SEC Division of Investment Management staff letter: GE Institutional Funds

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Investment Company Act of 1940 - Section 17(a)

GE Institutional Funds

December 21, 2005

RESPONSE OF THE OFFICE OF CHIEF COUNSEL GE Institutional Funds DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20052292

File No. 811-08257

Your letter dated December 21, 2005 requests our assurance that we would not recommend enforcement action to the Commission against the Purchasing Shareholders, as defined below, under Section 17(a)(1) of the Investment Company Act of 1940 (the "Company Act"), if the Purchasing Shareholders sell securities to one or more investment portfolios ("Portfolios") of the GE Institutional Funds (the "Fund") in exchange for shares of the Portfolios.

BACKGROUND

You state that the Fund is registered with the Commission as an open-end management investment company and is designed primarily for institutional investors. You state that the Fund currently has nine Portfolios and offers two classes of shares: (i) the Investment Class; and (ii) the Service Class.

You state that the GE Funds also is registered with the Commission as an open-end management investment company. You state that both the GE Funds and the Fund share the same board of trustees ("Board") and the same investment adviser, GE Asset Management Incorporated ("GEAM"), a direct wholly owned subsidiary of General Electric Company, a publicly held holding company. You state that each of seven of the GE Funds series (the "Redeeming Funds") correspond to a particular Portfolio of the Fund in that each Redeeming Fund has the same investment objectives, investment strategies, and investment portfolio managers as the corresponding Portfolio. You also represent that each Redeeming Fund and corresponding Portfolio have substantially identical portfolio holdings. 1 Unlike the Fund, the Redeeming Funds are designed primarily for retail and smaller institutional investors that do not meet the requirements for investing in the corresponding Portfolios.

You state that certain retirement plans and trusts sponsored and maintained by the General Electric Company and its affiliates hold shares of the Redeeming Funds and are now eligible to invest in the Portfolios because the Fund recently changed its eligibility requirements for persons that may invest in the Portfolios. You state that those investors (the "Purchasing Shareholders") are expected to choose to invest in the Portfolios because of the lower expense ratios, the absence of sales charges for purchasing the Fund's shares,

2 and the substantially identical investment objectives and policies of the Redeeming Funds.

The Redeeming Funds and the Fund propose to facilitate those investments by allowing the Purchasing Shareholders to redeem their shares of the Redeeming Funds in-kind, 3 and to use the redemption proceeds to acquire Investment Class shares of the corresponding Portfolios (the "proposed in-kind purchases"). In particular, the Purchasing Shareholders would use the redemption proceeds as consideration for the purchase of the corresponding Portfolios' shares (the "in-kind consideration"). 4 You represent that the in-kind redemptions and the proposed in-kind purchases would be effected simultaneously. You also represent that, for purposes of determining the amount of Portfolio shares to sell to the Purchasing Shareholders, the value ascribed to the in-kind consideration by the Portfolio would be the same as the value that the Redeeming Funds would ascribe to the in-kind consideration for purposes of determining the amount of redemption proceeds to pay a Redeeming Shareholder. 5

You claim that the proposed in-kind purchases would benefit a Redeeming Fund by allowing it to avoid significant brokerage costs that would be incurred if it had to sell its portfolio securities to realize cash to pay redemption proceeds to the Purchasing Shareholders. You claim that, similarly, the Portfolios would avoid significant brokerage costs that would be incurred if the Portfolios had to buy portfolio securities with the cash that would be invested in the Portfolios by the Purchasing Shareholders. In addition, you note that the Portfolios would likely buy the same securities as would have been paid out in the in-kind redemption.

You represent that each Portfolio will effect the proposed in-kind purchases in a manner consistent with the following (the "Proposed Procedures"):

1) An in-kind purchase will not dilute the interests of the shareholders of the Portfolio; 2) The in-kind consideration accepted by a Portfolio will consist of securities that are appropriate, in type and amount, for investment by the Portfolio in light of its investment objectives and policies, and current holdings; 3) A Purchasing Shareholder's in-kind consideration will consist only of the entire redemption proceeds obtained through the redemption of shares of the corresponding Redeeming Fund; 4) A Redeeming Fund and corresponding Portfolio will have the same procedures for determining their net asset values, 6 and will follow those procedures in determining the amount of redemption proceeds to be paid to the Purchasing Shareholder upon redemption from the Redeeming Fund, and the amount of Portfolio shares to sell to a Purchasing Shareholder, respectively. A Redeeming Fund and corresponding Portfolio will ascribe the same value to the in-kind consideration; 5) The redemption in-kind and the purchase in-kind will be effected simultaneously; 6) The Portfolio will effect the purchase in-kind pursuant to procedures adopted by the Board, including a majority of those trustees who are not "interested persons" of the Fund within the meaning of Section 2(a)(19) of the Company Act ("Independent Trustees"), that are reasonably designed to provide that the purchases in-kind are effected in a manner consistent with (1) through (5) above; 7) The Board, including a majority of Independent Trustees, will determine no less frequently than quarterly that all in-kind purchases made by Purchasing Shareholders during the preceding quarter: were effected in accordance with these procedures; did not favor the Purchasing Shareholders to the detriment of any other shareholder of the Portfolio; and were in the best interests of the Portfolio. 8) The Fund will maintain and preserve for a period of not less than six years from the end of the fiscal year in which the purchase occurred, the first two years in an easily accessible place, a copy of its in-kind purchase procedures, as well as other records for the purchase in-kind setting forth the identity of the Purchasing Shareholder, a description of the composition of the relevant Portfolio's investment portfolio (including each asset's value) immediately prior to the purchase in-kind, a description of each security delivered in connection with the purchase in-kind, the terms of the in-kind purchase, the information or materials upon which the asset valuations were made, and a description of the composition of the relevant Portfolio's investment portfolio (including each asset's value) one month after the in-kind purchase. 9) GEAM will, consistent with its fiduciary duties, disclose to the Independent Trustees the existence of, and all of the material facts relating to, any conflicts of interest between GEAM and the Portfolios in a proposed in-kind purchase to allow the Independent Trustees to approve the in-kind
purchase. 7

