Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Notices 41607

The Fund states that, in adopting the

Distribution Policy, the Board

considered that the Distribution Policy

provides a steady return to the Fund’s

shareholders and, during periods when

its per share NAV is increasing, a means

for the shareholders to receive, on a

periodic basis, some of the appreciation

in the value of their shares. The Board

also considered empirical evidence that,

in many cases, market discounts to

NAVs have narrowed upon adoption of

similar distribution policies by other

closed-end funds. The Board has set the

annualized Rolling Distribution Rate for

fiscal year 1998 at 9%.

3. The Fund requests relief to permit

it, so long as it maintains in effect the

Distribution Policy, to make up to four

capital gains distributions (as defined in

section 852(b)(30(C) of the Internal

Revenue Code of 1986, as amended (the

‘‘Code’’)) in any one taxable year.

Applicant’s Legal Analysis

1. Section 19(b) of the Act provides

that a registered investment company

may not, in contravention of such rules,

regulations, or orders as the SEC may

prescribe, distribute long-term capital

grains more often than once every

twelve months. Rule 19b–1(a) under the

Act permits a registered investment

company, with respect to any one

taxable year, to make one capital gains

distributions, as defined in section

852(b)(3)(C) of the Code. Rule 19b–1(a)

also permits a supplemental distribution

to be made pursuant to section 855 of

the Code not exceeding 10% of the total

amount distributed for the year. Rule

19b–1(f) permits one additional longterm capital gains distribution to be

made to avoid the excise tax under

section 4982 of the Code.

2. The Fund asserts that the limitation

on the number of net long-term capital

gains distributions in rule 19b–1

prohibits the Fund from including

available net long-term capital gains in

certain of its fixed quarterly

distributions. As a result, the Fund

states that it must fund these quarterly

distributions with returns of capital (to

the extent net investment income and

net realized short-term capital gains are

insufficient to cover a quarterly

distribution). The Fund further asserts

that, in order to distribute all of its longterm capital gains within the limits

permitted by rule 19b–1, the Fund may

be required to make certain of its

quarterly distributions in excess of the

total annual amount called for by the

Distribution Policy or retain and pay

taxes on the excess amount. The Fund

asserts that the application of rule 19b–

1 to the Fund’s Distribution Policy may

create pressure on the investment

adviser to limit the realization of longterm capital grains based on

considerations unrelated to investment

goals.

3. The Fund submits that the concerns

underlying section 19(b) and rule 19b–

1 are not present in the Fund’s situation.

One of the concerns leading to the

adoption of section 19(b) and rule 19b–

1 was that shareholders might be unable

to distinguish between frequent

distributions of capital gains and

dividends from investment income. The

Fund states that its Distribution Policy

has been fully and repeatedly described

in the Fund’s periodic communications

to its shareholders. The Fund states that,

in accordance with rule 19a–1 under the

Act, a separate statement showing the

source of the distribution accompanies

each distribution (or the confirmation of

reinvestment under the Fund’s dividend

reinvestment plan). In addition, a

statement showing the amount and

source of each quarterly distribution

during the year is included with Fund’s

IRS Form 1099–DIV report sent to each

shareholder who received distributions

during the year (including shareholders

who have sold shares during the year).

4. Another concern underlying

section 19(b) and rule 19b–1 is that

frequent capital gains distributions

could facilitate improper distribution

practices including, in particular, the

practice of urging an investor to

purchase shares of a fund on the basis

of an upcoming dividend (‘‘selling the

dividend’’), when the dividend results

in an immediate corresponding

reduction in NAV and is, in effect, a

return of the investor’s capital. The

Fund submits that this concern does not

arise with regard to closed-end

management investment companies,

such as the Fund, which do not

continuously distribute their shares.

Applicant further asserts that if the

Fund makes a rights offering to its

shareholders, the rights offering will be

timed so that issuable upon exercise of

the right will be issued only in the six

week period immediately following the

record date for the declaration of a

dividend. Thus, the abuse of selling the

dividend cannot occur as a matter of

timing.

5. The Fund states that increased

administrative costs also are a concern

underlying section 19(b) and rule 19b–

1. The Fund asserts, however, that it

will continue to make quarterly

distributions regardless of what portion

of the distribution is composed of longterm capital gains.

