SEC Division of Investment Management staff letter: American Century Companies, Inc. / J.P. Morgan & Co.

ACT I~:i (14-4

BlON ~ ~ ) U) j ¿(aX'!) ¡ ¡sf. )(4) /"Y$raJ b) RUL !l ~:t ¡v".'''--.' . ~~S?~m m£ i : J ~gl ¡t-.::-:~.... ¡" oJ: ti ~~-l::Ii tj ~! ftfJ PULIC - -- ;;~ f1"Ji fi. f;; .~li t:"'f ~ it; .,~ , AVAIIL (2./;73 / 1-t , : ~4.!Jr ~:.: J;~' d 2~:;"~ ".. i ' ;... . 1!J'. ..., I I-~.~.

American century

'. .'. . fi ." ." Our Ref. No. 97-543

companies, Inc. / J . P . -. Morgan & Co.
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Incorporated DIVISION OF INVESTMENT MANAGEMENT File No. 801-08174 Your letter dated December 2, 1997 requests that the staff of the Division of Investment Management not recommend enforcement action to the Commission under Section 15 (a) (4) of the Investment Company Act of 1940 (the "1940 Act") or section 205(a) (2) of the Investment Advisers Act of 1940 (the "Advisers Act"), if American Century Companies, Inc. ("ACC") proceeds with

the transaction described below, and its advisory subsidiary

continues to provide services and receive compensation under the

existing advisory contracts between that subsidiary and its

investment company clients or, without obtaining their consent, other advisory clients. FACTS JPM and ACC

In your. letter, you state that J. P. Morgan & Co.

Incorporated ("JPM") is a bank holding company incorporated under

Delaware law and registered under the Bank Holdîng Company Act of

1956. JPM's shares are listed on the New York, Amsterdam,

London, Paris, Swiss and Tokyo stock exchanges.

You state that ACC, a Delaware corporation, is the holding

company of a registered investment adviser and various other

operating subsidiaries that support ACC's business. ACC's stock

is not publicly traded. You represent that ACC is controlled by

the Stowers Family, which comprises ACC's founder and principal

stockholder, James E. Stowers, Jr., his children, grandchildren

and their spouses. You state that the ACC organization offers a

variety of asset management and investment advisory services and

serves as investment adviser to open-end investment companies ' registered under the 1940 Act (the "ACC Funds").

ACC' s Capital Stock and votinq Riqhts

You state that ACC's certificate of Incorporation provides

for two classes of common stock, Class A and Class B. Shares of

each class are entitled to equal pro rata interests in all

dividends of ACC and equal pro rata interests in ACC upon

~

liquidation of ACC. Class A shares have one vote per share, whereas Class B shares have 10,000 votes per share. The certificate of Incorporation provides that the Class B shares are entitled to elect 75% of ACC's board of directors, with the number of directors entitled to be so elected being rounded up to the next whole number, if necessary. The remainder of the directors are elected.. by the holders of the Class A shares. You state that, as of October 9, 1997, the members of the stowers

Family collectively held approximately 48.28% of the outstanding

equity interest in ACC and 69.75% of the combined voting power of

both classes of shares of common stock of ACC.

You represent that Class B shares can be converted at any

time at the request of the holder into an equal number of Class A

shares. Class B shares can be transferred only wi thin a limited

group of persons -- essentially among the members of the stowers

Family and certain charitable trusts established by them.

Ownership of a Class B share can be transferred outside that

group only by converting the share into a single Class A share

and, upon conversion, each Class A share will have only one vote

per share rather than 10,000 votes per share.

The Proposed Transaction

JPM, ACC and ACC's principal stockholders have agreed to a

transaction whereby ACC will sell, and JPM will purchase, shares

of ACC common stock representing 45% of all of the outstanding

shares of ACC' s common stock. i You state that the stowers Family

will not be obliged to sell any shares in the proposed

transaction, and does not intend to sell any. You represent that

under ACC's dual class voting stock structure, the 45% equity

interest will entitle JPM to a maximum of only 10.83% of the

voting power .in ACC. JPM also will receive certain minority

stockholder contractual protections (described below) and an

option, exercisable three years after JPM's initial investment,

to increase JPM's economic interest to 50%. You represent that

exercise of this option would increase JPM' s voting power in ACC

to a maximum of 12.04%.

You state that on October 9, 1997, ACC and JPM entered into

an agreement providing for the creation of a strategic alliance, of

which JPM' s equi ty investment in ACC is an important component.

You represent that the strategic alliance is structured so as to

give JPM a substantial economic stake as a stockholder of ACC in

the future development of ACC's business, and to satisfy other

objectives of critical importance to the parties, including that

Mr. stowers and his family retain control of ACC and continue to

actively participate in and be the principal public representatives

of ACC's business.

~

You represent that upon consummation of the proposed

transaction, and until such time as the option is exercised, the

stowers Family will continue to own the largest block of shares

of common stock in ACC. The voting power of the shares owned by

the stowers Family will remain at not less than 69.75%, and

conceivably could increase to as much as 87.55%, of the total

voting power. 2 If JP~ exercises the option, the shares owned by

the stowers Family would represent between 68.79% and 86.3% of

ACC's total voting power.

Upon completion of JPM's purchase, JPM, ACC, and ACC's

principal stockholders will enter into a stockholders agreement

(the "stockholders Agreement") pursuant to which, among other

things, the parties will agree that:

(i) JPM will have' the right to designate two members of ACC's board, which would consist of ten persons; the other

eight members would be designated by the holders of the Class B

shares, provided that at least six of the eight would be members

of ACC's management (and of such six, two will be James E.

stowers, Jr., and James E. stowers, III);

(ii) ACC will not take any of the actions listed on
Annex A attached to your letter without JPM's prior consent

(" special Approval Rights") 3; and
(iii) JPM will have the right, but only upon the occurrence of certain extraordinary events, to replace certain

members of ACC's management ("Management Replacement Rights") .
These extraordinary events consist of (1) ACC's total assets

under management declining by 25% or more in any calendar year

following closing (net of any change in the market value of

assets under management) or (2) events, described in your letter,

agreed to constitute extraordinary turnover in ACC' s senior

management.
The stockholders Agreement also will provide for a "steering

2 You state that an increase in the stowers Family's voting

power would occur if non-stowers Family stockholders elected to

sell their Class B shares to JPM. Class B shares so sold would

be converted to Class A shares, thus reducing the total number of

votes attributable to all shares of common stock of ACC then

outstanding. That, in turn, would increase the percentage voting

power of the remaining Class B shares held by the stowers Family.