You assert that effecting the proposed in-kind purchases in accordance with the Proposed Procedures would be fair to shareholders, consistent with the general purposes of the Company Act, consistent with the investment policies of the Portfolios, and beneficial to the Portfolios, Redeeming Funds and their shareholders. Accordingly, you seek guidance concerning the application of Section 17(a)(1) of the Company Act to the proposed in-kind purchases. 8

LEGAL ANALYSIS

Section 17(a)(1) of the Company Act, in relevant part, prohibits any affiliated person of a registered investment company ("first-tier affiliate"), or any affiliated person of such person ("second-tier affiliate"), acting as principal, from knowingly selling any security or other property to the investment company. 9 Section 17(a) was designed to prevent self-dealing and other forms of overreaching of a registered investment company by its affiliates. 10 In particular, the section protects investors by prohibiting "a purchase or sale transaction when a party to the transaction has both the ability and the pecuniary incentive to influence the actions of the investment company." 11

Section 17(a)(1) may be interpreted to prohibit the proposed in-kind purchases because a Purchasing Shareholder may be considered to be a second-tier affiliate of a Portfolio, 12 and the purchase would entail the sale of the in-kind consideration ( i.e. , securities) to the Portfolio in exchange for Investment Class shares. 13 A purchase in-kind transaction may raise certain concerns underlying Section 17(a) of the Company Act because an affiliate may use its influence to cause the registered investment company to accept unwanted portfolio securities. In addition, an affiliate may use its influence to cause the registered investment company to issue its shares to the affiliate in exchange for consideration ( i.e. , securities) that is of lesser value than the shares issued. 14

You contend that, by conducting the proposed in-kind purchases consistent with the Proposed Procedures, the purchases would not raise the concerns underlying the prohibitions of Section 17(a) of the Company Act. You also contend that the Proposed Procedures, while not identical to, are consistent with conditions imposed by the Commission in exemptive relief for in-kind purchase transactions that are similar to the proposed in-kind purchases. 15

In particular, you assert that no affiliated person of a Portfolio would cause the Portfolio to accept unwanted portfolio securities. You assert that, pursuant to the Proposed Procedures, the in-kind consideration would be consistent, in type and amount, with each Portfolio's investment objectives and policies and current holdings. You note that the in-kind consideration would consist of the in-kind proceeds from the redemption of shares of the corresponding Redeeming Fund, which has the same investment objectives and policies, is managed in the same manner, and has substantially identical portfolio holdings, as the corresponding Portfolio. You also note that, pursuant to the Proposed Procedures, the Board will review the in-kind purchases on at least a quarterly basis to ensure that, among other things, no Portfolio accepted unwanted portfolio securities. 16

You assert further that neither the Purchasing Shareholders, nor any other affiliated person of a Portfolio, would cause the Portfolio to issue its shares in exchange for in-kind consideration that was of lesser value than the shares because of the protections provided by the Proposed Procedures. Those procedures focus on the proper and consistent valuation of the in-kind consideration by the Portfolio and Redeeming Fund, and require a determination by the Board that the in-kind purchases did not favor the Purchasing Shareholders to the detriment of any other shareholder. In addition, the Proposed Procedures require a Portfolio to make and keep records relating to the in-kind purchases that would facilitate later review, as appropriate, of the in-kind purchases.

On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against the Purchasing Shareholders under Section 17(a)(1) of the Company Act if the Purchasing Shareholders sell securities to one or more Portfolios as part of an in-kind investment in the Portfolio(s). 17 Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.

Kenneth C. Fang Senior Counsel

INCOMING LETTER:

December 21, 2005

BY HAND

Douglas J. Scheidt, Associate Director and Chief Counsel U.S. Securities and Exchange Commission Division of Investment Management 100 F Street, N.E. Washington, D.C. 20549

Re: GE Institutional Funds: No Action Letter Request

Dear Mr. Scheidt:

We are writing on behalf of GE Institutional Funds (the "Fund"), an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"). We are seeking the concurrence of the staff of the Division of Investment Management that it will agree not to recommend enforcement action to the Securities and Exchange Commission ("Commission") under Section 17(a) of the Investment Company Act if the Fund, acting on behalf of one or more of its investment portfolios ("Portfolios"), were to accept investments in-kind from certain affiliated investors in the manner described below without first obtaining an exemptive order pursuant to Section 17(b) of the Investment Company Act.

