[Federal Register Volume 62, Number 54 (Thursday, March 20, 1997)]
[Notices]
[Pages 13410-13414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6969]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22561; 812-10282]


The Park Avenue Portfolio, et al.; Notice of Application

March 13, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (the ``Act'').

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[[Page 13411]]

APPLICANTS: The Park Avenue Portfolio (the ``Portfolio''), on behalf of 
itself and its six existing series, The Guardian Asset Allocation Fund 
(the ``Asset Allocation Fund''), The Guardian Park Avenue Fund (the 
Park Avenue Fund''), the Guardian Investment Quality Bond Fund (the 
``Bond Fund''), The Guardian Baillie Gifford International Fund (the 
``International Fund''), the Guardian Tax-Exempt Fund (the ``Tax-Exempt 
Fund'') and The Guardian Cash Management Fund (the ``Cash Fund''), and 
any series of the Portfolio hereafter established, and Guardian Baillie 
Gifford Limited (``GBG'') and Guardian Investor Services Corporation 
(``GISC''), each on behalf of itself and each open-end management 
investment company or series thereof organized in the future (any such 
fund or series, together with any series of the Portfolio hereafter 
established, collectively, ``Future Funds'') which is a member of the 
same ``group of investment companies'' as that term is defined in rule 
11a-3 under the Act, as the Portfolio, or as other investment companies 
for which GISC or GBG serve as investment advisers.

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

SUMMARY OF APPLICATION: The order would permit the Asset Allocation 
Fund, a series of the Portfolio, to purchase shares of affiliated open-
end investment companies in excess of the percentage limitations of 
section 12(d)(1).

FILING DATES: The application was filed on July 26, 1996 and amended on 
December 26, 1996 and February 20, 1997.

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 April 7, 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 request should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 201 Park Avenue South, New York, New York 10003.

FOR FURTHER INFORMATION CONTACT: Mary T. Geffroy, Staff Attorney, at 
(202) 942-0553, or Mercer E. Bullard, Branch Chief, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. The Portfolio, organized as a Massachusetts business trust, is 
an open-end management investment company registered under the Act. Its 
shares are registered under the 1933 Act. The Portfolio consists of six 
series. The five series other than Asset Allocation Fund, together with 
any Future Funds, will be the Underlying Funds (the ``Underlying 
Funds''), although the Asset Allocation Fund does not currently intend 
to invest in the International Fund or the Tax-Exempt Fund. The Asset 
Allocation Fund, the Park Avenue Fund, the International Fund and the 
Cash Fund offer two classes of shares, Class A and Class B. The Bond 
Fund and the Tax-Exempt Fund offer Class A shares only. Class A shares 
are sold subject to a front end sales charge (except for shares of the 
Cash Fund, which are sold at net asset value), which may be waived or 
reduced in certain circumstances. Class B shares do not have a front 
end sales charge but may be subject to a contingent deferred sales 
charge when such shares are redeemed within six years after purchase. 
Class B shares are subject to a distribution plan adopted by the 
Portfolio pursuant to rule 12b-1 under the Act.\1\
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    \1\ The Portfolio previously adopted a distribution plan under 
rule 12b-1 with respect to Class A shares. As of May 1, 1996, this 
plan was made dormant and no fees are currently, nor are they 
anticipated to be, authorized to be paid by the Class A shares 
pursuant to such plan.
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    2. Since its inception in 1993, the Asset Allocation Fund has 
attempted to provide investors with the opportunity to invest in both 
the equity an fixed-income markets through a single fund. The Asset 
Allocation Fund seeks long-term total investment return consistent with 
moderate investment risk. In furtherance of its objective, the Asset 
Allocation Fund uses theoretical models to allocate its assets in a 
combination of: (i) U.S. equity securities and convertible securities; 
(ii) fixed-income securities, including investment grade corporate debt 
securities, U.S. government securities and mortage-backed securities, 
and (iii) money market instruments. The Asset Allocation Fund may use 
financial futures contracts and options on securities and securities 
indices to facilitate the reallocation of the Fund's assets among the 
various sectors. Each portion of the Asset Allocation Fund's 
investments is separately and actively managed, and consists of the 
same types of securities as those acquired for the Park Avenue Fund, 
the Bond Fund and the Cash Fund. The equity and the money market 
portions of the Asset Allocation Funds portfolio are currently managed 
by the same portfolio managers who oversee the Park Avenue Fund and the 
Cash Fund, respectively.
    3. GISC, a New York corporation, is registered as an investment 
adviser under the Investment Advisers Act of 1940 (the ``Advisers 
Act''), and serves as investment adviser to all of the Portfolio's 
Funds except the International Fund. GISC is wholly owned by the 
Guardian Insurance & Annuity Company, Inc. (``GIAC''), which in turn is 
wholly owned by The Guardian Life Insurance Company of America, a 
mutual life insurance company organized in the State of New York. The 
International Fund is managed by GBG, a registered investment adviser 
under the Advisers Act organized as a joint venture between Baillie 
Gifford Overseas Limited (``BG Overseas'') and GIAC. GBG has appointed 
BG Overseas to act as sub-investment adviser to the International Fund. 
BG overseas is a registered investment adviser under the Advisers Act. 
For its services as investment adviser, each Fund currently pays GISC 
(other than the International Fund, which pays its fee to GBG) an 
advisory fee.
    4. Pursuant to an administrative services agreement between GISC 
and the Portfolio, GISC provides information and administrative 
services for each Fund. For these services, each Fund pays GISC a fee 
at the annual rate of 0.25% of the average daily net assets of that 
Fund's assets, except that the Park Avenue Fund pays the fee at the 
annual rate of 0.25% of average daily net assets for which a ``dealer 
of record'' has been designated. Under the proposed arrangements, the 
administrative service fee will be paid at the Underlying Fund level to 
the extent that the Asset allocation Fund's assets are invested in 
Underlying Funds, and at the Asset Allocation Fund level for the 
portion of assets, if any, invested in individual securities. The 
aggregate amount of the administrative services fees will not change, 
since the Asset Allocation Fund's shareholders will bear only their pro 
rata portion of the Underlying Funds' fees as well as the fee assessed