3 You represent that the special Approval Rights listed on

Annex A generally relate to transactions that could significantly

alter ACC's structure or business as currently conducted.

Telephone conversation between Alison M. Fuller and Leonard B.

Mackey on December 18, 1997.

committee" composed of equal numbers of representatives of ACC

and JPM. You represent that the steering committee will not be a

commi ttee of ACC' s board of directors, will have no legal

authority to direct the management or operations of ACC, and, in

fact, will not direct the management or operations of ACC.4

ANALYSIS
section 15 (a) (4) of the 1940 Act

section 15 (a) (4) of the 1940 Act makes it unlawful for any
person to serve or act as investment adviser of a registered

investment company, except pursuant to a written contract that

has been approved by a majority of the outstanding voting

securi ties of the investment company and that provides, in

substance, for its automatic termination in the event, of its

assignment. If the proposed transaction results in an assignment

of the advisory contracts between ACC' s advisory subsidiary and

the ACC Funds, the contracts would terminate and the advisory

subsidiary could not lawfully act or serve as investment adviser

to the ACC Funds unless and until shareholders of those funds had

approved new advisory contracts with the advisory subsidiary.

) An "assignment" is defined in section 2 (a) (4) of the 1940

Act to include any direct or indirect transfer or hypothecation

of an investment advisory contract by the assignor, or of a

controlling block of the assignor's outstanding voting securities

by a security holder of the assignor. Because the proposed

transaction does not entail the direct or indirect transfer of an

advisory contract, our analysis is limited to consideration of

whether the proposed transaction entails the transfer of a

controlling block of voting securities of ACC.

Although "controlling block of voting securities" is not defined in the 1940 Act, "control" is defined in section 2 (a) (9) of the 1940 Act as "the power to exercise a controlling influence

over the management or policies of a company." In addition, the

section provides a rebuttable presumption of control when a

person beneficially owns more than 25% of the voting securities

of a company. Conversely, the section provides that "any person

who does not so own more than 25 per centum of the voting

securities of any company shall be presumed not to control such

company." section 2 (a) (9) provides that any presumption established under the section may be rebutted by evidence, but

will continue until a determination to the contrary is made by

4 Telephone conversation between Alison M. Fuller and Leonard

B. Mackey on December 23, 1997.
..

the Commission by order either on its own motion or on

application by an interested person. 5

You state that the total amount of voting securities to be

acquired by JPM is less than 25% of the outstanding voting

securities of ACC and, therefore, is presumed not to be a

controlling block. Specifically, you state that although JPM

will acquire 45% of ACC's outstanding common stock and all of

those shares have voting rights, JPM will possess a maximum of

10.83%, and possibly as little as 8.63%, of the combined voting

power of ACC' s two classes of common stock after the completion

of the proposed transaction.

You argue that the granting of the Special Approval Rights

and Management Replacement Rights to JPM in the proposed

transaction does not justify rebutting the presumption that no

transfer of a controlling block of voting securities will occur~

You state that the Special Approval Rights and Management

Replacement Rights are not intended to, and will not, give JPM

the right to direct the day-to-day management of ACC. You

represent that the rights will apply only in extraordinary

situations and that they merely will provide JPM with limited

consent rights, as opposed to the right to direct affirmatively

5 The Commission has issued a number of orders under

section 2(a) (9) of the 1940 Act rebutting the presumption of
control by the beneficial owner of more than 25% of the outstanding voting securities of an investment adviser for purposes of Section 2 (a) (4) of the 1940 Act. See,~, Paine Webber Group Inc., et al., Investment Company Act Release - No.

21261 (July 27, 1995); Dimensional Fund Advisers Inc., Investment

Company Act Release No. 16911 (Apr. 12, 1989); and Hartwell &

Campbell Fund, Inc., et al., Investment Company Act Release No.

8453 (Aug. 9, 1974). The Commission also has issued at least one

order under section 2 (a) (9) rebutting the presumption of non￾control by the beneficial owner of less than 25% of the

outstanding voting securities of an investment adviser for

purposes of Section 2 (a) (4). See Dimensional Fund Advisers Inc.,

Investment Company Act Release No. 21527 (Nov. 21, 1995). In

addition, the Commission has issued an order under section 2 (a) (9) finding that the evidence presented did not rebut the presumption of non-control by the beneficial owner of less than

25% of the outstanding voting securities of an investment

adviser. See Investors Mutual, Inc., Investment Company Act Release No. 4595 (May 11, 1966) ("Investors Mutual"), aff'd

Phillips v. Securities and Exchanqe Commission, 388 F. 2d 964 (2nd

Cir. 1968) ("Phillips v. SEC").

the activities of ACC. 6

You state that after the proposed transaction, ACC's current

stockholders will retain approximately 90% of the voting power in

ACC and the right to appoint 80% of ACC's directors. Members of

the stowers Family will continue to hold key management positions

in ACC. The stowers Family will have the right to designate or

elect eight directors to the Board and will own 48.28% of the

equity interest of ACC. You represent that none of JPM's equity

investment in ACC ,the Special Approval Rights, the Management

Replacement Rights, or the ability to select two members of the

ACC board of directors will give JPM a controlling influence over

the management and policies of ACC as contemplated by the 1940

Act.7 You represent that upon completion of the proposed

transaction, the stowers Family will continue to control ACC.

We agree that the Class A common stock to be acquired by

JPM, representing 10.83% of the voting power of ACC, is

presumptively not a controlling block of voting securities of

ACC. That presumption continues unless and until the Commission

makes a determination to the contrary in a formal rebuttal proceeding under section 2 (a) (9) of the 1940 Act. Furthermore, based on the facts and representations described above, we agree

that the proposed transaction would not result in an assignment

of the advisory contracts of the ACC Funds wi thin the meaning of
section 2 (a) (4) of the 1940 Act. In reaching this conclusion, we
considered, among other things, your representations that (i) the

Stowers Family controls ACC and would continue to control ACC

after the proposed transaction, (ii) the proposed transaction has

been structured so as to preserve that control, and (iii) none of

the Management Replacement Rights, Special Approval Rights, or

the ability to select two members of the ACC board of directors

would give JPM a controlling influence over the management or

policies of ACC.