I. BACKGROUND

The Fund, a Delaware statutory trust, is designed primarily for institutional investors, such as corporations, foundations, endowments and trusts that manage various types of employee benefit plans as well as charitable, religious and educational institutions. The Fund currently consists of nine Portfolios, including the International Equity Fund, U.S. Equity Fund, Strategic Investment Fund, Small-Cap Value Equity Fund, Premier Growth Equity Fund, Value Equity Fund, and Income Fund. Shares of the Portfolios are currently offered in two classes: the Investment Class ("Class I") and Service Class. Purchasers of Class I shares do not pay any sales charges (including front-end, contingent deferred, or asset-based sales charges) or shareholder service and distribution fees in connection with their investments in the Portfolios.

GE Funds, a Massachusetts business trust, is registered as an open-end management investment company under the Investment Company Act. It is designed primarily for retail and smaller institutional investors that generally do not meet the requirements for investing in the Fund. GE Funds currently consists of 14 series, including GE International Equity Fund, GE U.S. Equity Fund, GE Strategic Investment Fund, GE Small-Cap Value Equity Fund, GE Premier Growth Equity Fund, GE Value Equity Fund, and GE Fixed Income Fund (collectively, the "Redeeming Funds"). The Redeeming Funds generally offer four classes of shares: A, B, C and Y. Class Y shares are held by various institutional investors, including certain retirement plans and trusts sponsored and maintained by General Electric Company ("GE"), a publicly held holding company, and its affiliates (the "GE-Affiliated Investors"). The Redeeming Funds and the corresponding Portfolios have the same investment objectives, investment strategies, portfolio managers and, therefore, substantially identical portfolio holdings. 18

GE Asset Management Incorporated ("GEAM"), an investment adviser registered under the Investment Advisers Act of 1940, as amended, serves as investment adviser to both the Fund and the GE Funds. GEAM provides investment management services to numerous registered investment companies, other U.S. and non U.S.-collective investment vehicles, including group trusts, partnerships and separate managed accounts offered to U.S. and non-U.S. pension and corporate accounts. GEAM is a direct wholly owned subsidiary of GE.

The same persons serve as members of the Board of Trustees of the Fund and GE Funds (the "Board").

A. Proposed Investment In-Kind Transactions

The Fund recently changed its eligibility requirements for persons that may invest in the various Portfolios. As a result, certain GE-Affiliated Investors that hold Class Y shares of the Redeeming Funds are now eligible to invest in the Portfolios. These investors (the "Redeeming Shareholders") are expected to choose to invest in the Portfolios because of the lower expense ratios of the Portfolios, the absence of sales charges for purchasing shares of the Portfolios, and the substantial identity in investment objectives and policies between the Redeeming Funds and corresponding Portfolios.

To facilitate the expected investments by Redeeming Shareholders in the Portfolios, the Fund and the GE Funds propose to permit in-kind redemption and purchase transactions where possible. Under this proposal, the Redeeming Shareholders would be allowed to redeem their shares of the Redeeming Funds in-kind and use the proceeds to acquire Class I shares of corresponding Portfolios in transactions occurring simultaneously. This approach would benefit Redeeming Shareholders, as well as remaining shareholders of the Redeeming Funds and the Portfolios (the "affected funds"), because they would avoid the significant brokerage costs that would be incurred if portfolio securities of the Redeeming Funds were sold to realize cash to pay redemption proceeds of the Redeeming Shareholders, and the redemption proceeds were then used to acquire similar portfolio securities when invested in corresponding Portfolios. In addition, because investors in Class I shares do not pay any front-end, contingent deferred, or asset-based sales charges, nor any service fees in connection with investing in the Portfolios, the Redeeming Shareholders would not incur any sales charges or service fees in connection with investing in the Portfolios.

We anticipate that a majority of the in-kind purchases would occur during the quarter immediately following the first date that the Redeeming Shareholders are eligible to invest in the Portfolios. We expect there will be instances, however, in which Redeeming Shareholders will choose to engage in the proposed in-kind purchases after this initial period.

The GE Funds would effect the proposed redemption in-kind transaction in reliance on the no-action relief granted by the staff in Signature Financial Group, Inc . (pub. avail. Dec. 28, 1999) (the "Signature Letter" ). Consequently, we are not requesting relief in this letter for the redemption in-kind transaction. Because the Redeeming Shareholders may be considered "affiliated persons" of "affiliated persons" of the Portfolios, as that term is defined in Section 2(a)(3) of the Investment Company Act, an in-kind purchase of the type contemplated would be subject to the prohibitions on affiliated transactions contained in Section 17(a) of the investment Company Act. The Fund is requesting relief in this letter so that the Redeeming Shareholders may acquire Class I shares of the Portfolios in an in-kind purchase using the in-kind redemption proceeds received from the Redeeming Funds.

II. APPLICABLE LAW AND LEGAL DISCUSSION

A. Applicable Law

Section 17(a)(l) of the Investment Company Act, in pertinent part, makes it unlawful for an affiliated person of a registered investment company (or an affiliated person of such person) knowingly to "sell" to such registered investment company any security or other property (except securities of which the buyer is the issuer). The Commission has observed that Section 17(a) was designed mainly to prohibit "a purchase or sale transaction when a party to the transaction has both the ability and the pecuniary incentive to influence the actions of the investment company." 19

Under Section 2(a)(3)(A) of the Investment Company Act, an "affiliated person" of another person is defined to mean any person directly or indirectly owning, controlling, or holding with power to vote 5% or more of the outstanding voting securities of the other person. Section 2(a)(3)(C) of the Investment Company Act defines the term "affiliated person" of another person to mean "any person directly or indirectly controlling, controlled by, or under common control with, such other person." Under Section 2(a)(3)(E), "affiliated person" is defined to mean the investment adviser of an investment company.