[[Page 13412]]

on any portion of the Asset Allocation Fund's assets invested in 
individual securities.
    5. Applicants request relief from the limitations of section 
12(d)(1) to the extent necessary to permit the Asset Allocation Fund, 
and any Future Fund that will be part of the same ``group of investment 
companies'' (as that term is defined in rule 11a-3 under the Act) as 
the Portfolio, or as other investment companies for which GISC or GBG 
serve as investment advisers, to purchase, and the Underlying Funds to 
sell, shares of the Underlying Funds in excess of the limits of section 
12(d)(1).
    6. Applicants anticipate that the Asset Allocation Fund will 
purchase shares of the Park Avenue Fund and the Bond Fund, as well as 
individual securities, including but not limited to money market 
instruments and certain futures and options currently used in 
reallocating the Asset Allocation Fund's investments. The Asset 
Allocation Fund may invest from time to time in the Cash Fund in lieu 
of individual money market instruments. The Asset Allocation Fund will 
invest in other investment companies only to the extent contemplated by 
the requested relief.
    7. At the time the Asset Allocation Fund commences to act as a fund 
of funds, and thereafter to adjust the allocation of its assets among 
the Underlying Funds in instances where futures and options 
transactions will not effectively facilitate shifts in allocation, the 
Asset Allocation Fund may transfer securities held in its portfolio, as 
well as cash, to an Underlying Fund in return for shares of the 
Underlying Fund. In addition, the Underlying Funds may from time to 
time pay the Asset Allocation Fund its pro rata share of the Underlying 
Fund's portfolio securities, as well as cash. These in-kind payments 
will be made only in circumstances where the in-kind transfers will 
consist of securities that are appropriate for the receiving entity. 
Any in-kind transfers between the Asset Allocation Fund and an 
Underlying Fund, either as payment by the Asset Allocation Fund for 
purchases of shares of an Underlying Fund, or as payment by an 
Underlying Fund of redemption proceeds to the Asset Allocation Fund, 
would be made in compliance with the provisions of rule 17a-7 under the 
Act, except in two respects. First, the requirements of rule 17a-7(a) 
that payment for the securities transferred be made in cash will not be 
met where an Underlying Fund pays the Asset Allocation Fund in its own 
shares, rather than in cash, for the securities transferred by the 
Asset Allocation Fund. Second, due to the fluctuating asset levels of 
the Asset Allocation Fund and the Underlying Funds, an affiliate or 
second tier affiliate of a Fund that provided the original seed capital 
for such Fund may, from time to time, hold more than 5% of the Fund's 
outstanding voting shares, and, as a result, it is possible that an in-
kind transaction would not meet the requirement of rule 17a-7 that 
exempt transactions must be effected between persons affiliated 
``solely by reason of having a common investment adviser * * *, common 
directors, and/or common officers.''