6. Section 6(c) of the Act provides that

the SEC may exempt any person or

transaction from any provision of the

Act or any rule thereunder 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. For the reasons stated above,

the Fund believes that the requested

relief satisfies this standard.

Applicant’s Condition

The Fund agrees that the order

granting the requested relief will

terminate upon the effective date of a

registration statement under the

Securities Act of 1933 for any future

public offering by the Fund of its shares

other than: (i) A rights offering with

respect to the Fund’s common stock to

holders of the Fund’s common stock, in

which (a) shares are issued only within

the six-week period immediately

following the record date of a quarterly

dividend, (b) the prospectus for the

rights offering makes it clear that

shareholders exercising the rights will

not be entitled to receive such dividend,

and (c) the Fund has not engaged in

more than one rights offering during any

given calendar year; or (ii) an offering in

connection with a merger,

consolidation, acquisition, spin-off or

reorganization of the Fund; unless the

Fund has received from the staff of the

SEC written assurance that the order

will remain in effect.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20690 Filed 8–3–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–23365; 812–10710]

MEMBERS Mutual Funds and CIMCO

Inc.; Notice of Application July 29,

1998

AGENCY: Securities and Exchange

Commission (‘‘Commission’’).

ACTION: Notice of application under

section 6(c) of the Investment Company

Act of 1940 (the ‘‘Act’’) for an

exemption from section 15(a) of the Act

and rule 18f–2 under the Act.

SUMMARY OF APPLICATION: Applicants

request an order to permit them to enter

into and materially amend subadvisory

contracts without obtaining shareholder

approval.

APPLICANTS: MEMBERS Mutual Funds

(the ‘‘Trust’’) and CIMCO Inc. (the

‘‘Manager’’).
41608 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Notices

1Applicants request that the relief also apply to

future Funds, and to all registered open-end

investment companies or series of such companies

that (i) are now, or in the future, advised by

Manager of any entity controlling, controlled by, or

under common control with the Manager; (ii) use

one or more Subadvisers, and (iii) comply with the

terms and conditions in the application. All

existing investment companies that currently

intend to rely on the order have been named as

applicants.

FILING DATES: The application was filed

on June 20, 1997, and amended on May

28, 1998. Applicants have agreed to file

an amendment during the notice period,

the substance of which is reflected in

this notice.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing by writing to the

Commission’s Secretary and serving the

applicants with a copy of the request,

personally or by mail. Hearing requests

should be received by the Commission

by 5:30 p.m. on August 24, 1998, and

should be accompanied by proof of

service on the applicants, in the form of

an affidavit or, for lawyers, a certificate

of service. Hearing requests should state

the nature of the writers’ request, the

reason for the request, and the issues

contested. Persons may request

notification of a hearing by writing to

the Commission’s Secretary.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 Fifth Street,

NW, Washington, DC 20549.

Applicants, 5910 Mineral Point Road,

Madison, WI 53705–0391, Attention:

Faye Patzner, Esq.

FOR FURTHER INFORMATION CONTACT:

Lawrence W. Pisto, Senior Counsel, at

(202) 942–0527, or Christine Y.

Greenlees, 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

Commission’s Public Reference Branch,

450 Fifth Street, NW, Washington, DC

20549 (tel. (202) 942–8090).

Applicants’ Representations

1. The Trust, a Delaware business

trust, is an open-end management

investment company registered under

the Act. The Trust currently is

comprised of seven separate series

(each, a ‘‘Fund’’ and collectively, the

‘‘Funds’’), each of which has its own

investment objective and policies. The

Manager, registered under the

Investment Advisers Act of 1940

(‘‘Advisers Act’’), provides overall

investment management to the Trust

and each Fund, subject to the

supervision of the Board of trustees of

the trust (the ‘‘Board’’), pursuant to an

investment management agreement (the

‘‘Management Agreement’’). Currently,

the Manager provides specific portfolio

management for five of the Funds, and

one or more subadvisers

(‘‘Subadvisers’’) provide specific

portfolio management for two of the

Funds. Each Subadviser is registered

under the Advisers Act.

