary 
of KAMHI.
    5. The Underlying Portfolios will pay investment advisory fees to 
KMFAI and/or SBS&F. In addition, the Underlying Portfolios will pay 
fees to their various service providers for all other services relating 
to their operations. The Direct Funds pay investment advisory fees to 
their investment adviser(s), as well as fees to the Direct Funds' 
various service providers. By investing in other investment companies, 
shareholders of the Direct Funds indirectly will pay their 
proportionate share of any Underlying Portfolio fees and expenses. 
Similarly, the Direct Funds' shareholders indirectly pay their 
proportionate share of any Other Portfolio fees and expenses.
    6. The Direct Funds will pay no front-end sales loads or contingent 
deferred sales charges in connection with the purchase or redemption of 
shares of either Underlying Portfolios or Other Portfolios. In 
addition, sales charges, distribution-related fees, and service

[[Page 5660]]

fees charged in connection with shares of the Direct Funds will not 
exceed the limits set forth on Rule 2830 of the Conduct Rules of the 
National Association of Securities Dealers, Inc. (the ``NASD'') when 
aggregated with any sales charges, distribution-related fees, and 
service fees that the Direct Funds pay relating to Underlying Portfolio 
and Other Portfolio shares.

Applicants' Legal Analysis

    1. Section 12(d)(1)(A) provides that no registered investment 
company may acquire securities of another investment company if such 
securities represent more than 3% of the acquired company's outstanding 
voting stock, more than 5% of the acquiring company's total assets, or 
if such securities, together with the securities of any other acquired 
investment companies, represent more than 10% of the acquiring 
company's total assets. Section 12(d)(1)(B) provides that no registered 
open-end investment company may sell its securities to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies.
    2. Section 12(d)(1)(F) of the Act provides that section 12(d)(1) 
shall not apply to an acquiring company if the company and its 
affiliates own no more than 3% of an acquired company's securities, 
provided that the acquiring company does not impose a sales load of 
more than 1.5% on its shares. In addition, the section provides that no 
acquired company is obligated to honor any acquiring company redemption 
request in excess of 1% of the acquired company's securities during any 
period of less than 30 days, and the acquiring company must vote its 
acquired company shares either in accordance with instructions from its 
shareholders or in the same proportion as all other shareholders of the 
acquired company. Applicants state that no exemptive relief is sought 
with respect to investments by the Direct Funds in shares of Other 
Portfolios.
    3. Section 12(d)(1)(G) of the Act provides that section 12(d)(1) 
shall not apply to the securities of an acquired company purchased by 
an acquiring company if: (i) the acquiring company and the acquired 
company are part of the same group of investment companies; (ii) the 
acquiring company holds only securities of acquired companies that are 
part of the same group of investment companies, government securities, 
and short-term paper; (iii) the aggregate sales loads and distribution-
related fees of the acquiring company and the acquired company are 
limited; and (iv) the acquired company has a policy that prohibits it 
from acquiring securities of registered open-end investment companies 
or registered unit investment trusts in reliance on section 12(d)(1) 
(F) or (G). Section 12(d)(1)(G)(ii) defines the term ``group of 
investment companies'' to mean any two or more registered investment 
companies that hold themselves out to investors as related companies 
for purposes of investment and investor services. Because the Direct 
Funds will invest in shares of Other Portfolios, they cannot rely on 
the exemption from section 12(d)(1) (A) and (B) afforded by section 
12(d)(1)(G).
    4. Applicants request relief from the limitations of section 
12(d)(1) (A) and (B) to the extent necessary to permit (i) the Direct 
Funds to purchase an unlimited amount of the outstanding voting shares 
of each Underlying Portfolio; (ii) the securities of each Underlying 
