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[Federal Register Volume 60, Number 7 (Wednesday, January 11, 1995)]
[Notices]
[Pages 2803-2805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-606]

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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20818; 812-9412]

Kidder, Peabody Investment Trust, et al.; Notice of Application

January 4, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').
APPLICANTS: Kidder, Peabody Investment Trust (``KPIT''); Kidder, 
Peabody Investment Trust II (``KPIT II''); Kidder, Peabody Investment 
Trust III (``KPIT III''); Kidder, Peabody Municipal Money Market 
Series; Kidder, Peabody California Tax Exempt Money Fund; Kidder, 
Peabody Premium Account Fund; Kidder, Peabody Equity Income Fund, Inc.; 
Kidder, Peabody Government Income Fund, Inc.; Kidder, Peabody 
Government Money Fund, Inc.; Kidder, Peabody Cash Reserve Fund, Inc.; 
Kidder, Peabody Tax Exempt Money Fund, Inc.; Institutional Series 
Trust; and Liquid Institutional Reserves (the ``Funds''); Kidder, 
Peabody Asset Management, Inc. (``KPAM''); Emerging Markets Management 
(``EMM''); GE Investment Management Incorporated (``GEIM''); George D. 
Bjurman & Associates (``GDB&A''); and Strategic Fixed Income, L.P. 
(``SFI'') (EMM, GEIM, GDB&A, and SFI together, the ``Subadvisers''); 
PaineWebber Incorporated (``PWI''); Mitchell Hutchins Asset Management 
Inc. (``MHAM''); and Mitchell Hutchins Institutional Investors Inc. 
(``MHII,'' and together with MHAM, ``Mitchell Hutchins'') (Mitchell 
Hutchins, together with PWI, KPAM and the Subadvisers are collectively 
referred to herein as the ``Advisers'').

RELEVANT ACT SECTIONS:  Order requested under section 6(c) for an 
exemption from section 15(a).

SUMMARY OF APPLICATION: Paine Webber Group Inc. (``PaineWebber'') has 
agreed to purchase the investment advisory business of Kidder, Peabody 
Group Inc. The transaction will result in the assignment, and thus the 
termination, of existing investment advisory and subadvisory contracts 
of the applicant investment companies. Applicants seek an order to 
permit the implementation, without shareholder approval, of interim 
investment advisory and subadvisory contracts, during a period of up to 
120 days following the closing of the transaction. The order also will 
permit the applicant investment advisers to receive from the applicant 
investment companies fees earned under the interim investment advisory 
contracts following approval by the investment companies' shareholders.

FILING DATE: The application was filed on January 4, 1995.

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

[[Page 2804]]

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 26, 1995, 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 such notification by 
writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, Mitchell Hutchins Asset Management Inc., 14th Floor, 1285 
Avenue of the Americas, New York, New York 10019; all other applicants, 
c/o Arthur J. Brown, Esq., Kirkpatrick & Lockhart, South Lobby--9th 
Floor, 1800 M Street, NW., Washington, D.C. 20036-5891.

FOR FURTHER INFORMATION CONTACT:
Marc Duffy, Senior Attorney, at (202) 942-0565, or C. David Messman, 
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 Funds are registered open-end management investment 
companies. The Advisers are registered as investment advisers under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). The Funds each 
have entered into an investment advisory agreement with KPAM under 
which KPAM provides advisory and management services to the Funds (the 
``Advisory Agreements''). Certain of the Funds also have entered into 
subadvisory agreements with the Subadvisers and KPAM (the ``Subadvisory 
Agreements,'' and together with the Advisory Agreements, the ``Prior 
Agreements'').\1\
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    \1\ The Subadvisory Agreements relate to the following 
Subadvisers and Funds: EMM, with respect to the Kidder, Peabody 
Emerging Markets Equity Fund series of KPIT II; GEIM, with respect 
to Kidder, Peabody Global Equity Fund, the Kidder, Peabody Municipal 
Bond Fund series of KPIT II, and the Kidder, Peabody Intermediate 
Fixed Income Fund series of KPIT; GDB&A, with respect to the Kidder, 
Peabody Small Cap Equity Fund series of KPIT III; AND SFI, with 
respect to the Kidder, Peabody Global Fixed Income series of KPIT.
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    2. KPAM is a wholly-owned indirect subsidiary of Kidder, Peabody 
Group Inc. (``Kidder''). Kidder is a wholly-owned indirect subsidiary 
of General Electric Company (``General Electric'').
    3. MHAM and MHII serve as investment advisers to investment 
companies and non-investment company clients. MHAM and MHII are wholly-
owned subsidiaries of PWI. PWI is a registered investment adviser under 
the Advisers Act. PWI is wholly owned subsidiary of PaineWebber, a 
publicly held financial services holding company.
    4. On October 17, 1994, PaineWebber entered into an asset purchase 
agreement with General Electric and Kidder (the ``Asset Purchase 
Agreement''). PaineWebber agreed to purchase certain assets of Kidder 
(the ``Kidder Assets'') for cash and other consideration (the 
``Transaction''). PaineWebber has arranged for Mitchell Hutchins to 
undertake the investment advisory services now provided to the Funds by 
KPAM. Applicants intend to transfer the investment advisory business 
concurrently with the transfer of the retail operations and brokerage 
staff on January 29, 1995.
    5. At special meetings held on November 1, 1994, November 2, 1994, 
and December 16, 1994, the respective Boards of Trustees/Directors of 
the Funds (the ``Boards'') met to discuss the Transaction. During those 
meetings, the Boards, including a majority of the Board members who are 
not ``interested persons,'' as that term is defined in the Act (the 
``Independent Directors''), of the respective Funds, with the advice 
and assistance of counsel to the Independent Directors, made a full 
evaluation of the interim investment advisory agreements between the 
Funds and Mitchell Hutchins and the interim subadvisory agreements 
among Mitchell Hutchins, the Subadvisers, and certain of the Funds (the 
``Interim Agreements''). In accordance with section 15(c) of the Act, 
the Boards voted to approve the Interim Agreements. The Boards of each 
Fund also voted to recommend that shareholders of the Fund approve the 
Interim Advisory and Subadvisory Agreements, as well as a new advisory 
agreement with PWI or Mitchell Hutchins and, where applicable, new 
subadvisory agreements with the Subadvisers.
    6. Applicants seek an exemption from section 15(a) of the Act to 
permit the implementation, without shareholder approval, of the Interim 
Agreements. The exemption would cover the period commencing on the date 
of the transfer of the existing investment advisory and subadvisory 
agreements and continuing through the date new advisory and subadvisory 
agreements are approved or disapproved by shareholders of the 
respective Funds, which period shall be no longer than 120 days (the 
``Interim Period'').
    7. In approving the Interim Agreements, the Boards, including a 
majority of the Independent Directors, concluded that payment of the 
advisory and subadvisory fees during the Interim Period would be 
appropriate and fair because the fees to be paid are unchanged from the 
fees paid under the Prior Agreements, the fees would be maintained in 
an interest-bearing escrow account until payment is approved or 
disapproved by shareholders, and the nonpayment of fees would be 
inequitable to PaineWebber, Mitchell Hutchins, and the Subadvisers in 
view of the substantial services to be provided by such companies to 
the Funds, and the expenses incurred by such companies.
    8. Applicants believe that delaying the closing of the Transaction 
until shareholders of all of the Funds could vote on new advisory 
agreements would result in substantial defections by portfolio 
managers, advisory employees, and supervisory personnel. These 
defections could significantly impair the value of the Kidder Assets 
and significantly damage the Funds and their shareholders. Thus, 
applicants believe that the requested relief, which will permit the 
Transaction to close sooner than otherwise would be possible, is in the 
best interests of the Funds and their shareholders.