You should note that any different facts or representations

6 You represent that, had these provisions been in effect

during the past three years, the only transaction that would have

triggered the need for JPM's approval would have been the

acquisi tion by ACC of Benham Management International, Inc.

("Benham"), and certain amendments to ACC's certificate of

Incorporation made in anticipation of that acquisition. You also

represent that neither the acquisition of Benham nor the

amendments to ACC's certificate of Incorporation required the

approval of the shareholders of the ACC Funds. Telephone

conversation between Alison M. Fuller and Leonard B. Mackey on

December 23, 1997.
7 Telephone conversation between Alison M. Fuller and Leonard

B. Mackey on December 23, 1997.

may require a different conclusion. In addition, if the staff

becomes aware in the future that JPM is in fact exercising a

controlling influence over the management or policies of ACC, the

staff would not be precluded by the position taken in this letter

from recommending to the Commission the institution of a

proceeding by the Commission under section 2 (a) (9) of the 1940 Act designed to rebut. the presumption that JPM does not control ACC.8 . Having stated our views here and in another recent letter9

regarding thê definition of assignment contained in section

2 (a) (4) of the 1940 Act and the operation of sections 2 (a) (9) and 15 (a) (4) of the Act, we will no longer respond to letters relating to the effect of proposed corporate transactions on existing investment advisory agreements of investment companies

registered under the 1940 Act unless they present novel or unusual issues.
section 205 (a) (2) of the Advisers Act
section 205 (a) (2) of the Advisers Act generally makes it
unlawful for a registered investment adviser to enter into or

perform any investment advisory contract unless the contract

provides, in substance, that no assignment of such contract may

be made by the investment adviser without the consent of the

client. This section does not, however, prohibit an adviser's

assignment of an investment advisory contract without client

consent. The section merely provides that the contract must

contain the specified provision. Thus, the assignment of a non-

investment company advisory contract,' without obtaining client

consent, could constitute a breach of the advisory contract, but

not a violation of section 205 (a) (2) .
8 In such a proceeding, the Commission would undertake a

broad inquiry, examining all of the facts and circumstances to

determine who controls the investment adviser. See,~,

Investors Mutual, supra note 5 (" (C)ontrol determinations involve issues of fact which . . . require a careful appraisal of the

over-all effect of the various relationShips and other

circumstances present in the particular case, some of which may

point to one inference while others to an opposite one" (footnote

omitted)); and Phillips v. SEC, supra note 5, at 972 ("(i)n

assessing an individual's potential influence, the Commission is

obliged to consider not merely legal power but 'the special circumstances of each case'" (citation omitted)) . 9 See,~, Dean Witter, Discover & Co; Morgan stanley

Group Inc. (pub. avail. Apr. 18, 1997).

.

Because you represent that the advisory contracts between

ACC's advisory subsidiary and its advisory clients contain the

required provision,lO we believe that we need not respond to your

second inquiry. 11
~~t.~
Alison M. Fuller

Attorney
December 23, 1997

10 Telephone conversation between Alison M. Fuller and

Leonard B. Mackey on December 18, 1997.

11 In previous no-action letters, the staff agreed not, to

recommend enforcement action under section 205 (a) (2) of the

Advisers Act. See,~, Templeton Investment Counsel Limited, et

al. (pub. avail. Dec. 23, 1985); Jennison Associates Capital Corp.

(pub. avail. Oct. 31, 1985); Scudder, Stevens & Clark, et al. (p~b.

avail. Feb. 15, 1985); Wellington Financial Corp. (pub. avail. Nov.

29, 1984); Investors Research Corporation (pub. avail. Aug. 10,

1984), Fiduciary Management Associates, Inc. (pub. avail. Feb. 23,

1984); and Equitable Life Assurance Society of the united States

(pub. avaiL. Dec. 12, 1983,). We believe that the inquiries raised

in those letters did not need to be answered in light of the

express wording of Section 205 (a) (2) of the Advisers Act.
",

607 ~=WRTEENTH STREET, N.W, ~e? &c ~
40 6ASINGHALL STREET
V/AS- 'GTON. D.C. 20C.o5-2018 LONDON EC2V 5DE, ENGLAND 7~ _~ =~CNE (202) ¿3¿-0700 a- /if' / / (:i75 / ,-/7 TELEi:HONE 44-171-628-0101 t';':; = ""LE (202) 434.0800 -Jtl'CP dlu/Jictycct/ ';~ Sàl-'e-Jiue F"ACSIMIL:: 44-171-628-6111 /f,/ 0/ / ,,1/0/ _ ,-/ feu" e.c;ÃY, ",/ . J. -/0-/ Ô Ô -0 -/:;;Y

WESTENDSTRAS5E 16-22 ¿.:.. S':UTH F"LOWE~ S~~EEi LOS "''-GELES, CA 90071-2901 60325 F'RANKF'URT/MAIN TELEPHONE (212) 878-8000 F'EDERAL REPU6LIC OF' GERMANY r"'==''''LE (2'3) 689-2999 F'ACSIMILE (212) 878-8375 TE_E=,"ONE (213) 689-2900 TELEPHONE 49-69'97-14-78-0

F'ACSIMILE 49-69-97-14-78'33

47 AVENUE HOC HE ONE EXCHANGE SQUARE
'75008 PARIS, F'RANCE
8 CONNAUGHT PLACE
TELE=~ONE 33-1-44-09-46-00
CENTRAL, HONG KONG
F'A::S'-'LE 33-1-44-09-46-01 TELEPHONE (652) 2844-3500 33-1-42-67-50-61 F'ACSIM'LE (852) 2844-3555 December 2, 1997

Douglas J. Scheidt, Esq.

