[Federal Register: April 30, 2003 (Volume 68, Number 83)]
[Notices]
[Page 23164-23167]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ap03-98]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-26027; 812-12861]
The Commerce Funds and Commerce Investment Advisors, Inc.; Notice
of Application
April 24, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under section 12(d)(1)(J) of
the Investment Company Act of 1940 (``Act'') for an exemption from
sections 12(d)(1)(A) and (B) of the Act and under sections 6(c) and
17(b) of the Act for an exemption from section 17(a) of the Act.
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SUMMARY: The order would permit certain registered open-end management
investment companies to acquire shares of other registered open-end
management investment companies both within and outside the same group
of investment companies.
Applicants: The Commerce Funds (the ``Trust'') and Commerce
Investment Advisors, Inc. (the ``Adviser'').
DATES: The application was filed on July 23, 2002, and amended on
February 21, 2003. 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 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 May 19, 2003, 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
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC
20549-0609. Applicants, 1000 Walnut Street, Kansas City, MO 64106.
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 at the
Commission's Public Reference Branch, 450 Fifth Street, NW.,
Washington, DC 20549-0102, (202) 942-8090.
Applicants' Representations
1. The Trust is an open-end management investment company
registered under the Act that is comprised of eleven investment
portfolios (each a ``Fund''), each of which pursues a distinct set of
investment objectives and policies. The Adviser is registered as an
investment adviser under the Investment Advisers Act of 1940 and serves
as investment adviser to the Trust. The Adviser is a wholly-owned
subsidiary of Commerce Bank, N.A. and an indirect subsidiary of
Commerce Bancshares, Inc., a registered multi-bank holding company.
2. Goldman, Sachs & Co. (``Goldman Sachs'') is a broker-dealer
registered under the Securities Exchange Act of 1934 and serves as the
principal underwriter/distributor of the Trust. Goldman Sachs is a
business unit of The Goldman Sachs Group, Inc. (``GS Group''). Goldman
Sachs Asset Management (``GSAM'') serves as administrator to the Trust.
As administrator, GSAM supplies the Trust with administrative officers
who are responsible for performing administrative functions on behalf
of the Trust.\1\
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\1\ The Trust and Goldman Sachs have received an order to permit
principal transactions effected in the ordinary course of business
between the Trust and Goldman Sachs. See Benchmark Funds, et al.,
Investment Company Act Rel. Nos. 22882 (Nov. 12, 1997) (notice) and
22929 (Dec. 9, 1997) (order) (the ``Benchmark Order'').
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3. Applicants request relief to permit: (a) One or more series of
the Trust and
[[Page 23165]]
any other registered open-end investment company or series thereof that
is part of the same group of investment companies as the Trust (each a
``Fund of Funds'') to acquire shares of registered open-end management
investment companies that are not part of the same group of investment
companies as the Fund of Funds (the ``Non-Affiliated Underlying
Funds'') and the Non-Affiliated Underlying Funds to sell such shares to
the Fund of Funds; and (b) the Fund of Funds to acquire shares of
certain other series of the Trust and any other registered open-end
investment company or series thereof that is part of the same group of
investment companies as the Trust (the ``Affiliated Underlying Funds'')
(together with the Non-Affiliated Underlying Funds, the ``Underlying
Funds'') and the Affiliated Underlying Funds to sell such shares to the
Fund of Funds.\2\ The requested order would apply to purchases made by
the Fund of Funds only where the Fund of Funds could not rely on the
provisions of section 12(d)(1)(F) of the Act. A Fund of Funds also may
make direct investments in stocks, bonds, and any other securities
which are consistent with its investment objective.
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\2\ All existing entities that currently intend to rely on the
requested order are named as applicants. Any other investment
company that relies on the order in the future will comply with the
terms and conditions of the application.
