[Federal Register Volume 62, Number 241 (Tuesday, December 16, 1997)]
[Notices]
[Pages 65827-65829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32749]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22933; 812-10670]


Financial Institutions Series Trust, et al.; Notice of 
Application

December 10, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for order under section 11(a) of the 
Investment Company Act of 1940 (the ``Act'').

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SUMMARY OF APPLICATION: Applicants request an order permitting certain 
offers of exchange of shares (the ``Exchange Program'') between Summit 
Cash Reserves Fund Portfolio (``MMF''), a money market fund sponsored 
by Merrill Lynch, Pierce, Fenner & Smith Incorporated (``Merrill 
Lynch'') and certain non-money market funds in other groups of 
investment companies (the ``Participating Funds'') on a basis other 
than their respective net asset values per share.

APPLICANTS: Financial Institutions Series Trust; Fund Asset Management, 
L.P. (``FAM''); Merrill Lynch Asset Management, L.P. (``MLAM''); 
Merrill Lynch Funds Distributor, Inc. (``MLFD''); and Merrill Lynch.

FILING DATES: The application was filed on May 15, 1997. Counsel for 
applicants has agreed to file an amendment to the application during 
the notice period, the substance of which is incorporated herein.

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

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Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should state the nature of the writer's 
interest, the reason for the request and the issues contested. All 
requests must be received by the SEC by 5:30 p.m. on January 2, 1998, 
and should be accompanied by proof of service on applicants, in the 
form of an affidavit or, for lawyers, a certicate of service. Persons 
who wish to be notified of the date of a hearing may request 
notification by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street N.W., Washington, D.C. 
20549. Applicants, c/o Merrill Lynch Asset Management, L.P. Attn: 
Robert Harris, Esq., 800 Scudders Mill Road, Plainsboro, New Jersey 
08536.

FOR FURTHER INFORMATION CONTACT: H.R. Hallock, Jr., Senior Counsel, at 
(202) 942-0568 (Division of Investment Management, Office of Disclosure 
and Review), or Mercer E. Bullard, Special Counsel, at (202) 942-0659 
(Division of Investment Management, Office of Chief Counsel).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee by 
writing the SEC's Public Reference Branch at 450 Fifth Street, N.W., 
Washington, D.C., or by telephone at (202) 942-8090.