Associate Director and Chief Counsel

Division of Investment Management

Secunties and Exchange Commission

450 Fifth Street, N. W.

Mail Stop 10-6

Washington, D.C. 20549
Re: Amencan Century Companies. Inc.lJ.P. Morgan & Co. Incoi:rated Dea Mr. Scheidt:
We are wnting on behalf of Amencan Century Companies, Inc., a Delaware corporation ("ACC"), and its subsidiar that serves as a registered investment adviser to request that the staff of the Division of Investment Management of the Secunties and Exchange Commission not recommend enforcement action to the Commission under Section 15(a)(4) of . the Investment Company Act of 1940, as amended (the "Investment Company Act"), and Section 205 (a) (2) of the Investment Advisers Act of 1940, as amended (the" Advisers Act" and collectively with the Investment Company Act, the "Acts"), if J.P. Morgan & Co. Incorprated, a Delaware corpration ("JPM"), acquires 45% of the issued and outstading shares of Class A common stock of ACC in the transaction descnbed in this letter.
I. Background

On October 9, 1997, ACC and JPM entered into an agreement that provides for creation of a strategic alliance through which the two organizations wil seek to leverage their distinctly different yet complementa capabilties in the asset management industry. As an importt component of the strategic alliance, JPM wil make a substatial equity investment in ACC by purchasing shares of ACC's Class A common stock representing approximately 45% of all shares of common stock outstading. As explained in greater detal in Part iv below, because of ACC's dual class voting stock structure, JPM's 45% equity interest in ACC wil entitle it to SC 17499.S

"

Y~~~j p ytí6

Douglas J. Scheidt, Esq. 2 December 2, 1997 a maximum of only 10.83% of the voting power in ACC. JPM also wil receive certn

minority stockholder contractual protections and an option, exercisable three yeas after its initial investment, to increase its economic interest to 50%. Exercise of this option, however, would only increase its voting power in ACC to a maximum of 12.04%. The Stowers Family, which for purpses of this letter comprises ACC's founder and principal stockholder, James' E.

Stowers, Jr., his children, grandchildren and their spouses, currently own approximately 48.28 % of the outstading equity interest and 69.75 % of the voting power of ACC. Upon consummation of the strategic alliance and until such time as the option is exercised, the Stowers Family wil continue to own the largest block of shares of common stock in ACC (representing 48.28% of the outstading equity interest and at least 69.75% of the voting power of ACC). If and when JPM's option is exercised, the Stowers Family's equity interest in ACC wil remain at 43.28% and the Stowers Family wil continue to control at least 68.79% of the voting power of ACC. Pursuant to a stockholders agreement to be entered into among JPM, ACC and ACC's principal stockholders (the "Stockholders Agreement"), JPM wil be entitled to designate two of ACC's ten directors; the balance wil be comprised of representatives designated by the Stowers Family, of whom at least six wil be drawn from a group comprised of Mr. Stowers, James E. Stowers, III and members of the Stowers Family and members of ACC's management. As more fully discussed below, for purpses of the Acts, we believe the arrangements contemplated by the strategic alliance wil not constitute a change of control of ACC (or the transfer ora controllng block of ACC's stock) because (i) JPM wil not acquire a controllng block of voting securities of ACC; (ii) the Stowers Family wil not dispose of a controllng block of voting securities of ACC (indee, as discussed below, under certn circumstances the transaction may cause an increase in the Stowers Family's voting power), and both before and after the transaction the Stowers Family wil continue to control ACC; and (iii) at all relevant times the Stowers Family wil have the right to appoint eight of ACC's ten directors.
II. The Parties

JPM is a bank holding company incorprated under the laws of the State of Delaware and registered under the Bank Holding Company Act of 1956, as amended. JPM is the fifth largest bank holding company in the United States with its shares listed on the New York, Amsterdam, London, Paris, Swiss and Tokyo stock exchanges. Its principal wholly owned subsidiaries are Morgan Guaranty Trust Company of New York and J.P. Morgan Securities Inc. As of June 30, 1997, JPM on a consolidated basis had tota assets of approximately $250 billon, loans net of the reserve for credit losses of approximately $29 bilion, and tota shareholders' equity of approximately $11 bilion. Asset management and servicing is one of the firm's five global business sectors, and it offers such services principallý to institutional clients. Assets under management were approximately $234 bilion at June 30, 1997. NC17~m,s .,

Y~e'J0 tß ~~

Douglas J. Scheidt, Esq. 3 December 2, 1997
ACC, a Delaware corpration, is the holding company of one active registered investment adviser and varous other operating subsidiares that support ACC's business. Its stock is not publicly traded. ACC was founded by James E. Stowers, Jr. and is controlled by the Stowers Family. While the ACC organization offers a varety of asset management and investment advisory services, its principal focus is to serve as investment adviser to mutual funds, all of which are open-end investment companies registered under the Investment Company Act (the "ACe Funds"), and to fiduciares of plans under the Employee Retirement Income Security Act of 1974. A subsidiar of ACC serves as distributor of the ACC Funds, and the shares of the ACC Funds are sold through that distrbutor and through mutual fund marketplaces and other distribution channels, on a no-load or a low-load basis. The ACC Funds generally impose account minimums ranging from $1,00 to $100,00, although in most cases the minimum required is $2,500. i The ACC organization had approximately $64.5 bilion under management at October 10, 1997, substatially all of which was attributable to registered investment companies. The average shareholder balance of retail investors in the ACC Funds is approximately $20,00. At October 10, 1997, the ACC Funds had approximately 1.7 milion retal shareholders, who have approximately 2.5 millon accounts.
III. The Strategic Allance

JPM and ACC propose to create a long-term strategic alliance designed to leverage their respective strengths while preserving their distinct brands, market reputations and cultures. The strategic allance structure wil give JPM a substántial economic stae as a stockholder of ACC in the future development of -ACC's business, while at the same time satisfying other objectives of critical importnce to the paries: (i) Mr. Stowers and his family wil retan control of ACC, and wil continue to actively participate in and be the principal public representatives of ACC's business; (ii) ACC wil continue to operate in its own distinctive corprate culture, thereby helping to preserve its highly productive relationships with its funds' shareholders and employees; and (ii) JPM's "high-end" image and brand wil be preserved separate from ACC's broad-based, small investor, retal-oriented brad. Indee, the crucial concept of brad separateness would be destroyed if, notwithstanding the reaities of the continuity in voting control and management of ACC, a change in control were deemed to have occurred and ACC were required to seek approval of the investors in the ACC Funds of new investment advisory contracts. Minimums for most of ACC's equity funds are waived if the shareholder agrees to invest the equivalent of $50 per month in such account. Approximately one-third of the ACC Funds offer an institutional class of shares with a substantially higher ($5 millon) investment minimum. NCI7499.S "