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4. Applicants state that each Fund of Funds will enable investors
to create either a comprehensive asset allocation program or achieve
diversification in a specific segment of the market with just one
investment. Applicants assert that a Fund of Funds will provide a
simple, convenient, low cost investment program for investors who are
able to identify their long-term investment goals but who may not be
comfortable deciding how to invest their assets to achieve those goals.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company from selling its shares 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 generally.
2. Section 12(d)(1)(J) of the Act provides that the Commission may
exempt any person, security, or transaction, or any class or classes of
persons, securities or transactions, from any provisions of section
12(d)(1) if the exemption is consistent with the public interest and
the protection of investors. Applicants seek an exemption under section
12(d)(1)(J) to permit the Fund of Funds to acquire shares of the
Underlying Funds and the Underlying Funds to sell their shares to the
Fund of Funds beyond the limits set forth in sections 12(d)(1)(A) and
(B).
3. Applicants state that the proposed arrangement will adequately
address the policy concerns underlying sections 12(d)(1)(A) and (B),
which include concerns about undue influence by a fund of funds over
underlying funds, excessive layering of fees, and overly complex fund
structures. Accordingly, applicants believe that the requested
exemption is consistent with the public interest and the protection of
investors.
4. Applicants state that the proposed arrangement will not result
in undue influence by a Fund of Funds or its affiliates over Underlying
Funds. To limit the influence that a Fund of Funds may have over a Non-
Affiliated Underlying Fund, applicants propose a condition prohibiting
the Adviser, the Fund of Funds, and certain affiliates (individually or
in the aggregate) from controlling a Non-Affiliated Underlying Fund
within the meaning of section 2(a)(9) of the Act. To limit further the
potential for undue influence over the Non-Affiliated Underlying Funds,
applicants propose conditions 2 through 7, stated below, to preclude a
Fund of Funds and its affiliated entities from taking advantage of a
Non-Affiliated Underlying Fund with respect to transactions between the
entities and to ensure the transactions will be on an arm's length
basis.\3\
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\3\ Applicants assert that Goldman Sachs has no control or
influence over the investment decisions of the Trust (including the
Fund of Funds), and therefore cannot use the Fund of Funds structure
to exercise an undue influence over a Non-Affiliated Underlying Fund
in any way. Therefore, conditions 4, 6, and 7 would not apply to a
GS Group entity.
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5. As an additional assurance that a Non-Affiliated Underlying Fund
understands the implications of an investment by a Fund of Funds under
the requested order, the Fund of Funds and Non-Affiliated Underlying
Fund will execute an agreement (prior to an investment in the shares of
the Non-Affiliated Underlying Fund in excess of the limits of section
12(d)(1)(A)(i) of the Act) stating that the board of directors or
trustees of the Non-Affiliated Underlying Fund and the adviser to the
Non-Affiliated Underlying Fund understand the terms and conditions of
the order and agree to fulfill their responsibilities under the order.
Applicants note that a Non-Affiliated Underlying Fund may choose to
reject an investment from the Fund of Funds.
6. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. Applicants state that the board of
trustees of the Fund of Funds (the ``Board''), including a majority of
the trustees who are not ``interested persons'' as such term is defined
in section 2(a)(19) of the Act (``Disinterested Trustees''), will find
that the investment advisory fees charged under any investment advisory
agreements are based on services provided that will be in addition to,
rather than duplicative of, services provided under the investment
advisory agreement of any Underlying Fund in which a Fund of Funds may
invest. In addition, the Adviser will waive fees otherwise payable to
the Adviser by a Fund of Funds in an amount at least equal to any
compensation received by the Adviser, or an affiliated person of the
Adviser, from a Non-Affiliated Underlying Fund in connection with the
investment by the Fund of Funds in the Non-Affiliated Underlying Fund.
Applicants also state that the aggregate sales charges and/or service
fees charged with respect to shares of a Fund of Funds will not exceed
the limits applicable to funds of funds set forth in rule 2830 of the
Conduct Rules of the National Association of Securities Dealers (``NASD
Conduct Rules'').