Applicants' Representations

    1. MMF, a money market fund, is a series of Financial Institutions 
Series Trust, an open-end management investment company registered 
under the Act. FAM and MLAM are wholly-owned by Merrill Lynch & Co. 
(``ML&Co.'') and are registered as investment advisers under the 
Investment Advisers Act of 1940. FAM serves as MMF's investment 
adviser.\1\ MLFD, a broker-dealer registered under the Securities 
Exchange Act of 1934 (the ``1934 Act'') and a member of the National 
Association of Securities Dealers, Inc. (the ``NASD''), serves as MMF's 
distributor. Merrill Lynch, a wholly-owned subsidiary of ML&Co., is a 
broker-dealer registered under the 1934 Act and a member of the NASD.
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    \1\ In the future, MMF may be a feeder fund to another money 
market fund in reliance on section 12(d)(1)(E) of the Act, in which 
case the only investment securities it would hold would be shares of 
the master fund. In that event, either FAM or MLAM will serve as the 
investment adviser of the fund in which MMF invests.
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    2. The Participating Funds will be non-money market open-end 
management investment companies registered under the Act (a) that are 
or will be sold to customers of Merrill Lynch under agreements whereby 
Merrill Lynch serves as a selected dealer or agent; (b) whose 
investment adviser is other than FAM or MLAM; (c) whose principal 
underwriter is other than MLFD; and (d) that have agreed to participate 
in the Exchange Program. Shares of Participating Funds may be sold with 
a front-end sales load (``FESL''), subject to a contingent deferred 
sales charge (``CDSC'') or subject to alternative sales charge 
arrangements (e.g., a level load). Each of the principal underwriters 
of the Participating Funds will be registered as a broker-dealer under 
the 1934 Act and a member of the NASD.
    3. Customers of Merrill Lynch who have acquired shares of 
Participating Funds typically have such shares held in nominee name on 
the books of Merrill Lynch. Merrill Lynch provides consolidated account 
statements and year-end tax reports for its customers reflecting all 
positions held on the books of Merrill Lynch, including shares of 
Participating Funds. Merrill Lynch does not typically act as a selected 
dealer for money market funds other than those in the Merrill Lynch 
``group of investment companies'' (including MMF), as that term is 
defined in rule 11a-3.\2\ Accordingly, Merrill Lynch does not typically 
hold on its books shares of money market funds that currently have 
exchange privileges with the Participating Funds.
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    \2\ Rule 11a-3 defines ``group of investment companies'' to mean 
two or more open-end investment companies that hold themselves out 
as being related and that have a common adviser or principal 
underwriter (or advisers and underwriters that are affiliated 
persons of one another within the meaning of section 2(a)(3) of the 
Act).
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    4. The Participating Funds generally offer exchange privileges that 
permit an investor to exchange shares of one Participating Fund for 
shares of another Participating Fund in the same group of investment 
companies without paying a CDSC on the redemption of the shares 
exchanged or a FESL on the shares purchased, depending on the sales 
loads charged by each Fund. Currently, a Merrill Lynch customer who is 
a shareholder of a Participating Fund may exchange into a money market 
fund with which the Participating Fund has an exchange privilege. In 
that event, because the customer's interest in that money market fund 
will not be carried on Merrill Lynch's books, Merrill Lynch is unable 
to provide a consolidated report of the customer's entire position. 
Alternatively, the customer could acquire a money market fund in the 
Merrill Lynch group of investment companies, the shares of which can be 
recorded on the books of Merrill Lynch. In that case, however, the 
customer would have to redeem shares of the Participating Fund and pay 
any applicable CDSC or, if Participating Fund shares subject to an FESL 
are redeemed, the customer may have to pay the FESL upon any subsequent 
repurchase of those shares.
    5. The Exchange Program would enable Merrill Lynch customers who 
hold Participating Fund shares to maintain all of their holdings at 
Merrill Lynch, while also being able to avail themselves of the 
exchange privileges offered by the Participating Fund in which they 
have invested. These shareholders would be able to make exchanges into 
MMF, or exchanges back into shares of the same Participating Fund 
involved in the original exchange, without incurring a sales load. 
These shareholders also would be able to exchange their MMF shares at a 
reduced or no sales load into shares of certain other Participating 
Funds in the same group of investment companies as the Participating 
Fund involved in the original exchange.
    6. Any exchange under the Exchange Program will be made in 
accordance with the exchange privileges offered by the Participating 
Fund group in which the Merrill Lynch customer has invested. Thus, 
shareholders of a Participating Fund who exchange their shares for 
shares of MMF may not exchange the MMF shares for shares of another 
fund that is not in the same group of investment companies as the 
Participating Fund. The Exchange Program also will not enable 
Participating Fund shareholders to exchange their shares directly for 
shares of another Participating Fund except in accordance with the 
exchange privileges offered by the particular Participating Fund group.
    7. All shares involved in the Exchange Program will be held in 
Merrill Lynch's omnibus account on each Fund's books.\3\ Merrill Lynch, 
as selected dealer for both MMF and the Participating Fund involved in 
the exchange, will process the sale and related purchase of shares at 
the price calculated in accordance with each Fund's prospectus. Merill 
Lynch will accept and record the payment of sales loads, administrative 
fees and redemption fees. In particular, upon receipt of a share 
exchange request, Merrill Lynch will process the share exchange on its 
mutual fund shareholder software system in accordance with the 
directions of the prospectuses for MMF and for the Participating Fund 
involved

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in the exchange. Merrill Lynch also will prepare and mail appropriate 
confirmations or statements related to the share exchange transactions.
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    \3\ Shares held in certificated form will not be eligible for 
the Exchange Program.
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    8. The exchange arrangements for MMF and each Participating Fund 
will be described in general terms in MMF's prospectus, including the 
existence of any administrative or redemption fees charged (without 
necessarily identifying the specific Funds available for exchange). 
Each Participating Fund's prospectus will be required to disclose the 
amount of any administrative or redemption fees that will be imposed in 
connection with an exchange to or from MMF.