5ù () /0 /2./// ;Y~e~.j t:j //.cIIJ
Douglas J. Scheidt, Esq. 4 December 2, 1997
iv. ACC's Capital Stock and Voting Rights

ACC's Certificate of Incorpration provides (and following the implementation of the strategic alliance wil continue to provide) for two classes of common stock, Class A and Class B. Although shares in each class are entitled to equal pro rata interests in all dividends and upon liquidation of ACC, Class A shares have one vote per share while Class B shares have 10,00 votes per share. Class B shares can be converted at any time at the request of the holder into equal numbers of Class A shares. With limited exceptions, the Class A shares and the Class B shares vote together as a single class. The Certificate of Incorpration provides that the Class B shares are entitled to elect 75% of ACC's board of directors, with the number of directors entitled to be so elected being rounded up to the next whole number, if necessa. The remainder of the directors are elected by the holders of the Class A shares. Accordingly, if the board consisted of ten members, as contemplated by the terms of the proposed strategic alliance, the Class B shares would elect eight of those ten members. Class B shares can be transferred only within a limited group of persons - essentially among members of the Stowers Family and certn chartable trusts established by them. Ownership of a Class B share can be transferred

outside that group only by converting the share into a single Class A share (and upon any such conversion, each such share wil have only one vote per share rather than 10,00 votes per

share). At October 9, 1997, there were 13,368,717 Class A shares and 5,635.8603 Class B

shares outstading, and the members of the Stowers Family collectively held 48.28% of the outstanding equity interest in ACC and 69.75% of the combined voting power of both classes of shares of common stock.
V. JPM's Investment in ACC

JPM, ACC and ACC's principal stockholders have agreed to a transaction whereby ACC wil sell, and JPM wil purchase, shares of ACC common stock which wil represent 45% of all outstading shares of ACC's common stock (Le., 45% of the outstading equity interest in ACC). The members of the Stowers Family wil not be obligated to sell any shares in the proposed trnsaction, and do not intend to sell any. As described below, the 45% of the outstading shares of ACC's common stock to be acquired by JPM would represent no more than 10.83% of the combined voting power of all outstanding shares of common stock. Upon completion of JPM's purchase, JPM, ACC and ACC's principal stockholders wil enter into the Stockholders Agreement pursuant to which, among other things, the paries wil agree that:
(i) JPM wil have the right to designate two members of ACC's board, which

would consist of ten persons; the other eight members would be designated by the holders of the SC1749'.5 ~

úb o/~ /'t/ 1/; /. ;Jlc-Y6-?V W /1e-U4 c￾Douglas J. Scheidt, Esq. 5 December 2, 1997 Class B shares, Z provided that at least six of the eight would be members of ACC's management (and of such six, two wil be James E. Stowers, Jr. and James E. Stowers, III); (ii) ACe. wil not tae any of the actions listed on Annex A attached to this

letter without JPM's prior consent (JPM's rights to approve those actions are sometimes referred to in this letter as the "Special Approval Rights"); and (ii) JPM wil have the right, but only upon the occurrence of certn

extraordinar events, to replace certn members of ACC's management. These extraordinar events consist of (x) ACC's total assets under management declining by 25% or more in any calendar yea following closing (net of any change in the market value of assets under management) or (y) events agree to constitute extraordinary turnover in ACC's senior management3 (JPM's rights described in this clause (iii) are sometimes referred to in this letter as the "Management Replacement Rights"). The Stockholders Agreement also wil provide for a "steering committee"

comprised of equal numbers of representatives of ACC and JPM. That committee wil perform a liaison function between the paries to the strategic alliance and coordinate the product,

marketing, defined contribution and other activities of the alliance. It wil not be a committee of ACC's board of directors and wil have no legal authority to direct the management or . operations of ACC.
VI. Investment Company Act and Investment Advisers Act

Section 15(a)( 4) of the Investment Company Act requires that an advisory contract
with an investment company provide for the contract's automatic termination in the event of its assignment. Similarly, Section 205 (a) (2) of the Advisers Act provides that no assignment of an advisory contract can be made without the client's consent. 2 At least 74.84% of the Class B shares would be owned by the Stowers Family after consummtion of the

strategic alliance.

3 If any three of ACC's Chief Executive Offcer, Chief Oprating Offcer, Chief Investment Offcer and

Chief Marketing Offcer cease to be employed by ACC in any 12-month period (other than by death, disability or norml retirement) or if any five of the individuals holding speified senior maagement positions (including those individuals holding the foregoing positions) cea to be employed by ACC in any 12-month period (other than as aforesaid), JPM can veto any replacement named by ACC's Board of Directors, and if no agreement with respt to the replacement is reached within three months of the event causing the replacement, JPM has the right to fill such position. In addition, if the Chief Operating Officer of ACC is one of those who has ceased to be employed, then JPM can either replace his successor or name his successor, as well as veto any selection of his replacement made by ACC's Board of Directors. SC17499,5

J: 'V/r//.

.7lc-Y&7.J ~ ;/ ~,tt

ó
Douglas J. Scheidt, Esq. 6 December 2, 1997
"Assignment" is defined under each Act to include "any direct or indirect transfer or hypothecation of a contract.,. ., or of a controllng block of the assignor's outstanding voting

securities by a security holder of the assignor. "4 Although "controllng block" is not defined under either Act, "control" is defined under both Acts as "the power to exercise a controllng influence over the management or policies of a company, unless such power is solely the result of an official position with such company. "s In addition, the Investment Company Act provides for a rebuttable presumption of control where "any person. . . owns beneficially, either directly or indirectly through one or more controlled companies, more than 25 % of the voting seurities of a company." Conversely, a person who owns less than 25 % of the voting securities of a company is presumed not to control the company. 6 The staff has accepted the concept that a "controllng block" of stock meas more than 25% of the outstanding voting securities of a 7 company.
Section 2
(a) (42) of the Investment Company Act provides in relevant part:
4 See Investment Company Act §2(a)(4); Advisers Act §202(a)(1). The staff has interpreted the term "assignment" consistently under both Acts. See, e.g., Dea Witter, Discover & Co.; Morgan Staley Group Inc., SEC No-Action Letter (avaiL. Apr. 18, 1997); Templeton Investment Counsel Ltd., SEC No-Action Letter (avaiL. Jan. 22, 1986).