A Redeeming Shareholder may be considered an "affiliated person" of an "affiliated person" (a "second-tier affiliate") of a Portfolio because the Redeeming Shareholder may be considered an "affiliated person" of GEAM, within the meaning of Section 2(a)(3)(C), by virtue of being under the common control of GE, and GEAM may be considered an "affiliated person" of the Portfolio under Section 2(a)(3)(E) by virtue of serving as the Portfolio's investment adviser. Alternatively, certain Redeeming Shareholders may be considered second-tier affiliates of a Portfolio because they may be considered "affiliated persons" of a Redeeming Fund by virtue of owning 5% or more of the outstanding voting securities of the Redeeming Fund, and the Redeeming Fund and the Portfolio may be considered "affiliated persons" of each other by virtue of being under the common control of GEAM, their common adviser.

Section 17(a)(1), therefore, may be interpreted to prohibit a Redeeming Shareholder from purchasing Class I shares of a Portfolio using the in-kind proceeds of redemption from a Redeeming Fund because the in-kind purchase may be viewed as the "sale" of securities to the Portfolio.

Although Section 17(a) may be deemed to apply to a particular transaction, the Commission staff has granted no-action relief in the past when, in the staff's view, the transaction might be effected fairly without implicating the concerns underlying Section 17(a). In the Signature Letter, the staff granted relief from Section 17(a) to permit affiliated redemption in-kind transactions provided certain procedures were followed. The staff was satisfied that the redemption in-kind transactions described in that letter would be effected fairly and not implicate the concerns underlying Section 17(a). 20 For the reasons and under the circumstances described below, we believe the staff can make a similar determination with respect to the proposed in-kind purchase and, therefore, should grant the requested no-action relief.

B. Proposed Procedures for In-Kind Purchases

The Fund proposes to accept in-kind purchases from a Redeeming Shareholder only pursuant to certain procedures that will be adopted by the Board, including a majority of those Trustees who are not "interested persons" of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act ("Independent Trustees"). These procedures will be substantially identical to the procedures the staff established in the Signature Letter for making in-kind redemptions and, we believe, would adequately address the concerns underlying the prohibitions in Section 17(a) of the Investment Company Act. The procedures are:

(1) The in-kind purchase will be effected at the current net asset value per share of the relevant Portfolio and will not dilute the interests of other shareholders of that Portfolio. The redemption in-kind and the purchase in-kind transactions will be effected simultaneously. (2) The securities delivered to the Portfolio by Redeeming Shareholders pursuant to the purchase in-kind will be valued in the same manner as they would be valued for purposes of computing the Portfolio's net asset value per share. 21 Securities for which quotations are readily available on a national securities exchange will be valued at the last quoted sales price, or if there is no reported sale, the security will be valued at the last quoted bid price. Certain fixed income securities will be valued by a dealer or by a pricing service based upon a computerized matrix system, which considers market transactions and dealer supplied valuations. Valuations for municipal bonds will be based on prices obtained from a qualified municipal bond pricing service, which prices will be based on the mean of the bid and ask prices of the secondary market. 22

(3) The in-kind purchase will be consistent with a Portfolio's policies and undertakings relating to the sale of the Portfolio's shares, as set forth in the prospectus and statement of additional information for the Portfolio. Accordingly, the in-kind consideration accepted by a Portfolio for the purchase of Portfolio shares will consist of securities that are appropriate, in type and amount, for investment by the Portfolio in light of its investment objectives and policies, and current holdings. (4) The in-kind securities accepted by a Portfolio will be limited to securities that are traded on public securities markets or for which quoted bid and asked prices are available, and will not include the following types of securities or assets: (a) securities which, if accepted, will have to be registered under the Securities Act of 1933, as amended; (b) securities issued by entities in countries which restrict the holdings of securities by non-nationals, including investment vehicles such as the Fund, or otherwise limit the ability to transfer the security other than through a securities exchange transaction; and (c) certain portfolio assets (such as forward currency exchange contracts, futures and option contracts, and repurchase agreements) that, although they may be liquid and marketable, involve the assumption of contractual obligations, require special trading facilities or may only be traded with the counterparty to the transactions in order to effect a change in beneficial ownership. A Redeeming Shareholder will receive from a Redeeming Fund and deposit to a Portfolio cash for the portion of the Redeeming Fund's assets represented by cash equivalents (such as certificates of deposit, commercial paper, and repurchase agreements). In addition, a Redeeming Shareholder will receive and deposit cash for other securities and assets that are not readily distributable (including securities and assets of the types described above in (a), (b) and (c), receivables, and prepaid expenses) net of a pro rata portion of all liabilities (including accounts payable), and for those portfolio securities not amounting to round lots ( e.g., 100 shares) (or which would not amount to round lots if included in the in-kind distribution and purchase) or fractional shares and accruals on these securities. (5) The purchases in-kind will be made only with the redemption proceeds a Redeeming Shareholder receives from a Redeeming Fund, which has an investment objective and investment policies that are substantially similar to those of the Portfolio in which the purchase in-kind is to be made, and which has the same investment adviser as, or an investment adviser under common control with, the Portfolio. (6) The purchases in-kind for any Portfolio will be made only with securities and cash that have been distributed pro rata from a Redeeming Fund to Redeeming Shareholders (so that a Redeeming Shareholder will receive its proportionate share of every security and asset
position in a Redeeming Fund's portfolio, subject to the exceptions noted above), and will be effected in a manner that is consistent with the procedures set forth above in (1) to (5). (7) The Board, including a majority of the Independent Trustees, will determine no less frequently than quarterly that all purchases in-kind made by Redeeming Shareholders during the preceding quarter: (a) were effected in accordance with the various procedures; (b) did not favor the Redeeming Shareholders to the detriment of any other shareholder of the Portfolio; and (c) were in the best interests of each Portfolio. (8) The Fund will maintain and preserve for a period of not less than six years from the end of the fiscal year in which the purchase occurred, the first two years in an easily accessible place, a copy of its in-kind purchase procedures, as well as other records for the purchases in-kind setting forth the identity of the purchasing shareholder, a description of the composition of the relevant Portfolio's investment portfolio (including each asset's value) immediately prior to the purchase in-kind, a description of each security delivered in connection with the purchase in-kind, the terms of the in-kind purchase, the information or materials upon which the asset valuations were made, and a description of the composition of the relevant Portfolio's investment portfolio (including each asset's value) one month after the in-kind purchase. (9) GEAM will, consistent with its fiduciary duties, disclose to the Independent Trustees the existence of, and all of the material facts relating to, any conflicts of interest between GEAM and the Portfolios in a proposed in-kind purchase to allow the Independent Trustees to approve the in-kind purchase. 23