Applicants' Legal Analysis

    1. Section 12(d)(1)(A) of the Act 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)(J) provides that the SEC may exempt any person, 
security, or transaction from any provision of section 12(d)(1), if and 
to the extent that such exemption is consistent with the public 
interest and the protection of investors. Applicants submit that the 
requested exemption is consistent with the public interest and the 
protection of investors.
    3. Applicants believe that section 12(d)(1) of the Act is intended 
to prevent unregulated pyramiding of investment companies and the 
abuses which are perceived to arise from such pyramiding, including 
layering of advisory fees and duplicative sales charges, the threat of 
large scale redemptions, and the complexity of the investment vehicle.
    4. Applicants believe that no ``layering'' of advisory fees will 
result from the proposed structure. While GISC will reserve the right 
to charge an asset allocation fee of up to .15% annually, it intends to 
voluntarily waive the entire amount of this fee during any period in 
which the Asset Allocation Fund is operated as a fund of funds. If any 
or all of this fee is charged in the future, it will be imposed only if 
GISC determines that the fee will be justified by the incremental 
benefits, not otherwise available, of the ongoing profession asset 
allocation service that GISC provides for investors choosing to invest 
in the Asset Allocation Fund rather than in specific Underlying Funds. 
Further, the trustees of the Portfolio, including a majority of the 
trustees who are not ``interested persons'' of the Portfolio, as 
defined in section 1(a)(19) of the Act (the ``Independent Trustees''), 
must, in approving the advisory arrangements of the Asset Allocation 
Fund, find that any allocation or advisory fee is based on services in 
addition to, rather than duplicative of, services provided pursuant to 
any Underlying Fund's advisory contract.
    5. Applicants assert that investors in the Asset Allocation Fund 
will not incur duplicative sales charges or distribution expenses 
because the Asset Allocation Fund will invest exclusively in Class A 
shares of the Underlying Funds, with a waiver of any applicable front 
end sales load. Applicants further contend that since Class A shares do 
not bear any rule 12b-1 fees, there will be no duplication of rule 12b-
1 fees applicable for Class B shares of the Asset Allocation Fund. 
Applicants note that, in any event, the aggregate sales charges and 
distribution expenses borne by investors in the Asset Allocation Fund 
will comply in all respects with rule 2830 of the NASD's Conduct Rules.
    6. Applicants also assert that the Asset Allocation Fund's 
shareholders will bear a reduced amount of portfolio transaction costs 
under a fund of funds structure. By investing in the Underlying Funds, 
applicants believe that shareholders will be able to take advantage of 
reduced brokerage and other transaction costs associated with 
investment in individual securities, except to the extent that the 
Asset Allocation Fund continues to invest in small lots of individual 
securities. Although shareholders will be subject to their 
proportionate share of the transaction costs at the Underlying Fund 
level, applicants assert that such costs will reflect the generally 
lower costs associated with trading larger blocks of securities and are 
expected to reduce such costs for shareholders of the Asset Allocation 
Fund.
    7. Applicants believe that a concern underlying section 12(d)(1) is 
that, if one fund is permitted to own a sizeable percentage of the 
shares of another fund, the management of the underlying fund must be 
continually aware that a possible large redemption carries with it a 
loss of advisory fees. Applicants believe that concern over this 
potential abuse is not relevant to the proposed