In addition, rules enacted under both Acts create a safe harbor for transactions that do not result in a change of actual control or management of the investment adviser by providing that such transactions should not be deemed an assignment. See Rule 2a-6; Rule 202(a)(I)-1. The proposing releases for these rules suggest that they were enacted to exclude transactions that technically constitute an assignment under the Acts' definition of the term, but which, in fact, do not alter the actual control or maagement of the adviser and thus do not raise concerns about "traffcking" in investment advisory contracts, against which the prohibitions on assignment were meat to protect. Since it is our view that the propose investment doe not give nse to an assignment within the languge of the definitions under the Acts, we do not believe that it is necessary to analyze the propose investment under the safe harbor provisions. However, it should be noted that the'propose transaction is consistent with the spint of the safe harbor rules, as it does not involve an actual change in control or management of ACC. s Investment Company Act §2(a)(9); Advisers Act §202(a)(12). 6 See Investment Company Act §2(a)(9). The Advisers Act has no similar presumption; however, the staff has applied consistent principles in interpreting "assignment" under both Acts. See Dea Witter, Discover & Co.; Morgan Staley Group Inc., SEC No-Action Letter (avaiL. Apr. 18, 1997); Templeton Investment Counsel Ltd., SEC No-Action Letter (avaiL. Jan. 22, 1986). 7 See, e.g., Wellington Management Company, SEC No-Action Letter (avail. November 29, 1979); Finomic

Investment Fund Inc., SEC No-Action Letter (avaiL. June 18, 1973).
NCI7499.S
"

(/7 ()/. /i-l/,/; /. Uú:é?0 ~/ /l-étt. Ó
Douglas J. Scheidt, Esq. 7 December 2, 1997
"Voting Security" meas any security presently entitling the holder thereof to vote for the election of directors of a company. A specified percentage of the outstading voting securities of a company meas such amount of its outstading voting securities as entitles the holder or holders thereof to cast said speified percentage of the aggregate votes which the holders of all the outstading voting securities of such company are entitled to cast. (Emphasis supplied). Thus, for these purpses, the relevant test in determining whether a block of voting securities is a controllng block is the number of votes represented by those securities as a percentage of tota voting power.

VII. Analysis

A. Voting Securities

Neither the number of shares of common stock to be acquired by JPM nor its contractual rights to board representation wil vest in it control of ACC. While JPM wil acquire 45% of ACC's outstanding common stock and all those shares have voting rights, after its acquisition JPM wil possess a maximum of 10.83%, and possibly as little as 8.63%, of the combined voting power of ACC's two classes of common stock. Under the Investment Company Act's definition of "voting security", for purpses of that Act, JPM wil be deemed to hold between 8.63% and 10.83% of ACC's voting securities. The transfer of that amount of voting securities is presumed under the Investment Company Act not to involve a controllng block of ACC's voting securities because the level is below 25%. It is true that JPM also wil have the contractual right to designate two out of ten (i.e., 20%) of ACC's board of directors; however, even if, for purpses of the Investment Company Act, JPM's abilty to designate 20% of the ACC's board meas that it would be deemed to acquire 20% of the "voting seurities" of ACC, that level of ownership nonetheless also is below 25%, with the result that JPM would be presumed under the Investment Company Act not to control ACC. Similarly, the other terms of the strategic allance do not involve a change in voting rights that could be deemed a transfer of a controllng block of ACC's voting securities. Under prior staff interpretations, if ACC's current stockholders, as a group, or its largest single stockholder were to lose 25 % of their voting power as a result of the proposed transaction, a change of control could be deemed to occur.8 That, however, wil not happen in this case. The 8 See note 14 of Dea Witter, Discover & Co.;' Morgan Stanley Group Inc., SEe No-Action Letter (avaiL.

April 18, 1997).

i-C17499,S
"

5Z 0__1/'-/1//
¿/~t/JJ r-/ //C(t.
Douglas J. Scheidt, Esq. 8 December 2, 1997 shares owned by the Stowers Family currently represent 69.75% of ACC's tota voting power. Following the first phase of .the transaction, the voting power of the shares owned by the Stowers Family wil remain at not less than 69.75%, and conceivably could increase to as much as 87.55%, of tota votingpower.9 If and when JPM elected to exercise its option after three yeas, the shares owned by the Stowers Family wil represent between 68.79% and 86.3% of ACC's tota voting power. The Stowers Family currently owns 74.84% of the Class B shares (which elect at least 75% of ACC's board) and a majority of the Class A shares.10 After implementation of the strategic alliance, the Stowers Family, through its continued control of the Class B shares, II wil have the right to elect eight of ten directors, subject only to the

stipulation that six of the eight must be members of management. Since the Stowers Family has been instrumenta in selecting members of management, this stipulation is not a material limitation on the Stowers Family's governance rights. All four of ACC's existing directors are members of management and were appointed by the Stowers Family. Even after implementation of the strategic alliance, all future members of management wil be appointed by a Stowers￾elected board. The continued control rights of the Stowers Family clealy rebut any inference that the proposed transaction could constitute a change in control. Indee, the staff in the past

has concurred that, even if the 25%-of-voting-securities test is satisfied (which is not the case here), the resulting presumption of a change of control may be rebutted when another pary retans dominant control rights.12 Based on that analysis, we believe that the Stowers Family's continued control of ACC would rebut a presumption of change of control even if JPM were acquiring more than 25% of voting power (which is not the case here). In the present case, the continued control by the Stowers Family refutes any possible inference that a transfer of a controllng block of ACC's stock to JPM wil occur when the strategic alliance is consummated. 9 An increa in the Stowers Family's voting power would happen if non-Stowers Family stockholders elected

to sell their Class B shares to JPM. Any Class B share so sold would be converted to a Class A share, thus reducing the total number of votes attributable to all shares of common stock of ACC then outstanding. That in turn would increase the percentage voting power of the remaining Class B shares held by the Stowers Family. 10 Currently, a representative of another block of minority shareholders is required to be elected to the board pursuant to the term of an unrelated shareholders agreement. It is expeted that the shareholders agreement wil be eliminated as part of the propose strategic allance. II The Stowers Family would own at least 74.84%, and quite possibly all, of the Class B shares following consummtion of the transaction. l~ See, e.g., Templeton Investment Counsel Ltd., SEC No-Action Letter (avaiL. Jan. 22, 1986) (internal

restructuring resulting in transfer of approximately 36 % of outstanding capital stock not a change of control as dominant shareholder continues to control company), and the no-action letters cited therein. :-Cl1~m,5

