[Federal Register Volume 62, Number 8 (Monday, January 13, 1997)]
[Notices]
[Pages 1783-1786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-686]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22441; 812-10300]


The OFFITBANK Investment Fund, Inc., et al.; Notice of 
Application

January 6, 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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APPLICANTS: The OFFITBANK Investment Fund, Inc. (``OFFITBANK Fund''), 
on behalf of OFFITBANK Total Return Fund (``TRF''), and on behalf of 
OFFITBANK High Yield Fund, OFFITBANK Emerging Markets Fund, OFFITBANK 
Latin America Total Return Fund, OFFITBANK Investment Grade Global Debt 
Fund, OFFITBANK Global Convertible Fund, OFFITBANK California Municipal 
Fund, OFFITBANK New York Municipal Fund, and OFFITBANK National 
Municipal Fund, and any future series; The OFFITBANK Variable Insurance 
Fund, Inc. (``OFFITBANK VIF''), on behalf of OFFITBANK VIF-Total Return 
Fund (``VTRF'' and, together with TRF, the ``Parent Funds'') and 
OFFITBANK VIF-High Yield Fund, OFFITBANK VIF-Emerging Markets Fund, 
OFFITBANK VIF-U.S. Government Securities Fund, OFFITBANK VIF-Investment 
Grade Global Debt Fund, OFFITBANK VIF-High Grade Fixed-Income Fund, and 
OFFITBANK VIF-Global Convertible Fund, and any future series; each 
open-end management investment company or series thereof to be 
organized in the future and which is advised by OFFITBANK (each such 
company or series, other than TRF and VTRF, an ``Underlying Fund,'' and 
collectively, the ``Underlying Funds''); and OFFITBANK (``OFFITBANK'').

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

SUMMARY OF APPLICATION: The requested order would permit each Parent 
Fund to invest all or a portion of its assets in the Underlying Funds 
in excess of the percentage limitations of section 12(d) (1).

FILING DATES: The application was filed on August 16, 1996, and amended 
on December 17, 1996.

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 January 31, 
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 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: OFFITBANK Fund and OFFITBANK VIF, 125 W. 55th 
Street,

[[Page 1784]]

New York, N.Y. 10019; OFFITBANK, 520 Madison Avenue, New York, N.Y. 
10022.

FOR FURTHER INFORMATION CONTACT:
Christine Y. Greenlees, Senior Counsel, at (202) 942-0581, or Mary Kay 
Frech, 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. OFFITBANK Fund and OFFITBANK VIF are each Maryland corporations 
that are registered under the Act as open-end management investment 
companies. OFFITBANK Fund intends to establish TRF as a new series. 
VTRF is an existing series of OFFITBANK-VIF which has not yet commenced 
investment operations. OFFITBANK Fund is available to institutional and 
retail investors, while OFFITBANK-VIF is designed to serve as a funding 
vehicle for variable annuity contracts and variable life insurance 
policies offered by certain participating insurance companies.
    2. OFFITBANK is a New York State chartered trust company that 
currently provides investment advisory services to the Underlying 
Funds, and will serve as investment adviser to the Parent Funds.\1\ 
OFFITBANK's principal business is rendering discretionary investment 
management services to high net worth individuals and family groups, 
foundations, endowments, and corporations.
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    \1\ Applicants state that OFFITBANK is a ``bank,'' as defined in 
section 202(a)(2) of the Investment Advisers Act of 1940, and 
therefore is not required to be, and is not, registered as an 
investment adviser.
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    3. The Parent Funds are designed to provide investors with one or 
more diversified investment programs to meet particular investment 
goals and risk tolerances. The Parent Funds are intended for persons 
who are able to identify their long-term goals and risk tolerances, but 
prefer to allow OFFITBANK to decide which specific funds to choose at 
any particular time to seek to achieve these goals.
    4. Each Parent Fund proposes to invest all or a portion of its 
assets in shares of the Underlying Funds, and, therefore, to operate as 
a fund of funds. Any assets that are not invested in the Underlying 
Funds will be invested directly in stocks, bonds, and other 
instruments, including money market instruments.\2\ Allocations of a 
Parent Fund's assets among Underlying Funds will be made consistent 
with its investment objective as described in the applicable 
prospectus. The Underlying Funds in which a Parent Fund may invest also 
will be described in the Parent Fund's prospectus. To the extent the 
identity of the Underlying Funds in which a Parent Fund may invest 
changes over time (such as through the inclusion of new Underlying 
Funds), shareholders and investors will receive disclosure of such 
changes.
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    \2\ Each Parent Fund that will make investments in reliance on 
the proposed order will invest in other investment companies only to 
the extent contemplated by the requested relief.
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    5. OFFITBANK anticipates charging an advisory fee to each Parent 
Fund with respect to that portion of the Parent Fund's assets invested 
directly in stocks, bonds, and other instruments. With respect to the 
portion of a Parent Fund's assets invested in the Underlying Funds, 
OFFITBANK will not charge any advisory fee to the Parent Fund unless 
such fee is found to be based upon services under an investment 
advisory contract that are additional to, rather than duplicative of, 
services provided pursuant to any Underlying Fund's advisory contract. 
Shareholder servicing costs, which include transfer agency functions, 
and mailing and printing of prospectuses, shareholder reports and 
proxies to existing shareholders, also will be borne by investors at 
the Parent Fund level.
    6. The Underlying Funds currently are sold without front-end or 
contingent deferred sales charges. Certain of the Underlying Funds are 
subject to rule 12b-1 fees and shareholder servicing fees. While it is 
currently anticipated that the Parent Funds will be sold without any 
front-end or contingent deferred sales charges, and will not be subject 
to any rule 12b-1 or shareholder servicing fees, applicants serve the 
right to impose sales charges and service fees in the future with 
respect to any entities subject to the requested order, as permitted in 
condition 4 below, and any other provisions or limitations of 
applicable law.