Applicants' Legal Conclusions

    1. Section 15(a) prohibits an investment adviser from providing 
investment advisory services to an investment company except under a 
written contract that has been approved by a majority of the voting 
securities of such investment company. Section 15(a) further requires 
that such written contract provide for its automatic termination in the 
event of an assignment. Under section 2(a)(4) of the Act, an assignment 
includes any direct or indirect transfer of a contract by the assignor.
    2. The transfer of Kidder's investment advisory business, as 
contemplated by the Asset Purchase Agreement, will result in an 
``assignment'' within the meaning of section 2(a)(4) of the Act, of the 
Prior Agreements. Consistent with section 15(a), therefore, each such 
agreement will terminate by its terms.
    3. Rule 15a-4 provides, among other things, that if an investment 
adviser's investment advisory contract is terminated by assignment, the 
investment adviser may continue to act as such for 120 days at the 
previous compensation rate if a new contract is approved by the board 
of directors of

[[Page 2805]]

the investment company, and if the investment adviser or a controlling 
person of the investment adviser does not directly or indirectly 
receive money or other benefit in connection with the assignment. 
Because General Electric will receive a benefit in connection with the 
assignment of the contracts, applicants may not rely on rule 15a-4.
    4. Applicant's believe that the requested relief will allow the 
Funds to continue to operate on an orderly basis until the shareholders 
have the opportunity to consider new investment advisory agreements. 
The 120 day Interim Period will facilitate the orderly and reasonable 
consideration of the new agreements.
    5. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act, 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. 
Applicants believe that the requested relief meets this standard.

Applicants' Conditions

    Applicants agree as conditions to the requested exemptive relief 
that:
    1. The Interim Agreements will have the same terms and conditions 
as the Prior Agreements.
    2. Fees earned by the Mitchell Hutchins and the Subadvisers and 
paid by a Fund during the Interim Period in accordance with the Interim 
Agreements will be maintained in an interest-bearing escrow account, 
and amounts in such account (including interests earned on such paid 
fees) will be paid to Mitchell Hutchins and the Subadvisers only upon 
approval of the Fund shareholders or, in the absence of such approval, 
to the respective Funds.
    3. The Funds will hold meetings of shareholders to vote on approval 
of new investment advisory or sub-advisory agreements, as the case may 
be, on or before the 120th day following the termination of the Prior 
Agreements.
    4. General Electric or a subsidiary thereof, and PWI or a 
subsidiary thereof, will share equally the cost of preparing and filing 
this application. General Electric or a subsidiary thereof will pay the 
costs relating to the solicitation of the approvals of the Funds' 
shareholders of the Interim Agreements necessitated by the Transaction.
    5. Mitchell Hutchins and the Subadvisers will take all appropriate 
actions to ensure that the scope and quality of advisory and other 
services provided to the Funds under the Interim Agreements will be at 
least equivalent, in the judgment of the respective Boards, including a 
majority of the Independent Directors, to the scope and quality of 
services previously provided. In the event of any material change in 
personnel providing services under the Interim Agreements, Mitchell 
Hutchins and the Subadvisers will apprise and consult the Boards of the 
affected Funds to assure that such Boards, including a majority of the 
Independent Directors, are satisfied that the services provided by 
Mitchell Hutchins and the Subadvisers will not be diminished in scope 
or quality.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-606 Filed 1-10-95; 8:45 am]
BILLING CODE 8010-01-M
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