[Federal Register Volume 60, Number 238 (Tuesday, December 12, 1995)]
[Notices]
[Pages 63748-63749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30223]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21570; 812-9820]


EAI Select Managers Equity Fund, et al.; Notice of Application

December 6, 1995.
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: EAI Select Managers Equity Fund (``Fund''), Evaluation 
Associates Capital Markets, Incorporated (``Manager''), EAI Partners, 
L.P. (``EAI''), Evaluation Associates, Incorporated 401(K) Plan and 
Trust (``EAI Plan''), Harding Service Corporation, et al. Profit 
Sharing Plan and Trust (``Harding Plan''), and Stockwood VII, Inc. 401K 
Plan (``Stockwood Plan'', and, together with the EAI Plan and the 
Harding Plan, the ``Affiliated Plans'').

RELEVANT ACT SECTIONS: Order requested under section 17(b) of the Act 
exempting applicants from section 17(a) of the Act and pursuant to 
section 17(d) of the Act and rule 17d-1 thereunder.

SUMMARY OF APPLICATION: The requested order would permit a collective 
investment account sponsored by EAI to transfer its securities to the 
Fund.

FILING DATES: The application was filed on October 16, 1995 and amended 
on December 1, 1995. Applicants agree to file an additional amendment, 
the substance of which is incorporated herein, during the notice 
period.

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 December 28, 
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 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: EAI, 200 Connecticut Avenue, Suite 700, Norwalk, 
Connecticut 06854-1958; Harding Plan and Stockwood Plan, 300 South 
Street, P.O. Box 1975, Morriston, New Jersey 07962-1975.

FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, or Alison E. 
Baur, 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 Fund is an open-end management investment company organized 
as a Massachusetts business trust. The Fund has filed a registration 
statement under the Securities Act of 1933 which will become effective 
prior to the consummation of the transactions described in this 
application. The Manager is the investment adviser of the Fund and 
presently owns all of the Fund's outstanding shares. EAI is the parent 
of the Manager and is the sponsor of the EAI Plan, an in-house employee 
benefit plan for employees of EAI, the Manager, and their affiliates.
    2. The Harding Plan is an employee benefit plan for employees of 
Harding Service Corporation (``Harding''). The Stockwood Plan is an 
employee benefit plan for employees of Stockwood VII, Inc. 
(``Stockwood''). Certain trustees of the Harding Plan and the Stockwood 
Plan have a greater than five percent direct or indirect equity 
interest in EAI. In addition, certain officers, employees and/or 
affiliates of Harding and Stockwood have a greater than five percent 
direct or indirect equity interest in EAI.
    3. The Affiliated Plans and certain other participant-directed 
employee benefit plans (collectively, the ``Plans'') currently invest 
in The EAI Small Managers Equity Fund Trust, a collective investment 
account (``Account''). EAI is the investment adviser of the Account. 
The Account has not registered under the Act in reliance on the 
exception from the definition of ``investment company'' under section 
3(c)(1) of the Act. Section 3(c)(1) provides that an issuer whose 
outstanding securities are beneficially owned by not more than one 
hundred persons and which is not making and does not propose to make a 
public offering of its securities is not an investment company. In The 
PanAgora Group Trust (pub. avail. April 29, 1994), the staff stated 
that, for purposes of section 3(c)(1), the staff would consider a 
defined contribution plan participant who decides whether or how much 
to invest in a private investment company to be a beneficial owner of 
the company's securities. Participants in the Plans have discretion to 
direct investment of their assets, and there are more than 100 such 
participants. Therefore, the Account may no longer rely on the 
exception in section 3(c)(1) unless the Plans' investment in the 
Account is terminated by December 31, 1995.\1\

    \1\ See Latham & Watkins (pub. avail. Dec. 28, 1994).
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    4. EAI believes that the Fund is a suitable alternative investment 
vehicle for the Plans. Applicants contemplate that the Account would 
make an in-kind distribution of securities held in the Account's 
portfolio to the Plans and that those Plans choosing to invest in the 
Fund would purchase shares of the Fund by contributing the distributed 
securities to the Fund in exchange for Fund shares. The Account would 
remain available to employee benefit plans whose participants cannot 
direct asset investment.
    5. Upon its withdrawal from the Account, each Plan would receive 
securities equal in value to its pro rata beneficial interest in the 
Account. Each Plan purchasing shares of the Fund by contribution of the 
securities distributed to it would receive shares of the Fund having a 
net asset value equal to the value of the securities contributed. 
Assets of the Plans used to purchase Fund shares would be valued at 
``current market value'' as defined in rule 17a-7(b). The assets of the 
Fund would be invested with the same objectives and in the same manner 
as the assets of the Account are presently invested.
    6. Each Plan choosing to purchase Fund shares by an in-kind 
contribution of securities would do so only upon written direction of 
the Plan fiduciaries. A party independent of EAI would provide such 
direction for the Affiliated Plans. EAI and/or the Manager would 
provide each Plan fiduciary with the Fund's current prospectus and a 
written statement disclosing the fee structure under which the Manager 
would be paid. Because the total expenses to be paid by the Fund will 
be higher than those paid by the Account, a Plan purchasing shares of 
the Fund would 

[[Page 63749]]
incur greater total expenses, and this would be disclosed in a written 
statement to the Funds.
    7. Applicants represent that investments in the Fund by the Plans 
would provide the plans with several benefits that are not presently 
available with the Account. The Plan participants would enjoy the 
protections of the Securities Act and the Act. In addition, investment 
of Plan assets in the Fund allows the Plan's participants and sponsors 
to monitor more easily the performance of their investments, as 
information concerning the investment performance of the Fund generally 
would be available in daily newspapers.