7. Applicants state that the proposed arrangement will not create
an overly complex fund structure. Applicants note that an Underlying
Fund will be prohibited from acquiring securities of any investment
company in excess of the limits contained in section 12(d)(1)(A),
except to the extent that such Underlying Fund (a) receives securities
of another investment company as a dividend or as a result of a plan of
reorganization of a company (other than a plan devised for the purpose
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed
to have acquired) securities of another investment company pursuant to
exemptive relief from the Commission permitting such Underlying Fund to
(i) acquire securities of one or more
[[Page 23166]]
affiliated investment companies for short-term cash management
purposes, or (ii) engage in interfund borrowing and lending
transactions. In addition, applicants represent that a Fund of Funds'
prospectus contains and will contain concise, ``plain English''
disclosure designed to inform investors of the unique characteristics
of the Fund of Funds structure, including, but not limited to, its
expense structure and the additional expenses of investing in the
Underlying Funds.
B. Section 17(a)
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and any
affiliated person of the company. Section 2(a)(3) of the Act defines an
``affiliated person'' of another person to include any person 5% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote by the other person and
any person directly or indirectly controlling, controlled by, or under
common control with the other person.
2. Applicants state that the Fund of Funds and the Affiliated
Underlying Funds may be deemed to be under common control by virtue of
having the same Adviser. Applicants also state that a Fund of Funds and
an Underlying Fund might become affiliated persons if the Fund of Funds
acquires more than 5% of the Underlying Fund's outstanding voting
securities. In light of this possible affiliation, section 17(a) could
prevent an Underlying Fund from selling shares to and redeeming shares
from the Fund of Funds.
3. Section 17(b) of the Act authorizes the Commission to grant an
order permitting a transaction otherwise prohibited by section 17(a) if
it finds that (a) the terms of the proposed transaction are fair and
reasonable and do not involve overreaching on the part of any person
concerned; (b) the proposed transaction is consistent with the policies
of each registered investment company involved; and (c) the proposed
transaction is consistent with the general purposes of the Act. Section
6(c) of the Act permits the Commission to exempt any person or
transactions from any provisions of the Act if 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 proposed arrangement satisfies the
standards for relief under sections 17(b) and 6(c) of the Act.
Applicants state that the terms of the arrangement are fair and
reasonable and do not involve overreaching. Applicants note that the
consideration paid for the sale and redemption of shares of the
Underlying Funds will be based on the net asset values of the
Underlying Funds. Applicants state that the proposed arrangement will
be consistent with the policies of each Fund of Funds as set forth in
each Fund of Funds' registration statement, the policies of each
Underlying Fund, and with the general purposes of the Act.
Applicants' Conditions
1. (a) The Adviser, (b) any person controlling, controlled by, or
under common control with the Adviser, and (c) any investment company
and any issuer that would be an investment company but for section
3(c)(1) or section 3(c)(7) of the Act advised by the Adviser or any
person controlling, controlled by, or under common control with the
Adviser (collectively, the ``Group'') will not control (individually or
in the aggregate) a Non-Affiliated Underlying Fund within the meaning
of section 2(a)(9) of the Act. If, as a result of a decrease in the
outstanding voting securities of a Non-Affiliated Underlying Fund, the
Group, in the aggregate, becomes a holder of more than 25% of the
outstanding voting securities of the Non-Affiliated Underlying Fund,
the Group will vote its shares of the Non-Affiliated Underlying Fund in
the same proportion as the vote of all other holders of the Non-
Affiliated Underlying Fund's shares.
2. The Fund of Funds and its Adviser, promoter, and principal
underwriter, and any person controlling, controlled by, or under common
control with any of those entities (each a ``Fund of Funds Affiliate'')
will not cause any existing or potential investment by the Fund of
Funds in shares of a Non-Affiliated Underlying Fund to influence the
terms of any services or transactions between the Fund of Funds or a
Fund of Funds Affiliate and the Non-Affiliated Underlying Fund or its
investment adviser, sponsor, promoter, and principal underwriter, and
any person controlling, controlled by, or under common control with any
of those entities (each a ``Non-Affiliated Underlying Fund
Affiliate'').