Under the foregoing procedures, no first- or second-tier "affiliated person" of a Portfolio would be in a position to overreach the Portfolio by causing it to accept unwanted portfolio securities in connection with a purchase in-kind transaction. A Redeeming Shareholder would not be permitted to choose the portfolio securities of the Redeeming Funds to be distributed for redemption and to be used to purchase Class I shares of the corresponding Portfolios, since each Redeeming Shareholder would receive a pro rata distribution of securities and cash from each Redeeming Fund. The in-kind redemption from the Redeeming Funds would be made under procedures that comply with those outlined in the Signature Letter, which have been adopted by the Board of Trustees of the GE Funds, including a majority of the Independent Trustees. In addition, under the proposed procedures, an in-kind purchase of Class I shares of the corresponding Portfolios could only be made with the entire redemption proceeds, and in Portfolios that have substantially identical investment objectives, policies and holdings as the Redeeming Funds.

Under the proposed procedures, the in-kind securities to be used for redemption and purchase could not be valued in a way that would favor the Redeeming Shareholders to the detriment of other shareholders of the affected funds. The procedures to be used to value the in-kind securities in connection with an in-kind purchase would be based on objective, verifiable valuation measures, and these procedures would be the same as those used to compute the net asset value of the affected funds. The Redeeming Funds would value the securities for the in-kind redemption on the same day that the Portfolios would value the securities to be used for the in-kind purchase of Class I shares. Securities for which exchange quotations are readily available would be valued at the last quoted sales price, or if there is no reported sale, the security would be valued at the last quoted bid price. Certain fixed income securities would be valued by a dealer or by a pricing service based upon a computerized matrix system, which considers market transactions and dealer supplied valuations.

In light of the protections afforded by the proposed procedures, therefore, no Redeeming Shareholder or other first- or second-tier affiliate of a Portfolio would be in a position to cause the Portfolio to issue its share for in-kind consideration that was not of equivalent value to the shares being issued.

C. Rule 17a-7

The proposed procedures, and the circumstances of the contemplated in-kind transaction, also satisfy many of the requirements of Rule 17a-7 under the Investment Company Act. There is added assurance, therefore, that the conflicts of interest which Section 17(a) was intended to prevent are not likely to occur under the contemplated transaction.

Rule 17a-7 exempts from Section 17(a) certain purchase and sale transactions between registered funds or between a fund and a person that is an affiliated person of the fund solely by virtue of having a common investment adviser, common directors and/or common officers. To rely on Rule 17a-7, however, various conditions must be satisfied, including: (a) the transaction must be for no consideration other than cash payment against prompt delivery of a security for which market quotations are available; (b) the transaction must be effected at the "current market price" in accordance with Rule 17a-7(b); (c) the transaction must be consistent with the policies of the funds involved, as set forth in their filings made with the Commission; (d) no brokerage commissions, fees (except for customary transfer fees), or other remuneration must be paid in connection with the transaction; (e) the boards of the funds must have adopted procedures reasonably designed to provide that conditions (a) through (d) have been complied with, and the boards must monitor such compliance quarterly; (f) the boards of the funds must satisfy the fund governance standards of Rule 0-1(a)(7) under the Investment Company Act; and (g) the funds must maintain and preserve certain records regarding the transactions.