:.7) O/: /i-/ /"//. ul~7e7-J ~ // c-u.J
Douglas J. Scheidt, Esq. 9 December 2, 1997
B. Power to Exercise a Controllng Influence
Under the terms of the proposed transaction, JPM wil have the Special Approval Rights and, under certn extraordinar circumstaces, the Management Replacement Rights.

The existence of these consent and replacement rights does not justify rebutting the presumption that, because less than 25 % of the voting rights in ACC wil be transferred, no transfer of a voting securities wil occur. The Speial Approval Rights and Management Replacement Rights are not intended to, and wil not, give JPM the right to direct day-to-day management of ACC. Rather, they wil apply only in extraordinar situations. Furthermore, controllng block of

they merely provide JPM with limited consent rights, as opposed to the right to affirmatively direct the activities of ACC. Had these provisions been in effect during the past three yeas, the only transaction that would have triggered the nee for JPM's approval would have been the acquisition by ACC of Benham Management International, Inc. and certn amendments to ACC's Certificate of Incorpration made in anticipation of that acquisition. None of the investor protection or other policy considerations underlying the Acts would be advanced by treating ACC's need to obtan a minority stockholder's consent for these types of extraordinar transactions as involving a transfer of a controllng block of ACC's voting securities (and hence leading to automatic termination of investment advisory contracts with clients). Indee, if that

interpretation were correct, many loan agreements, which customarly include "negative covenants" against extraordinar transactions without the lender's consent, similarly could be deemed to involve changes of control. After the proposed transaction, ACC's current stockholders wil retan approximately 90% of the voting power in ACC and the right to appoint 80% of ACC's directors. It is expected that members of current management wil continue to manage ACC's daily operations. Members of the Stowers Family wil continue to hold key management

positions (James E. Stowers, Jr. wil be the Chairman and James E. Stowers, III, his son, wil be the Chief Executive Officer), and the Stowers Family would have the right to designate or elect eight directors to the board and wil own 48.28% of the equity interest of ACC (43.28% if JPM's option were exercised after three yeas). Members of management who, absent extraordinar circumstaces, wil be appointed by the Stowers Family, wil constitute at least 60% of ACC's board of directors. There wil be no change in the personnel or operations of ACC (other than (i) in the areas of marketing and distribution, which wil change only to the extent of the joint marketing efforts described in Par II of this letter and (ii) to the extent of applicable regulatory requirements). ACC and JPM each wil continue to operate independently, and JPM wil not have control of the daily operations of ACC. Accordingly, neithe(!PM's equity investmenVin ACC, nor the Special Approval Rights or the Management Replacement Rights, wil give JPM a controllng influence over the management and policies of ACC as contemplated by the Acts. Certinly, nothing in any of these arrangements involves the "traffcking" in investment advisory NCI7499,S

-~~~

Douglas J. Scheidt, Esq. 10 Decmber 2, 1997 contracts against which the prohibitions on assignment are intended to protect. 13 For these reasons, it is our opinion the propose trsaction would not effect an "assignment" of the advisory contracts of ACC's advïsory subsidiar as that term is defined in Section 2(a)(4) of the Investment Company Act and Section 202(a)(I) of the Advisers Act.

---

For the reasons set fort above, we are of the opinion that the acquisition of 45 % of the shares of Class A common stock of ACC by JPM wil not result in a "change of control" or a transfer of a controllng block of the voting seurities of ACC, within the meaing of the Acts. We respetfully request that the Division, base on our opinion that the shares to be acquired by JPM, including giving effect to the rights associated with those shares that JPM wil have under the terms of the acquisition, do not constitute a controllng block of voting seurities of ACC, not recommend enforcement action to the Commission under Section 15(a)(4) of the Investment Company Act or Section 205(a)(2) of the Advisers Act if ACC procees with the propose transaction and its advisory subsidiar continues to provide services and receive compensation under the existing advisory contracts between that subsidiar and its investment company clients or, without obtaning their consent, other advisory clients. Should you require additional factual information or further analysis, please contact either me at (212) 878-8489 or John Heay at (212) 878-8281. We thank you for your prompt consideration of this matter. Sincerely, l.n-,/ p JfLOYIvif Lenard B. Mackey, Jrf cc: Wiliam M. Lyons, Esq.

Edward J. Kelly, III, Esq.

Nora Jordan, Esq.

13 See Investment Truts and Investment Companes: Heags on S. 3580, 76th Cong., 3d Sess. 253 (1939) (statement of David Schenker, Chef Counsel, Securities and Exchage Commssion Investment Trust Study); Investment Company Act Relea No. 10809 (Aug. 6, 1979) (proposing Rule 2a-6). NeI7499.5 ';

,grC;16'lJ f?;' ,y t2¿j ó Annex A
The approval of majority of the Board of Directors of ACC, and a majority of the JPM Directors on the Board, shall be necessa for ACC to effect any of the following actions:
(a) Any merger, consolidation, acquisition or joint venture, parnership, or business combination of ACC or any of its controlled subsidiares with or into any other person other than an acquisition (including an acquisition structured as a merger, consolidation or other business combination) that the Board determines in goo faith is incidental to the business and operations of ACC and in which the aggregate purchase price payable by ACC in such transaction or series of related transactions does not excee an amoUnt equal to (i) in the case of any such transaction or series of related transactions for which the relevant date is on or prior to December 31, 1998, the greater of (x) 20% of ACC's tagible stockholders' equity at the relevant date or (y) $60 milion, or (ii) in the case of any transaction for which the relevant date is later than December 31, 1998, 20% of tangible stockholders' equity at the relevant date; (b) Any sae, lease, assignment or other disposition by ACC or any of its

controlled subsidiares, in any single transaction or series of related transactions, of any tagible or intangible assets with an aggregate value in excess of (i) in the case' of any such transaction or series of related transactions for which the relevant date is on or prior to December 31, 1998, the greater of (x) 20% of ACC's tangible stockholders' equity at the relevant date or (y) $50 milion, or (ii) in the case of any transaction or series of related transactions for which the

relevant date is later than December 31, 1998, 20% of ACC's tagible stockholders' equity at the relevant date;