3. The Board of the Fund of Funds, including a majority of the
Disinterested Trustees, will adopt procedures reasonably designed to
ensure that the Adviser is conducting the investment program of the
Fund of Funds without taking into account any consideration received by
the Fund of Funds or Fund of Funds Affiliate from a Non-Affiliated
Underlying Fund or a Non-Affiliated Underlying Fund Affiliate in
connection with any services or transactions.
4. Once an investment by the Fund of Funds in the securities of a
Non-Affiliated Underlying Fund exceeds the limits of section
12(d)(1)(A)(i) of the Act, the board of directors or trustees of each
Non-Affiliated Underlying Fund, including a majority of the
disinterested directors or trustees, will determine that any
consideration paid by the Non-Affiliated Underlying Fund to the Fund of
Funds or a Fund of Funds Affiliate (other than a GS Group entity) in
connection with any services or transactions: (a) Is fair and
reasonable in relation to the nature and quality of the services and
benefits received by the Non-Affiliated Underlying Fund; (b) is within
the range of consideration that the Non-Affiliated Underlying Fund
would be required to pay to another unaffiliated entity in connection
with the same services or transactions; and (c) does not involve
overreaching on the part of any person concerned.
5. No Fund of Funds or Fund of Funds Affiliate will cause a Non-
Affiliated Underlying Fund to purchase a security from an underwriting
or selling syndicate in which a principal underwriter is an officer,
director, member of an advisory board, investment adviser, or employee
of the Fund of Funds or a person of which any such officer, director,
member of an advisory board, investment adviser, or employee is an
affiliated person (each an ``Underwriting Affiliate''). An offering of
securities during the existence of an underwriting or selling syndicate
of which a principal underwriter is an Underwriting Affiliate (other
than a GS Group entity) is referred to as an ``Affiliated
Underwriting.''
6. The board of directors or trustees of a Non-Affiliated
Underlying Fund, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to monitor any
purchases by the Non-Affiliated Underlying Fund of securities in
Affiliated Underwritings once an investment by the Fund of Funds in the
securities of the Non-Affiliated Underlying Fund exceeds the limits of
section 12(d)(1)(A)(i) of the Act, including any purchases made
directly from an Underwriting Affiliate (other than a GS Group entity).
The board of directors or trustees of the Non-Affiliated Underlying
Fund will review these purchases periodically, but no less frequently
than annually, to determine whether the purchases were influenced by
the investment by the Fund of Funds
[[Page 23167]]
in shares of the Non-Affiliated Underlying Fund. The board of directors
or trustees of the Non-Affiliated Underlying Fund will consider, among
other things, (a) whether the purchases were consistent with the
investment objectives and policies of the Non-Affiliated Underlying
Fund; (b) how the performance of securities purchased in an Affiliated
Underwriting compares to the performance of comparable securities
purchased during a comparable period of time in underwritings other
than Affiliated Underwritings or to a benchmark such as a comparable
market index; and (c) whether the amount of securities purchased by the
Non-Affiliated Underlying Fund in Affiliated Underwritings and the
amount purchased directly from Underwriting Affiliates (other than a GS
Group entity) have changed significantly from prior years. The board of
directors or trustees of the Non-Affiliated Underlying Fund shall take
any appropriate actions based on its review, including, if appropriate,
the institution of procedures designed to assure that purchases of
securities from Affiliated Underwritings are in the best interests of
shareholders.