2. Under the Management Agreement,

the Manager monitors the performance

of each Subadviser and of a Fund’s

portfolio and reallocates Fund assets

among Subadvisers, or recommends to

the Board that a Fund employ or

terminate particular Subadvisers. Each

Subadviser recommended by the

Manager is selected and approved by

the Board, including a majority of the

trustees who are not ‘‘interested

persons’’ of the Manager or the Trust

(the ‘‘Independent Trustees’’). The

Manager also provides the Trust and the

Funds with overall administrative

services. Each Fund pays the Manager a

fee based on the Fund’s average net

assets.

3. Under subadvisory agreements

between the Manager and the

Subadvisers (‘‘Subadvisory

Agreements’’) and subject to general

supervision by the Manager and the

Board, each Subadviser makes the

specific investment decisions for the

Fund it advises, and has discretionary

authority to invest all or a portion of the

assets of that Fund. No Subadviser has

any broader supervisory, management,

or administrative responsibilities with

respect to the Trust or a Fund. The

Manager pays the Subadvisers out of the

fees it receives from the Trust.

4. Applicants seek an exemption to

permit Subadvisers selected by the

Manager and approved by the Board to

serve as portfolio managers without

shareholder approval.1 Shareholder

approval is, and will continue to be,

required for any Subadviser that is an

affiliated person, as defined in section

2(a)(3) of the Act, of the Trust or the

Manager, other than by reason of serving

as a Subadviser to one or more of the

Funds (‘‘Affiliated Subadviser’’).

Applicants’ Legal Analysis

1. Section 15(a) of the Act makes it

unlawful for any person to act as an

investment adviser to a registered

investment company except pursuant to

a written contract that has been

approved by a majority of the

investment company’s outstanding

voting securities. Rule 18f–2 under the

Act provides that each series or class of

stock in a series company affected by a

matter must approve the matter if the

Act requires shareholder approval.

2. Section 6(c) of the Act authorizes

the Commission to exempt any person,

security or transaction from any

provision of the Act to the extent that

the exemption is necessary or

appropriate in the public interest and

consistent with the protection of

investors and the purposes fairly

intended by the policies and provisions

of the Act. Applicants request relief

under section 6(c) from section 15(a) of

the Act and rule 18f–2 under the Act.

For the reasons discussed below,

applicants believe that the requested

relief meets the standard of section 6(c).

3. Applicants assert that the Trust’s

investors rely on the Manager for

investment management, and expect the

Manager to select one or more

Subadvisers best suited to achieve a

Fund’s investment objectives.

Applicants represent that the Manager

has substantial experience in

performing these functions. Applicants

submit that, consequently, from the

perspective of an investor, the role of

the Subadvisers is comparable to that of

individual portfolio managers employed

by other investment advisory firms.

Applicants thus contend that, without

the requested relief, the Trust may be

precluded form promptly and timely

employing Subadvisers best suited to

the needs of the Funds. Applicants also

note that the Management Agreement

will remain fully subject to the

requirements of section 15 of the Act

and rule 18f–2 under the Act, including

the requirements for shareholder

approval.

Applicants’ Conditions

Applicants agree that any order

granting the requested relief will be

subject to the following conditions:

1. The Manager will provide

management and administrative

services to the Funds and, subject to the

review and approval of the Board, will:

(i) set the overall investment strategies

of the Funds; (ii) recommend

Subadvisers; (iii) allocate and, when

appropriate, reallocate, the assets of the

Funds among Subadvisers in those cases

where a Fund has more than one

Subadviser; and (iv) monitor and

evaluate the investment performance of

the Subadvisers, including their

compliance with the investment

objectives, policies, and restrictions of

the Funds.

2. Before any Fund may rely on the

order requested in the application, the

operation of the Fund in the manner

described in the application will be

approved by a majority of its
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Notices 41609

1 15 U.S.C. 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

outstanding voting securities, as defined

in the Act, or, in the case of a new Fund

whose public shareholders purchased

shares on the basis of a prospectus

containing the disclosure contemplated

by condition 4 below, by the sole initial

shareholder(s) before offering shares of

such Fund to the public.

3. Within 90 days of the hiring of any

Subadviser, the Manager will furnish

shareholders of the affected Fund with

all information about the Subadviser

that would be included in a proxy

statement. The Manager will meet this

condition by providing shareholders

with an information statement meeting

the requirements of Regulation 14C,

Schedule 14C, and item 22 of Schedule

14A under the Securities Exchange Act

of 1934.