Applicant's Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) of the Act would prevent, in substance, each 
Parent Fund from purchasing or acquiring shares of any Underlying Fund 
if immediately after such purchase or acquisition it would own in the 
aggregate: (a) more than 3% of the total outstanding voting stock of 
the acquired company; (b) securities issued by the acquired company 
having an aggregate value in excess of 5% of the value of the total 
assets of the acquiring company; or (c) securities issued by the 
acquired company and all other investment companies having an aggregate 
value in excess of 10% of the value of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act would prevent, in 
substance, each Underlying Fund from selling its shares to its 
respective Parent Fund if, immediately after such sale, more than 3% of 
the total outstanding voting stock of the Underlying Fund is owned by 
the Parent Fund, or more than 10% of the total outstanding voting stock 
of the Underlying Fund is owned by the Parent Fund and other investment 
companies.
    2. In October 1996, the National Securities Markets Improvement Act 
of 1996 (the ``1996 Act'') was adopted.\3\ Among other things, the 1996 
Act amended the Act by adding section 12(d)(1)(G), which exempts from 
the limitations of section 12(d)(1) certain ``fund of funds'' 
structures that comply with the conditions prescribed in section 
12(d)(1)(G). Applicants state that, but for the fact that applicants 
propose that the Parent Funds have the flexibility to invest directly 
in stocks, bonds, and other instruments, in addition to investing in 
the Underlying Funds, applicants would be able to rely on the exemption 
now provided in the Act.\4\
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    \3\ Pub. L. No. 104-290 (1996).
    \4\ Section 12(d)(1)(G) limits direct investing outside of 
affiliated funds to certain government securities and short-term 
instruments.
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    3. The 1996 Act also added section 12(d)(1)(J), which provides, in 
relevant part, that the SEC may by order conditionally or 
unconditionally exempt any person, security, or transaction from the 
limitations 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 request an order under section 12(d)(1)(J) 
exempting them from section 12(d)(1) to permit each Parent Fund to 
invest in any Underlying Fund in excess of the percentage limitations 
of that section.
    4. Applicants state that section 12(d)(1) is intended to prevent 
unregulated pyramiding of investment companies, and the abuses which 
are perceived to arise from such pyramiding. Applicants note that, 
prior to the enactment of section 12(d)(1), there was concern that 
unregulated pyramiding of investment companies would provide, for those 
in control at the top of the pyramid, an element of power and 
domination over funds

[[Page 1785]]

further down in the pyramid. For example, applicants note that a Parent 
Fund might be able to influence, without proper authority, the 
activities of the persons operating an Underlying Fund or the 
activities of the Fund itself. Applicants state that, arguably, this 
control could arise via a threat of large-scale redemptions or the fact 
that an acquired fund, faced with substantial investment in its shares 
by an acquiring fund, might feel constrained to manage its assets in a 
manner different from the fund's normal practice in order to be able to 
satisfy unexpected, disruptive, large redemption requests.
    5. Applicants believe that none of the dangers that were of concern 
to Congress in drafting section 12(d)(1) are present in the proposed 
Parent Fund arrangement. Unlike the fund of funds operations that 
prompted enactment of section 12(d)(1), the Parent Funds and the 
Underlying Funds will all be part of the same group of investment 
companies. Further, applicants state that OFFITBANK, which will be the 
adviser to the Underlying Funds as well as to the Parent Funds, is 
governed by its obligations to the Parent Funds and the Underlying 
Funds and their shareholders and any allocation or reallocation by 
OFFITBANK of a Parent Fund's assets among Underlying Funds would be 
required to be made in accordance with those obligations. Applicants 
also believe that OFFIBANK's own self-interest will prompt it to 
maximize benefits to all shareholders, and not disrupt the operations 
of any of the Parent Funds or the Underlying Funds. Finally, applicants 
reiterate that, but for the fact that the Parent Funds may invest 
directly in stocks, bonds, and other instruments, applicants' proposal 
is consistent with fund of funds structures now explicitly permitted 
under section 12(d)(1)(G) of the Act.
    6. As noted above, OFFITBANK anticipates charging an advisory fee 
to the Parent Fund to the extent that the Fund's assets are invested 
directly in stocks, bonds, or other instruments, rather than shares of 
the Underlying Funds. With respect to the portion of a Parent Fund's 
assets invested in the Underlying Funds, applicants represent that, 
before approving any advisory contract under section 15 of the Act, the 
directors of each Parent Fund, including a majority of the directors of 
each Parent Fund who are not ``interested persons,'' as defined in 
section 2(a)(19) of the Act (``Independent Directors''), shall find 
that the advisory fees, if any, 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's advisory 
contract.
    7. While investment in the Parent Funds will involve additional 
expenses due to the costs of establishing and maintaining the Parent 
Funds as separate series, applicants believe that those additional 
expenses will not be substantial and that such expenses will be offset 
by the benefits which are presumed to be generated for the Underlying 
Funds and inure indirectly to the Parent Funds. Applicants believe 
that: (a) the addition of assets from each Parent Fund to the 
Underlying Fund may reduce the expense ratio for each Underlying Fund; 
(b) to the extent that shareholders of the Parent Funds otherwise would 
directly open accounts with each of the Underlying Funds, the number of 
accounts and related expenses at the Underlying Fund level may be 
reduced; and (c) by investing in the Underlying Funds, the Parent Funds 
may more efficiently achieve a level of diversification through various 
asset classes than if investments were made directly in portfolio 
securities, and without incurrence of transaction costs associated with 
direct investing. Moreover, applicants will provide to the Chief 
Financial Analyst of the SEC's Division of Investment Management annual 
expense ratios for each Parent Fund and each Underlying Fund, as 
specified in condition 5 below. Applicants believe that this will 
enable the SEC to monitor the expenses relating to each Parent Fund. 
Based on the foregoing, applicants believe that the proposed 
transactions satisfy the requirements of section 12(d)(1)(J).