Applicants' Legal Analysis

    1. Section 11(a) of the Act prohibits any offer by a registered 
open-end management investment company or its principal underwriter 
involving the exchange of the company's shares on any basis other than 
the relative net asset value of the securities to be exchanged, unless 
the terms of the offer have been approved in advance by the SEC or meet 
the requirements of any rules adopted to regulate exchange offers.
    2. Rule 11a-3 allows an investment company or its principal 
underwriter to make exchange offers to its shareholders or to 
shareholders in another company in the same group of investment 
companies, and to charge a sales load, redemption fee, administrative 
fee or any combination thereof in connection with the exchange, subject 
to compliance with certain requirements. Among other requirements, 
paragraph (b)(6)(i) of the rule requires that the prospectus of the 
offering company disclose the amount of any administrative or 
redemption fee charged in connection with an exchange.
    3. Applicants request an order under section 11(a) to permit the 
exchange of shares of MMF for shares of Participating Funds, and shares 
of Participating Funds for shares of MMF, at other than their 
respective net asset values at the time of exchange. Applicants state 
that these exchanges would include, for example, (i) exchanges of MMF 
shares for shares of a Participating Fund sold with an FESL or a CDSC 
(``CDSC Shares''), (ii) exchanges of CDSC Shares of a Participating 
Fund for MMF shares, and (iii) the imposition of an ``administrative'' 
and/or ``redemption'' fee (as defined in rule 11a-3) in connection with 
the exchanges.
    4. Applicants state that each exchange will comply with all the 
requirements of rule 11a-3, except (a) the requirement that the 
Participating Funds and MMF be part of the same ``group of investment 
companies,'' as that term is defined in paragraph (a)(5) of the rule, 
and (b) the requirement of paragraph (b)(6)(i) that MMF's prospectus 
disclose the amount of any administrative or redemption fee imposed on 
an exchange transaction for its securities, provided that MMF's 
prospectus will disclose the existence of these fees.
    5. Applicants submit that the Exchange Program would not create any 
opportunity for improper gain by the underwriters of the Participating 
Funds, by MLFD, or by Merrill Lynch, and would not raise the 
possibility of inducing exchanges for the purpose of exacting 
additional sales charges, the abuse against which section 11(a) was 
directed. Furthermore, if the exchanges were always made at relative 
net asset values, applicants believe that the distribution systems of 
the Participating Funds could be disrupted because an investor could 
easily avoid applicable FESLs by acquiring shares of MMF and 
immediately exchanging those shares for Participating Fund shares, or 
avoid applicable CDSCs by exchanging CDSC Shares for MMF shares and 
then redeeming such shares without payment of any otherwise applicable 
CDSC. Applicants contend that the Exchange Program would avoid these 
problems.
    6. Applicants also contend that the Exchange Program would benefit 
exchanging shareholders by crediting them for FESLs already paid, or, 
in the case of CDSC Shares, for the time the MMF shares are held or for 
distribution fees paid with respect to MMF shares under rule 12b-1 
under the Act, consistent with the requirements of rule 11a-3. Finally, 
applicants contend Merrill Lynch is logically positioned to implement 
the Exchange Program even though members of different ``groups of 
investment companies'' are involved because it is the single entity 
with the information needed to execute both the redemption and purchase 
orders involved in a share exchange.
    7. Applicants believe there will be such a wide variety of 
potential exchange arrangements offered by different families of 
Participating Funds that it would be impractical for MMF's prospectus 
to state the amounts of administrative or redemption fees imposed on an 
exchange transaction. Applicants also submit that shareholders will be 
fully informed of the fees and charges applicable to any exchange, 
because each Participating Fund's prospectus will include the 
information required by rule 11a-3.
    Finally, applicants note that MMF's prospectus will include general 
information about the Exchange Program and refer shareholders to their 
financial consultants for more detailed information.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Merrill Lynch will be responsible for tracking the payment of 
sales loads, administrative fees and redemption fees by shareholders of 
investment companies or portfolios covered by the application, and 
otherwise will conduct share exchanges in accordance with the 
applicants' representations.
    2. Offers of exchange pursuant to the applicants' Exchange Program 
will be conducted in accordance with rule 11a-3 under the Act, except 
that:
    (a) An offering company will not be limited to making an exchange 
offer only to the holder of a security of the offering company, or of 
another open-end investment company within the same group of investment 
companies as the offering company;
    (b) MMF's prospectus will describe the existence (but not the 
amount) of any administrative or redemption fees imposed on an exchange 
pursuant to the Exchange Program.
    3. Merrill Lynch will maintain and enforce internal control 
procedures that are designed to assure the Exchange Program's 
compliance with all applicable provisions of rule 11a-3 under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32749 Filed 12-15-97; 8:45 am]
BILLING CODE 8010-01-M