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arrangements. Applicants assert that there is little risk that GISC 
will exercise inappropriate control over the Underlying Funds. 
Applicants note that the Asset Allocation Fund only will acquire shares 
of Underlying Funds that are members of the same group of investment 
companies. Applicants also believe that, because GISC or GBG is 
investment adviser to the Underlying Funds as well as to the Asset 
Allocation Fund, a redemption from one Underlying Fund will simply lead 
to the investment of the proceeds in another Underlying Fund.
    8. Applicants believe that another concern underlying section 
12(d)(1) is the impact that the threat of large scale redemptions might 
have on the orderly management of an underlying fund. Applicants 
believe that, for example, to address the threat of large scale 
redemptions, the underlying fund might be required to maintain 
excessive cash balances, and if it did not, it might have to sell off a 
substantial portion of its assets, thereby saddling the fund's 
remaining shareholders with capital gains and a greater pro rata 
portion of fixed costs. Applicants believe that the Asset Allocation 
Fund will be structured in a manner to minimize and essentially 
eliminate these types of problems. Applicants contend that, because 
investors will rely on GISC to periodically readjust the mix of equity 
and debt exposure, the Asset Allocation Fund is not likely to be used 
as a short-term trading vehicle. Applicants state that, to attempt to 
minimize the impact on shifts among the Underlying Funds, the Asset 
Allocation Fund will continue to be permitted to engage in futures 
contracts and options on securities and securities indices to 
facilitate an orderly adjustment in allocation of the Funds' assets. 
Applicants believe that this policy allows the Asset Allocation Fund to 
respond to changes in market conditions, and would serve to minimize 
any effects of a shift in its allocation among the Underlying Funds.
    9. Applicants state that, to address the concern that the 
popularity of funds of funds could lead to the creation of more complex 
vehicles that would not serve any meaningful purpose, and as a 
condition to the requested relief, no Underlying Fund will acquire 
securities of any other investment company in excess of the limits 
contained in section 12(d)(1)(A).
    10. Applicants state that the Asset Allocation Fund will provide 
true diversification benefits since the Underlying Funds will pursue 
different investment strategies. Moreover, the Asset Allocation Fund 
will provide greater diversification in the actual number and type of 
securities in its portfolio by investing in the Park Avenue Fund and 
the Bond Fund than it would have provided under its current structure.
    11. Section 17(a) generally makes it unlawful for an affiliated 
person of a registered investment company to sell securities to, or 
purchase securities from, the company. Applicants state that, because 
the Asset Allocation Fund and the Underlying Funds are each advised by 
GISC or GBG, the Asset Allocation Fund and the Underlying Funds could 
be deemed to be affiliates of one another. Applicants believe that 
purchases by the Asset Allocation Fund of the shares to the Underlying 
Funds and the sale by the Underlying Funds of their shares of the Asset 
Allocation Fund could be deemed to be principal transactions between 
affiliated persons under section 17(a).
    12. 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 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 
permit purchases and redemptions by the Asset Allocation Fund of shares 
of the Underlying Funds and the sales by the Underlying Funds of their 
shares to the Asset Allocation Fund.
    13. Applicants believe that the proposed arrangements meet all of 
the qualifications necessary for exemption under sections 6(c) and 
17(b). The consideration to be paid and received for the sale and 
redemption of shares of Underlying Funds will be based on the net asset 
value of Class A shares of such Funds. Applicants state that the 
proposed transactions will be consistent with the policies of each of 
the Asset Allocation Fund and the Underlying Funds as set forth in 
their combined prospectus and statement of additional information 
contained in the Portfolio's registration statement.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The Asset Allocation Fund and each Underlying Fund will be part 
of the same ``group of investment companies,'' as defined in rule 11a-3 
under the Act.
    2. No Underlying Fund shall acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    3. Before approving any advisory contract under section 15 of the 
Act, the Board of Trustees of the Portfolio, including a majority of 
Trustees who are not ``interested persons,'' as defined in section 
2(a)(19) of the Act, shall find that advisory fees charged under such 
contract are based on services provided that are in addition to, rather 
than duplicative of, services provided pursuant to any Underlying Fund 
advisory contract. Such finding, and the basis upon which the finding 
was made, will be recorded fully in the minute books of the Asset 
Allocation Fund.
    4. Any sales charges or services fees charged with respect to 
securities of the Asset Allocation Fund, when aggregated with any sales 
charge or service fees paid by the Asset Allocation Fund with respect 
to securities of the Underlying Funds, shall not exceed the limits set 
forth in rule 2830 of the NASD's Conduct Rules.
    5. Applicants agree to provide the following information, in 
electronic format, to the Chief Financial Analyst of the Commission's 
Division of Investment Management: monthly average total assets for the 
Asset Allocation Fund and each of the Underlying funds; monthly 
purchases and redemptions (other than by exchange) for the Asset 
Allocation Fund and each Underlying Fund; monthly exchanges into and 
out of the Asset Allocation Fund and each Underlying Fund; month-end 
allocations of the Asset Allocation Fund's assets among the Underlying 
Funds; annual expense ratios for the Asset Allocation Fund and each 
Underlying Fund; and a description of any vote taken by the 
shareholders of any Underlying Fund, including a statement of the 
percentage of votes cast for and against the proposal by the Asset 
Allocation Fund and by the other shareholders of the Underlying Fund. 
Such information will be provided as soon as reasonably practicable 
following each fiscal year-end of the Asset Allocation Fund (unless the 
Chief Financial Analyst shall notify the Asset Allocation Fund, the 
Portfolio or GISC in writing that such information need no longer be 
submitted).


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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-6969 Filed 3-19-97; 8:45 am]
BILLING CODE 8010-01-M