B. Section 17(a)

    1. Section 17(a) makes it unlawful for an affiliated person of a 
registered investment company, or an affiliated person of such person, 
to sell securities to, or purchase securities from, the company. Under 
the proposed structure, the Parent Funds and the Underlying Funds may 
be deemed to be affiliates of one another. Purchases by the Parent 
Funds of the shares of the Underlying Funds and the sale by the 
Underlying Funds of their shares to the Parent funds could thus be 
deemed to be principal transactions between affiliated persons under 
section 17(a).
    2. 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 provisions of the 
Act.
    3. Section 6(c) of the Act provides that the SEC may exempt persons 
or transactions if, and to the extent that, 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.
    4. Applicants submit that the terms of the proposed transactions 
are fair and reasonable and do not involve overreaching. The 
consideration paid for the sale and redemption of shares of the 
Underlying Funds will be based on the net asset value of the Underlying 
Funds, subject to applicable sales charges. In addition, applicants 
assert that the proposed transactions will be consistent with the 
policies of each Parent Fund. The investment of assets of the Parent 
Funds in shares of the Underlying Funds and the issuance of shares of 
the Underlying Funds to the Parent Funds will be effected in accordance 
with the investment restrictions of each Parent Fund and will be 
consistent with the policies of (as set forth in the registration 
statement applicable to) each Parent Fund. Applicants also state that, 
for the reasons discussed above, the proposed transactions are 
consistent with the general purposes of the Act. Applicants believe 
that the proposed transactions meet the standards of sections 6(c) and 
17(b).\5\
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    \5\ Section 17(b) applies to specific proposed transactions, 
rather than an ongoing series of future transactions. See Keystone 
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c) 
frequently is used to grant relief from section 17(a) to permit an 
ongoing series of future transactions.
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Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each Parent 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 directors of each Parent Fund, including a majority of the 
Independent Directors, shall find that the advisory fees, if any, 
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's advisory contract. Such finding,

[[Page 1786]]

and the basis upon which the finding was made, will be recorded fully 
in the minute books of the Parent Fund.
    4. Any sales charges or service fees charged with respect to shares 
of each Parent Fund, when aggregated with any sales charges or service 
fees paid by the Parent Fund with respect to shares of any Underlying 
Fund, shall not exceed the limits set forth in Rule 2830 of the Rules 
of Conduct of the National Association of Securities Dealers, Inc.
    5. Applicants will provide the following information, in electronic 
format, to the Chief Financial Analyst of the SEC's Division of 
Investment Management: monthly average total assets for each Parent 
Fund and each of its Underlying Funds; monthly purchases and 
redemptions (other than by exchange) for each Parent Fund and each of 
its Underlying Funds; monthly exchanges into and out of each Parent 
Fund and each of its Underlying Funds; month-end allocations of each 
Parent Fund's assets among its Underlying Funds; annual expense ratios 
for each Parent Fund and each of its Underlying Funds; 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 its Parent Fund and by the other shareholders 
of the Underlying Funds. Such information will be provided as soon as 
reasonably practicable following each fiscal year-end of the Parent 
Funds (unless the Chief Financial Analyst shall notify the Parent Funds 
or OFFITBANK in writing that such information need no longer be 
submitted).

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-686 Filed 1-10-97; 8:45 am]
BILLING CODE 8010-01-M