4. The Trust will disclose in its

prospectus the existence, substance and

effect of any order granted pursuant to

the application. In addition, each Fund

will hold itself out to the public as

employing the ‘‘manager of managers’’

approach described in the application.

The prospectus will prominently

disclose that the Manager has the

ultimate responsibility for the

investment performance of the Fund

due to its responsibility to oversee

Subadvisers and recommend their

hiring, termination and replacement.

5. No director, trustee, or officer of the

Trust or the Manager will own, directly

or indirectly (other than through a

pooled investment vehicle that is not

controlled by any such director, trustee,

or officer), any interest in a Subadviser

except for: (a) ownership of interests in

the Manager or any entity that controls,

is controlled by, or under common

control with the Manager, or (b) or

ownership of less than 1% of the

outstanding securities of any class of

equity or debt securities of any publicly

traded company that is either a

Subadviser or controls, is controlled by,

or is under common control with a

Subadviser.

6. The Manager will not enter into

Subadvisory Agreements on behalf of a

Fund with any Affiliated Subadviser

without such agreement, including the

compensation to be paid thereunder,

being approved by the shareholders of

the applicable Fund.

7. At all times, a majority of the Board

will be Independent Trustees, and the

nomination of new or additional

Independent Trustees will be placed

within the discretion of the thenexisting Independent Trustees.

8. When a change of Subadviser is

proposed for a Fund with an Affiliated

Subadviser, the Board, including a

majority of the Independent Trustees,

will make a separate finding, reflected

in the minutes of meetings of the Board,

that the change of Subadvisers is in the

best interest of the Fund and its

shareholders and does not involve a

conflict of interest from which the

Manager or Affiliated Subadviser

derives an inappropriate advantage.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20750 Filed 8–3–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

Sunshine Act Meeting

FEDERAL REGISTER CITATION OF PREVIOUS

ANNOUNCEMENT: [63 FR 39916, July 24,

1998]

STATUS: Closed Meeting.

PLACE: 450 Fifth Street, N.W.,

Washington, D.C.

DATE PREVIOUSLY ANNOUNCED: July 24,

1998.

CHANGE IN THE MEETING: Cancellation of

Meeting.

The closed meeting scheduled for

Friday, July 31, 1998, at 10:00 a.m., has

been cancelled.

At times, changes in Commission

priorities require alterations in the

scheduling of meeting items. For further

information and to ascertain what, if

any, matters have been added, deleted

or postponed, please contact: The Office

of the Secretary (202) 942–7070.

Dated: July 31, 1998.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20947 Filed 7–31–98; 3:47 pm]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40271; File No. SR–CHX–

98–18]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Stock Exchange, Inc.

Relating to the Exchange’s Withdrawal

of Capital Provisions

July 28, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on June 26,

1998, the Chicago Stock Exchange, Inc.

(‘‘CHX’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II

and III below, which Items have been

prepared by the CHX. The Commission

is publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to amend

Article II, Rule 6(b) of the Exchange’s

rules relating to the Exchange’s

Withdrawal of Capital provisions.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

CHX included statements concerning

the purpose of, and basis for, the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The CHX has prepared

summaries, set forth in sections (A), (B)

and (C) below, of the most significant

aspects of such statements.

(A) Self Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Exchange proposes to amend

Article II, Rule 6(b) of the Exchange’s

rules in order to limit the applicability

of the Exchange’s Withdrawal of Capital

provisions to member firms for which

the Exchange is the Designated

Examining Authority (‘‘DEA’’). The

Exchange’s Withdrawal of Capital

provisions limit the ability of a partner

in a member firm to withdraw capital

from the firm. Currently, this

requirement applies to both member

firms for which the Exchange is the DEA

as well as firms subject to examination

by a self-regulatory organization

(‘‘SRO’’) other than the Exchange if the

member’s DEA does not have a

comparable rule. The proposed rule

change would eliminate this

requirement for all firms for which the

Exchange is not the DEA.

The Exchange does not believe that,

given the current regulatory scheme, it

is necessary to review and analyze the

rules of other SROs to determine

whether such rules are comparable to

the Exchange’s rule on this particular

issue. All other SROs have rules that

have been approved by the SEC and that