Portfolio to have an aggregate value of as much as 100% of the total 
assets of the Direct Funds: (iii) the Direct funds to invest up to 100% 
of their assets in the securities of the Underlying Portfolios; and 
(iv) each of the Underlying Portfolios to sell more than 10% of its 
total outstanding voting stock to the Direct Funds.
    5. Applicants believe that the purpose of section 12(d)(1) was to 
limit and address the perceived adverse consequences of ``pyramiding'' 
of investment companies in a fund of funds arrangement, including the 
duplicative costs involved in such a structure, the exercise of undue 
influence or control over the underlying series, and the potential 
adverse impact of large-scale redemptions.
    6. Applicants assert that the structure of applicants' fund of 
funds will include safeguards designed to address multiple layering of 
advisory fees. Applicants state that, before approving any advisory 
contract under section 15 of the Act, the directors of the Direct 
Funds, including a majority of the directors/trustees who are not 
``interested persons,'' as defined in section 2(a)(19), will find that 
any advisory fees charges under the contract are based on services 
provided that are in addition to, rather than merely duplicative of, 
services provided under any Underlying Portfolio advisory contract. 
Applicants state further that this finding, documented in the minute 
books of the Direct Funds. Applicants state that the directors of the 
Direct Funds will make a similar finding with respect to the Other 
Portfolios, as well, which will be fully documented.
    7. Applicants state that, to address the issue of multiple layers 
of sales loads, the Direct Funds will pay no front-end or contingent 
deferred sales charge in connection with the purchase or redemption of 
shares of the Underlying Portfolios, Applicants state further that, as 
a condition to the requested exemptive relief, any sales charges, 
distribution-related fees, or service fees relating to the shares of 
the Direct funds will not exceed the limits set forth in rule 2830 of 
the Conduct Rules of the NASD when aggregated with any sales charges, 
distribution-related fees, or service fees that the Direct Funds may 
pay relating to the acquisition, holding, or disposition of Underlying 
Portfolio or Other Portfolio shares. Applicants assert that the 
aggregate sales charges, therefore, will not exceed the amount that 
otherwise lawfully could be charged at either fund level.
    8. Applicants state administrative and similar fees will be charged 
at the Direct Fund and Underlying Portfolio/Other Portfolio levels. 
However, applicants believe that the redundancy of administrative fees 
and expenses between the Direct Funds and the Underlying Portfolios 
will be minimal, because distinct services are being provided at each 
level. Likewise, applicants believe that distinct services will be 
provided at each level of the Direct Funds' investment in Other 
Portfolios, thus minimizing any concerns of redundancy of 
administrative fees and expenses. In any event, applicants believe that 
administrative and other expenses may be reduced at both levels under 
the proposed Direct Funds' structure. Thus, applicants believe that an 
investment in the Direct Funds should not be significantly more 
expensive than a direct investment in an Underlying Portfolio or Other 
Portfolio.
    9. Applicants believe that the concern of undue influence and 
control is addressed by the proposed structure of the Direct Funds. 
Applicants assert that there is little risk that the Direct Funds' 
adviser will exercise inappropriate control over the Underlying 
Portfolios, which are part of the same ``group of investment 
companies.'' Applicants also contend that the Other Portfolios cannot 
be controlled in any meaningful way by the Direct Funds because section 
12(d)(1)(F) limits them, together with their affiliates, the acquiring 
no more than 3% of the total outstanding stock of any Other Portfolio. 
In addition, applicants note that section 12(D)(1)(F) permits the Other 
Portfolios to reject redemption requests by a Direct Fund that exceed 
1% of the Other Portfolio's total outstanding securities during any

[[Page 5661]]