Applicants' Legal Analysis

    1. Section 17(a) of the Act, in relevant part, prohibits an 
affiliated person of a registered investment company, or an affiliated 
person of such person, acting as principal, from selling to or 
purchasing from such investment company any security or other property. 
Section 2(a)(3) of the Act, in relevant part, defines ``affiliated 
person'' to include: (a) Any person directly or indirectly owning, 
controlling, or holding with the power to vote, 5% or more of the 
outstanding voting securities of such other person; (b) any person 
directly or indirectly controlling, controlled by, or under common 
control with, such other person; and (c) if such other person is an 
investment company, any investment adviser thereof.
    2. Although the SEC has taken a no-action position with respect to 
certain collective investment fund conversions, that position is 
conditioned on affiliated persons, or second-tier affiliates, of the 
Fund having no beneficial interest in the proposed transactions. 
Federated Investors (pub. avail. April 21, 1994). In the case of the 
EAI Plan, the transaction involves assets belonging to an employee 
benefit plan established for employees of EAI or other affiliated 
persons that could be considered second-tier affiliates of the Fund. In 
the case of the Harding Plan and Stockwood Plan, the transactions 
involve assets belonging to employee benefit plans with trustees, 
officers, employees, and/or affiliates of the sponsoring entities 
having a greater than five percent ownership interest in EAI. 
Applicants request an exemptive order to permit the Fund to accept in-
kind transfers of the assets of the Affiliated Plans.
    3. 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.
    4. Applicants represent that the proposed transactions meet the 
requirements of section 17(b). Because the value of the shares each 
Plan receives in the Fund would be equal to fair market value of that 
Plan's pro rata share of assets in the Account, applicants represent 
that the transactions are fair to all involved and do not involve 
overreaching on the part of any person. In addition, applicants 
represent that because the investment policies and objectives of the 
Fund are identical to those of the Account, the transactions would be 
consistent with the portfolio objectives and policy of the Fund. 
Because the transactions would bring the Plans' investments under the 
supervision of the SEC, applicants represent that the transactions 
would be consistent with the provisions of the Act.
    5. Applicants represent that the proposed transactions would comply 
with rule 17a-7 under the Act in most respects. Rule 17a-7 exempts 
certain purchase and sale transactions otherwise prohibited by section 
17(a) if, among other requirements, the transactions are affected at an 
``independent market price'' and the investment company's board of 
directors reviews the transactions for fairness. Applicants would 
comply with rule 17a-7 to the extent possible, as stated in the 
conditions to the requested order.
    6. Section 17(d) prohibits an affiliated person of a registered 
investment company, or an affiliated person of such person, acting as 
principal, from effecting any transaction in which such investment 
company is a joint, or joint and several, participant with such person 
in contravention of SEC rules and regulations. Rule 17d-1 under the Act 
provides that no joint transaction covered by the rule may be 
consummated unless the SEC issues an order upon application. In passing 
upon such applications, the SEC considers whether participation by a 
registered investment company is consistent with the provisions, 
policies, and purposes of the Act, and is not on a basis less 
advantageous than that of other participants.
    7. Because EAI, as sponsor of the EAI Plan, may have legal title to 
the EAI Plan's assets invested in the Account, EAI may be viewed as 
acting as a principal in the proposed transactions. Applicants 
represent that, since the fiduciaries of each Plan would make an 
independent determination as to whether to invest in the Fund and 
assets used to purchase shares of the Fund would be valued at current 
market prices, the terms received by the Affiliated Plans would not be 
more or less advantageous than those available to other investors. In 
addition, as discussed previously, applicants represent that the 
transactions would be consistent with the Act and the rules thereunder.

 Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The purchase transactions will comply with the provisions of 
rule 17a-7(b)-(f).
    2. The purchase transactions will not occur unless and until the 
Board of Trustees of the Fund (including a majority of Trustees that 
are not interested persons of the Fund) and the Plans' fiduciaries (or, 
in the case of the Affiliated Plans, parties independent of EAI) find 
that the transactions are in the best interest of the Fund and the 
Plans, respectively. In the case of the Fund, this determination and 
the basis on which it is made will be recorded fully in the records of 
the Fund.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30223 Filed 12-11-95; 8:45 am]
BILLING CODE 8010-01-M