7. A Non-Affiliated Underlying Fund shall maintain and preserve
permanently in an easily accessible place a written copy of the
procedures described in the preceding condition, and any modifications,
and shall maintain and preserve for a period of not less than six years
from the end of the fiscal year in which any purchase from an
Affiliated Underwriting occurred, the first two years in an easily
accessible place, a written record of each purchase made once an
investment by the Fund of Funds in the securities of a Non-Affiliated
Underlying Fund exceeded the limits of section 12(d)(1)(A)(i) of the
Act, setting forth from whom the securities were acquired, the identity
of the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the board's determinations were
made.
8. Prior to an investment in shares of a Non-Affiliated Underlying
Fund in excess of the limit in section 12(d)(1)(A)(i), the Fund of
Funds and the Non-Affiliated Underlying Fund will execute an agreement
stating, without limitation, that the board of directors or trustees of
the Non-Affiliated Underlying Fund and the investment adviser to the
Non-Affiliated Underlying Fund understand the terms and conditions of
the order and agree to fulfill their responsibilities under the order.
At the time of its investment in shares of a Non-Affiliated Underlying
Fund in excess of the limit in section 12(d)(1)(A)(i), the Fund of
Funds will notify the Non-Affiliated Underlying Fund of the investment.
At such time, the Fund of Funds also will transmit to the Non-
Affiliated Underlying Fund a list of the names of each Fund of Funds
Affiliate and Underwriting Affiliate. The Fund of Funds will notify the
Non-Affiliated Underlying Fund of any changes to the list as soon as
reasonably practicable after a change occurs. The Non-Affiliated
Underlying Fund and the Fund of Funds will maintain and preserve a copy
of the order, the agreement, and the list with any updated information
for a period of not less than six years from the end of the fiscal year
in which any investment occurred, the first two years in an easily
accessible place.
9. Prior to approving any investment advisory or management
contract under section 15 of the Act, the Board of the Fund of Funds,
including a majority of the Disinterested Trustees, will find that the
advisory or management fees charged under the contract are based on
services provided that are in addition to, rather than duplicative of,
the services provided to Underlying Funds in which the Fund of Funds
will invest. This finding, and the basis upon which the finding was
made, will be recorded fully in the minute books of the Fund of Funds.
10. Any sales charges and/or service fees (as those terms are
defined in rule 2830 of the Conduct Rules of the NASD) charged with
respect to shares of the Fund of Funds will not exceed the limits
applicable to a fund of funds as set forth in rule 2830 of the Conduct
Rules of the NASD.
11. No Underlying Fund will acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act, except to the extent that such Underlying Fund
(a) receives securities of another investment company as a dividend or
as a result of a plan of reorganization of a company (other than a plan
devised for the purpose of evading section 12(d)(1) of the Act); or (b)
acquires (or is deemed to have acquired) securities of another
investment company pursuant to exemptive relief from the Commission
permitting such Underlying Fund to (i) acquire securities of one or
more affiliated investment companies for short-term cash management
purposes, or (ii) engage in interfund borrowing and lending
transactions.
12. The Adviser will waive fees otherwise payable to the Adviser by
the Fund of Funds in an amount at least equal to any compensation
(including fees received pursuant to a plan adopted by a Non-Affiliated
Underlying Fund pursuant to rule 12b-1 under the Act) received by the
Adviser, or an affiliated person of the Adviser, from a Non-Affiliated
Underlying Fund in connection with the investment by the Fund of Funds
in the Non-Affiliated Underlying Fund.
13. The nature of the services provided by Goldman Sachs to and the
relationship with Goldman Sachs of any Fund of Funds relying on the
requested order will be consistent with the representations made in the
Benchmark Order. Goldman Sachs will not be an affiliated person or a
second-tier affiliate of any investment adviser to any registered
investment company relying on the requested order. Goldman Sachs and
its affiliated persons will have no influence or control over the
investments made by any registered investment company relying on the
requested order. No affiliated person of Goldman Sachs will serve as a
director of any registered investment company relying on the requested
order.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-10629 Filed 4-29-03; 8:45 am]
BILLING CODE 8010-01-P