_ (c) Any transaction involving or consisting of a voluntary, consensual pledge

of, mortgage of, grant of a security interest in, or other encumbrance in the nature of a pledge or mortgage of, any tangible or intangible assets of ACC or any of its controlled subsidiares other than such pledges, mortgages, security interests and encumbrances in existence on the date of the Stockholders Agreement (including any extensions thereof), that, together with all other such pledges, mortgages, security interests and encumbrances made, granted or created after the date of the Stockholders Agreement and in existence, secures indebtedness in an aggregate amount in excess of an amount equal to (i) in the case of any such transaction for which the relevant date is on or prior to December 31, 1998, the greater of (x) 20% of ACC's tagible ~ stockholders' equity at the relevant date or (y) $50 milion, or (ii) in the case of any transaction for which the relevant date is later than December 31, 1998, 20% of tangible stockholders' equity at the relevant date;

(d) Any transaction pursuant to which ACC or any of its controlled subsidiar incurs, assumes or otherwise becomes liable for any indebtedness other than (i) indebtedness in existence on the date of the Stockholders Agreement and any replacements or refinancings thereof or (ii) indebtedness incurred for working capita purpses and under letter of credit facilities and finance leases that, together with all other such indebtedness described in this clause (ii) that remains outstading at the relevant date of the transaction represents in the aggregate indebtedness having an aggregate principal amount not in excess of (1) in the case of :-C17499,S .,

,ø (J ~ /ll/// /. uZc;C-?06-/ /7j£ttJ any such transaction for which the relevant date is on or prior to December 31, 1998, the greater of (x) 20% of ACC's tangible stockholders' equity at the relevant date or (y) $50 milion, or (2) in the case of any transaction for which the relevant date is later than December 31, 1998, 20% of ACC's tagible stockholders' equity at the relevant date; (e) Any issuance of equity securities of ACC (including preferred stock, options to acquire equity securities and securities convertible into equity securities) or any of its controlled subsidiares other than, in the case of equity securities of ACC only, those pursuant to any incentive arangement authorized by the Board; (f) Any increase in budgeted tota operating expenses for any calendar yea

by more than 20% of the prior yea's actual tota operating expenses unless the percentage increase in budgeted tota operating expenses for that yea is less than 20 percentage points

greater than the increase in budgeted tota operating revenues for that yea over the prior yea's actual tota operating revenues;

(g) Commencement of any volunta proceeing in respect of ACC or any of its controlled subsidiaries seeking liquidation, reorganization, dissolution or bankrptcy; (h) Except as provided in the Stockholders Agreement, entry by ACC or any

of its controlled subsidiares into any contract or transaction with, or' for the benefit of, any affiiate or corprate affiliate of ACC other than a controlled subsidiar of ACC; (i) Entry by ACC or any of its controlled subsidiaries into any material agreement, or related series of agreements that in the aggregate are material, including agreements comprising commitments to make capita expenditures, under which the aggregate amount of payments expeted to be made by ACC, divided by the number of years over which the payments are expected to be made is greater than (i) in the case of agreements for which the relevant date is on or prior to December 31, 1998, the greater of (x) 20% of ACC's tangible stockholders' equity at the relevant date or (y) $50 millon, or (ii) in the case of agreements for which the relevant date is later than December 31, 1998,20% of ACC's tangible stockholders' equity at the relevant date; (j) Payment of dividends (or other distnbutions) by ACC to its stockholders

in any calendar yea that would represent a higher percentage increase over the previous calendar yea than the percentage increase in ACC's net income over the same period or adoption of any dividend (or distribution) policy that is not consistent with the ACC's past practices and policies; (k) After the three-yea period following the date of the Stockholders

Agreement, any pro rata redemption, pro rata repurchase or other pro rata acquisition of outstading equity securities of ACC by ACC or any of its controlled subsidiaries, other than any such transaction in connection with incentive arangements; (1) Termination of, or material alteration of the responsibilties of, any senior offcer of ACC; NCI7499.S .,

úZ fJ/: /'-/I'//. 7lt:t! F //;6t(~

(m) Adoption of any matenal changes in ACC's compensation policies as in effect from time to time; (n) Any amendment of the charer or by-laws of ACC other than amendments that effect only immatenal changes not adverse to JPM; (0) Any cha,ge in the number of members of the Board except pursuant to

other provisions of the Stockholders Agreement; (p) The selection of any replacement for ACC's independent auditors;

(q) Any matenal change in any accounting, ta or legal compliance policy of ACC or any of its controlled subsidiares unless required in the goo faith opinion of the Board by changes in law, regulation or ,accounting conventions or pnnciples; (r) Entry into, or conduct of, any business or line of business other than those

descnbed as ACC's lines of business in the Vision Statement, or discontinuation of any matenal line of business in which ACC is engaged at the date of the Stockholders Agreement; (s) Engaging in any activity that is inconsistent with applicable banking laws or regulations or with any of the undertngs given pnor to the date of the Stockholders

Agreement to bank regulatory authonties and listed in a schedule to the Stockholders Agreement, or engaging in any new activity requinng consent or approval from any bank regulatory agency without such consent or approval first having been obtaned (it being understoo and agree that, if requested by the Board, JPM wil use its best efforts to obtan any such consent or approval); provided, that under no circumstace shall ACC ne required _ following the date of the Stockholders Agreement to terminate or modify any activity if to do so would matenally impact the manner in which ACC or its subsidiares provides services directly to or interacts with existing and prospective shareholders of the registered investment companies advised by ACC or its subsidiares; or (t) Except as contemplated by the Vision Statement, usage of the J.P. Morgan ànd related brand names. NCI1499,S ..