It is not so clear that the Fund could meet all of the conditions for relying on Rule 17a-7 to effect the purchase in-kind transaction. First, the transaction would not strictly be a cash-for-securities transaction as required by Rule 17a-7(a), although we recognize that the staff has granted no-action relief in similar circumstances in the past based on arguments in the request letters that the right to receive cash from a redeeming fund is substantially equivalent to the use of cash. 24 Second, the Portfolios' pricing procedures (as well as the procedures to be used to effect redemptions in-kind from the Redeeming Funds) will not follow precisely the methodology set forth in Rule 17a-7(b)(1). 25 Using "net asset value" valuation procedures would allow the Redeeming Funds and the Portfolios to effect these transactions with a minimum of disruption to current operations. In light of the various procedures that will accompany use of these valuation methods, as described above (including, particularly, the fact that the redemption in-kind and purchase in-kind would be effected at the same prices), the use of these methods should not in any way result in disadvantages for the Redeeming Funds or Portfolios. 26

Nevertheless, substantially all of the requirements of Rule 17a-7(c)-(g) would be satisfied under the proposed in-kind purchase and redemption transaction. The transaction will be consistent with the policies of the Fund and GE Funds, as set forth in their filings made with the Commission. The Fund and the GE Funds will not pay any brokerage commissions, fees (except for customary transfer fees), or other remuneration in connection with the proposed redemption in-kind and purchase in-kind transaction. The Board will adopt procedures reasonably designed to ensure that the proposed transaction is effected in accordance with the guidelines set forth above and, as applicable, the requirements of Rule 17a-7(a)-(d). At its quarterly meetings following an in-kind investment, the Board (including a majority of the Independent Trustees) will determine whether (a) the securities transferred in the in-kind investment were valued in accordance with the proposed procedures, and (b) the acquisition of the securities was consistent with the policies of the Portfolios as reflected in their registration statements and reports filed under the Investment Company Act. The Board intends to satisfy the corporate governance standards of Rule 0-1(a)(7) under the Investment Company Act by the compliance date. The Fund and GE Funds will maintain and preserve certain records in accordance with Rule 17a-7(g). 27

D. Policy Considerations

There are no adverse policy considerations that should concern the staff under the proposed in-kind transaction. The terms of this investment would be reasonable and fair to shareholders of the Redeeming Funds and Portfolios and consistent with the policies of the affected funds and the general purposes of the Investment Company Act.

1. Fairness to Shareholders

The shareholders of the affected funds would benefit significantly by permitting the Redeeming Shareholders to effect the redemption and purchase in-kind in the manner contemplated, and such shareholders would not incur any material related costs. As indicated, by permitting the Redeeming Shareholders to redeem their shares of the Redeeming Funds in-kind and to use these proceeds to acquire Class I shares of corresponding Portfolios, the affected funds would avoid the significant brokerage costs that they would otherwise incur if the redemption and purchase were effected as cash transactions. Given the size of the transaction that is expected (in the tens of millions of dollars), the avoidance of brokerage costs would result in huge savings for shareholders of the affected funds without any offsetting associated costs.

The fairness and reasonableness of the in-kind redemption and purchase transaction to shareholders of the affected funds is evident for another reason: the Redeeming Funds and the Portfolios have substantially identical investment objectives, policies and holdings and differ materially only with respect to the size of institutions that may invest in one or the other of these funds and with respect to the management fees and other operating expenses that apply.

If the requested relief is not granted (and no other avenue for possible relief may be pursued in a timely fashion), shareholders of the affected funds would be significantly disadvantaged. In such case, the Redeeming Funds would be forced to sell portfolio securities they hold to realize cash proceeds to distribute to Redeeming Shareholders, and would incur significant brokerage costs in doing so. The assets of the Redeeming Funds would be correspondingly depleted and the net asset value of shares of these Funds would be lower than would otherwise be the case, with correspondingly lower returns to remaining shareholders of these funds. In addition, once the Redeeming Shareholders have invested their cash proceeds to purchase Class I shares of the Portfolios, these Portfolios would incur equally significant brokerage costs in purchasing substantially the same securities as those sold by the Redeeming Funds.

2. Consistency with General Purposes of the Investment Company Act

The proposed in-kind investment would be consistent with the general purposes of the Investment Company Act, which are to mitigate and, so far as feasible, eliminate the conditions enumerated in Section 1(b) of the Investment Company Act which adversely affect the national public interest and the interest of investors. In particular, under the proposed procedures, as discussed above, the in-kind transaction would not present an opportunity for the affected funds to be operated, or their portfolio securities selected, in the interest of the Redeeming Shareholders rather than in the interest of all shareholders of the affected funds. The Redeeming Shareholders would deposit a pro rata distribution of the securities and assets received as a result of an in-kind redemption from the Redeeming Funds and, because of the similarity in investment objectives, policies, and portfolio holdings of the Portfolios and the Redeeming Funds, no person would receive any advantage.

The in-kind investment is also consistent with the interest of investors in the affected funds because it is designed to further the Fund's goal of avoiding the unnecessary brokerage and other investment expenses that would diminish the returns of all shareholders.

3. Consistency with Investment Policies

The proposed transactions would be consistent with each Portfolio's investment policies, as set forth in its prospectus. The investment policies and limitations of each Portfolio, as set forth in its prospectus, do not restrict the Portfolio's ability to accept investments in-kind. In addition, the proposed in-kind investments would be consistent with each Portfolio's objective to make long-term investments.

E. Exemptive Orders

The Commission previously has granted an exemptive order to GEAM and the Fund to permit in-kind investments in substantially similar circumstances. 28 In addition, the Commission has granted other exemptive orders in similar circumstances. 29 Although the procedures proposed above for effecting the in-kind purchase more closely follow the procedures of the Signature Letter , these procedures are not inconsistent with those included under the noted exemptive orders.