period of less than 30 days. Applicants state that, to protect further 
the Underlying Portfolios and Other Portfolios from unexpected large 
redemptions, the Direct Funds generally will be designed for 
intermediate and long-term investors.
    10. Applicants state that an additional concern underlying section 
12(d)(1) is that the popularity of fund of funds could lead to the 
creation of more complex vehicles that would not serve any meaningful 
purpose. Applicants submit that these concerns are addressed by the 
fact that no Underlying Portfolio or Other Portfolio can acquire 
securities of any other investment company in excess of the limits 
contained in section 12(d)(1)(A), except to the extent that such 
Underlying Portfolio or Other Portfolio (a) receives securities of 
another investment company as a dividend or as a result of a plan of 
reorganization of a company (other than a plan devised for the purpose 
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed 
to have acquired) securities of another investment company pursuant to 
exemptive relief from the SEC permitting such Underlying Portfolio or 
Other Portfolio to (i) acquire securities of one or more affiliated 
investment companies for short-term cash management purposes; or (II) 
engage in interfund borrowing and lending transactions.
    11. Section 12(d)(1)(J) provides that the SEC may exempt persons or 
transactions from any provision of section 12(d)(1) if and to the 
extent such exemption is consistent with the public interest and the 
protection of investors. Applicants assert that the Direct Funds will 
provide a simple answer to investor demand for a diversified, 
professionally managed fund and funds, and that the structure of the 
Direct Funds is consistent with the public interest and the protection 
of investors.
    12. Section 17(a) generally prohibits an affiliated person of a 
registered investment company from selling securities to, or purchasing 
securities from, the company. Applicants submit that the Direct Funds 
and Underlying Portfolios may be deemed to be affiliated persons of one 
another by virtue of being under common control of their adviser, or 
because Direct Funds own 5% or more of the shares of an Underlying 
Portfolio. Applicants state that sales by the Underlying Portfolios of 
their shares to the Direct Funds could be deemed to be principal 
transactions between affiliated persons under section 17(a)
    13. Section 6(c) of the Act provides that the SEC may exempt 
persons or transactions from any provision of the Act if 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. Applicants believe that relief under 
section 6(c) is appropriate for the reasons discussed above.
    14. Section 17(b) provides that the SEC shall exempt a proposed 
transaction from section 17(a) if evidence establishes that (a) the 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching; (b) the proposed transaction is consistent with the 
policies of the registered investment company involved; and (c) the 
proposed transaction is consistent with the general purposes of the 
Act. Applicants request an exemption under sections 6(c) and 17(b) to 
allow the transactions described above.
    15. Applicants believe that the terms of the proposed arrangement 
are reasonable and fair and do not involve overreaching because the 
consideration paid for the sale and redemption of shares of Underlying 
Portfolios will be based on the net asset values of the Underlying 
Portfolios. Applicants note the investment of assets of the Direct 
Funds in shares of the Underlying Portfolios and the issuance of shares 
of the Underlying Portfolios to the Direct Funds will be effected in 
accordance with the investment restrictions of the Direct Funds and 
will be consistent with the policies as set forth in the registration 
statement of the Direct Funds. Applicants also believe that the 
proposed arrangement is consistent with the general purposes of the 
Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. All Underlying Portfolios will be part of the same ``group of 
investment companies,'' as defined in section 12(d)(1)(G)(ii) of the 
Act, as the Direct Funds.
    2. No Underlying Portfolio or Other Portfolio will acquire 
securities of any other investment company in excess of the limits 
contained in section 12(d)(1)(A) of the Act, except to the extent that 
such Underlying Portfolio or Other Portfolio (a) receives securities of 
another investment company as a dividend or as a result of a plan of 
reorganization of a company (other than a plan devised for the purpose 
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed 
to have acquired securities of another investment company pursuant to 
exemptive relief from the SEC permitting such Underlying Portfolio or 
Other Portfolio to (i) acquire securities of one or more affiliated 
investment companies for short-term cash management purposes; or (ii) 
engage in interfund borrowing and lending transactions.
    3. Any sales charges, distribution-related fees, and service fees 
relating to the shares of the Direct Funds, when aggregated with any 
sales charges, distribution-related fees, and service fees paid by the 
Direct Funds relating to its acquisition, holding, or disposition of 
shares of the Underlying Portfolios (and Other Portfolios), will not 
exceed the limits set forth in rule 2830 of the NASD Conduct Rules.
    4. Before approving any advisory contract under section 15 of the 
Act, the boards of directors/trustees of the Direct Funds, including a 
majority of the directors/trustees who are not ``interested persons,'' 
as defined in section 2(a)(19), will find that the advisory fees 
charged under the contract are based on services provided that are in 
addition to, rather than duplicative of, services provided under any 
Underlying Portfolio or Other Portfolio advisory contract. This 
finding, and the basis upon which the finding was made, will be 
recorded fully in the minute books of the Direct Funds.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2905 Filed 2-5-97; 8:45 am]
BILLING CODE 8010-01-M