III. CONCLUSION

For the foregoing reasons, we respectfully request that the staff agree not to recommend enforcement action to the Commission for a violation of Section 17(a) if the Fund were to accept the in-kind investment from GE Affiliated Investors. We would be willing to respond to any questions the staff may have concerning this request or to supplement in any way the arguments made in this letter. Please call the undersigned at (202) 551-1758 or David Hearth at (415) 856-7007 with any question. In accordance with the provisions of Securities Act Release No. 6269 (December 5, 1980), we have enclosed seven additional copies of this no-action request.

Sincerely,

Wendell M. Faria for PAUL, HASTINGS, JANOFSKY & WALKER LLP

Endnotes

1

In particular, you represent that a Redeeming Fund invests in substantially identical underlying securities and in substantially the same proportional amounts as the corresponding Portfolio. 2

You state that purchasers of the Investment Class shares do not pay any sales charges (including front-end, contingent deferred, or asset-based sales charges) or shareholder service or distribution fees in connection with their investments in the Portfolios. 3

An in-kind redemption entails a fund's payment of redemption proceeds in the fund's portfolio securities rather than cash. You represent that the redemptions would, essentially, be effected pro

rata , in that each Purchasing Shareholder who redeems would receive a proportionate share of every security position in a Redeeming Fund's portfolio, except that the Purchasing Shareholder will receive cash in lieu of certain securities and other assets that are not readily distributable. 4

You anticipate that the majority of proposed in-kind purchases would occur during the quarter immediately following the first date that the Purchasing Shareholders are eligible to invest in the Portfolios. You represent, however, that certain Purchasing Shareholders could opt to engage in the proposed in-kind purchases after this period. 5

You represent that the Redeeming Funds and Portfolios use the same valuation methods to value their assets for purposes of issuing and redeeming their shares pursuant to Rule 22c-1 under the Company Act. You represent further that the Redeeming Funds and the Portfolios would effect the in-kind redemptions and proposed in-kind purchases, respectively, consistent with the requirements of Rule 22c-1 under the Company Act. 6

See Rule 22c-1 and Rule 2a-4 under the Company Act. 7

See

Tannenbaum v. Zeller , 552 F.2d 402, 418 (2d Cir. 1977), cert . denied , 434 U.S. 934 (1977) (stating that the investment adviser had a duty to disclose information to the unaffiliated directors of the fund "in every area where there was even a possible conflict of interest" between the interests of the adviser and the interests of the fund). 8

You do not request relief for the proposed in-kind redemption in which the Redeeming Funds would satisfy a redemption request from the Purchasing Shareholders by means of an in-kind distribution of portfolio securities. Instead, you represent that the GE Funds would effect the proposed in-kind redemption in reliance on the no-action relief that we provided in Signature Financial Group, Inc. (pub. avail. Dec. 28, 1999). 9

See Section 2(a)(3) of the Company Act defining "affiliated person." First- and second-tier affiliates are referred to collectively as "affiliates." 10

See Investment Company Mergers, Investment Company Act Release No. 25259 (Nov. 8, 2001). 11

See Mergers and Consolidations Involving Registered Investment Companies, Investment Company Act Release No. 10886 (Oct. 2, 1979), citing Hearings on S.3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76 th Cong. 3d Sess., at 256-259 (1940). 12

In particular, you indicate that each Purchasing Shareholder may be deemed to be a first-tier affiliate of GEAM pursuant to Section 2(a)(3)(C) of the Company Act because it may be deemed to be under the common control with the General Electric Company. GEAM may be deemed to be a first-tier affiliate of the Portfolios pursuant to Section 2(a)(3)(E) of the Company Act because GEAM serves as the investment adviser to the Portfolios. Alternatively, you indicate that certain Purchasing Shareholders may be deemed to be second-tier affiliates of a Portfolio because certain Purchasing Shareholders may be deemed to be first-tier affiliates of the corresponding Redeeming Fund, which may be a first-tier affiliate of a Portfolio. Specifically, certain Purchasing Shareholders may be deemed to be first-tier affiliates of the Redeeming Fund pursuant to Section 2(a)(3)(A) of the Company Act because they own, control or hold with power to vote, five percent or more of its outstanding voting securities. The Redeeming Fund may be deemed to be a first-tier affiliate of a Portfolio pursuant to Section 2(a)(3)(C) of the Company Act because it may be deemed to be under the common control of GEAM. 13

We note that a purchase in-kind transaction involving an investor that is itself a registered investment company may raise additional issues under Section 17(a) of the Company Act. This letter does not address those transactions. 14

See , e.g. , Exemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and Certain Affiliated Persons Thereof, Investment Company Act Release No. 11136 (Apr. 21, 1980) at n.11 and accompanying text. 15

See , e.g. , GE Asset Management, Investment Company Act Release Nos. 24674 (Oct. 3, 2000) (Notice) and 24717 (Oct. 30, 2000) (Order); Ark Funds, Investment Company Act Release Nos. 24275 (Feb. 2, 2000) (Notice) and 24316 (Feb. 25, 2000) (Order); Black Rock Funds, Investment Company Act Release Nos. 23089 (Mar. 27, 1998) (Notice) and 23123 (Apr. 22, 1998) (Order). 16

Telephone conversation between Kenneth C. Fang of the staff and Wendell M. Faria of Paul, Hastings, Janofsky & Walker LLP, counsel to the Fund, on December 21, 2005 17

See

also Trust Funds Institutional Managed Trust (pub. avail. July 20, 1988) and Metropolitan Series Funds (pub. avail. Aug. 29, 1986) (providing no-action assurances under Section 17(a) of the Company Act in similar, but not identical, circumstances). 18

A Redeeming Fund invests in substantially identical underlying securities and substantially the same proportional amounts as the corresponding Portfolio. 19

See Investment Company Act Release No. 10886 (Oct. 2, 1979), citing Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess., at 256-59 (1940). 20

See also Trust Funds Institutional Managed Trust (pub. avail. July 20, 1988) (no-action relief granted from Section 17(a) to permit units of a short-term bond portfolio to be exchanged for units of a limited volatility bond portfolio under circumstances that complied substantially with the conditions of Rule 17a-7 under the Investment Company Act); Metropolitan Series Fund, Inc. (pub. avail. Aug. 29, 1986) (no-action relief granted from Section 17(a) to permit a life insurance company to transfer portfolio securities from one fund to another substantially in compliance with Rule 17a-7); Federated Investors (pub. avail. Apr. 21, 1994) (no action relief granted from Section 17(a) to permit the assets of a common trust fund and collective investment fund to be transferred to certain registered funds substantially in accordance with the conditions of Rule 17a-7). While these letters provide useful support for the relief we are seeking, it is not clear to us that the circumstances of any one fit squarely with the circumstances of our request, as described herein. We discuss these letters in more detail below. 21

The prices determined for securities of a Redeeming Fund will be the same as the prices determined for deposit of securities to a corresponding Portfolio since the Fund and the GE Funds use the same procedures to determine the prices of portfolio securities. Therefore, the value ascribed to the in-kind consideration by a Portfolio, for purposes of determining the amount of shares to sell to a Redeeming Shareholder, will be the same as the value that the corresponding Redeeming Fund will ascribe to the in-kind redemption proceeds paid to a Redeeming Shareholder and used to purchase shares of that Portfolio. The Redeeming Funds and the Portfolios will effect the in-kind redemptions and proposed in-kind purchases, respectively, consistent with the requirements of Rule 22c-1 under the Investment Company Act. 22

Consistent with procedures that have been adopted by the Board, a Portfolio, as well as the corresponding Redeeming Fund, will use fair values to determine the prices of portfolio securities for an in-kind transaction for those securities that have been fair valued on the day of the transaction. In any such case, for the reason stated above in n. 4, the fair value prices will be the same for both the Portfolio and the corresponding Redeeming Fund. 23

See Tannenbaum v. Zeller, 552 F.2d 402, 418 (2d Cir. 1977), cert. denied, 434 U.S. 934 (1977) (stating that the investment adviser had a duty to disclose information to the unaffiliated directors of the fund "in every case where there was even a possible conflict of interest" between the interests of the adviser and the interests of the fund). 24

See, e.g., Cash Accumulation Trust and Daily Accumulation Fund (pub. avail. Nov. 30, 1984); Trust Funds Institutional Managed Trust (pub. avail. Jul. 20, 1988). 25

For example, securities for which there are no reported sales are valued at the last quoted bid price rather than the average of the highest current independent bid and the lowest current independent offer. 26

We note that the staff previously has granted relief in similar circumstances to permit use of "net asset value" valuation procedures that were different from the procedures described in Rule 17a-7(b). See, e.g., Trust Funds Institutional Managed Trust (pub. avail. Jul. 20, 1988). The incoming letter in that case noted that shareholders would not be any worse off by use of "net asset value" procedures and, in fact, could in certain cases enjoy a windfall if Rule 17a-7(b) procedures were used instead to value the securities for making an in-kind purchase. 27

We note that the Commission staff has granted no-action relief with respect to similar transactions involving bank fiduciary accounts in which the representation was made that substantially all of the conditions of Rule 17a-7 would be satisfied. See, e.g., The

First National Bank of Chicago (pub. avail. Sept. 22, 1992) (no-action relief granted from Section 17(a) to permit certain fiduciary accounts for which a bank served as trustee, fiduciary or agent, to purchase shares of certain registered investment companies advised by the bank with the securities held in the fiduciary accounts, based particularly on the representation that substantially all of the conditions of Rule 17a-7 would be satisfied). See also Federated Investors (pub. avail. April 21, 1994) ( "Federated" ) (no-action relief granted from Section 17(a) to permit similar transactions involving bank collective investment and common trust funds where the representation was made that substantially all of the conditions of Rule 17a-7 would be satisfied). 28

See, e.g. , GE Asset Management Incorporated and GE Institutional Funds , Investment Company Act Release Nos. 24674 (Oct. 3, 2000) (notice) and 24717 (Oct. 30, 2000) (order). 29

See, e.g. , Ark Funds , Investment Company Act Release Nos. 24275 (February 2, 2000) (notice) and 24316 (February 25, 2000) (Order); BlackRock Funds , Investment Company Act Release Nos. 23089 (Mar. 27, 1998) (notice) and 23123 (Apr. 22, 1998) (order); The Sessions Group , Investment Company Act Release Nos. 23014 (Jan. 30, 1998) (notice) and 23052 (Mar. 2, 1998) (order).

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Modified: 12/12/2005