SEC Division of Investment Management staff letter: Neuberger & Berman Income Funds

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SECTON Il (a. ) ~.'- .. RUL I =f 0-- 8 February 27 i 1998 .. J' Our Ref. No. 98-64 AV.A PUO :i /2:¡ / iS'~:
Neuberger & Bermn
Income Funds,
Neuberger & Bermn , Income Trust, and

Neuberger & Bermn
Income Maagers Trust
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
File Nos. 811-3802,
DIVISION OF INVSTMNT MAAGEMNT 811-7724. and 811-7824

Your le~ter dated January 29, 1998 requests our assurance

that we will not recommend enforcement action to the Commission

under Section 17 (a) of the Investment Company Act of 1940 (the

"1940 Act") if, in reliance on Rule 17a-8 under the 1940 Act, one

series of each of Neuberger & Bermn Income Funds (" Income

Funds ") and Neuberger & Bermn Income Trust (" Income Trust II ) transfers substantially all of its assets to another series of

the same trust and then dissolves, as described in greater detail

in your letter.

FACTS
Organization
Income Funds, Income Trust, and Income Managers Trust

(IIManagers Trust") each are registered with the Commission as

Trust is a New York common law trust. .. Each series of Income

diversified, open-end, management, investment companiè's. Income

Funds and Income Trust are Delaware business trusts, and Managers , ..

Funds and Income Trust is a feeder fund ("Fund") in a master-

feeder fund structure. Each Fund invests all of its net

investable assets in a corresponding portfolio ("Portfolio") of

Managers Trust. Neuberger & Berm Management Incorporated ("N&B

Management ") serves as the investment manager of each Portfolio,

as administrator of each" Fund, and as distributor of the shares

of each Fund. Neuberger & Bermn, LLC (Ii Neuberger & Bermn II ) serves as sub-adviser to each Portfolio. All of the voting stock

of N&B Management is owned by principals of Neuberger & Bermn.

Neuberger & Bermn Limited Maturity Bond Fund ("Limited Maturity Fund II ) and Neuberger & Bermn Ultra Short Bond Fund ( IIUl tra Short Fund ") are series of Income .Funds. Neuberger & Bermn Limited Maturity Bond Trust ("Limited Maturity Trust") and Neuberger & Bermn Ultra Short Bond Trust ("Ultra Short Trust")

are series of Income Trust. "Under the master- feeder fund

structure, Ultra Short Fund and Ultra Short Trust each invests

substantially all of its net investable assets in a corresponding

portfolio of Managers Trust, known as Neuberger & Bermn Ultra

Short Bond Portfolio ("UI tra Short Portfolio "). Likewise, .

Limited Maturity Fund and Limited Maturity Trust each invests

substantially all of its net investable assets in Neuberger &

Bermn Limited Maturity Bond Portfolio ("Limited Maturity Portfolio") i also.a portfolio of Managers Trust.

The Pronosed Transactions

On ,the closing date of the proposed transactions, Ultra

Short Fund would be reorganized into Limited Maturity Fund and

Ultra Short Trust would be reorganized into Limited Maturity Trust, using the procedures described in detail in your letter. 1 After the proposed transactions, Ultra Short Fund, Ultra Short

Trust and Ultra Short Portfolio would each dissolve. You

represent that, when the reorganizations are completed, each

person who had held shares in Ultra Short Fund immediately before

the reorgani\ation would hold shares in Limited Maturity Fund of

exactly the same total value, and each person who had held shares

in Ultra Short Trust immediately before the reorganization would

hold shares in Limited Maturity Trust of exactly the same total

value. You also represent that pursuant to the term of the

trust instruents of Income Funds and Income Trust, and as

permitted by Delaware business trust law, no shareholder vote is

required to effect the proposed transactions, and no such vote

will be obtained.

You state that the same individuals comprise the Boards of Trustees of Managers Trust, Income Fuds and Income Trust ¡these entities also share common executive officers. You represent

that the Boards of Trustees of Managers Trust, Income Funds and

Income Trust (including all of the Trustees who are not

interested persons of Managers Trust, Income Funds, or Income

Trust) determined at a meeting th~t the proposed transactions

were in the best interests of each of the Ultra Short and Limited

Maturity series of Managers Trust, InGQme Funds, and Income

Trust, and that the interests of shareholders or interest holders

in the Ultra Short and Limited Maturity series of Managers Trust,

Income Funds, and Income Trust would not be diluted as a result

of the transactions. You also represent that the Boards i

determinations, as well as the factors considered in reaching

their conclusions, have been appropriately recorded in the minute

books of Managers Trust, Income Funds and Income Trust., :
5% Holders

You state that certain investors are record holders of 5% or

more of the outstanding shares of both Funds to be involved in

the proposed transactions. Specifically, a brokerage firm

operating a II fund supermrket II currently holds, as record owner, more than 5% of the shares of each of Ultra Short Fund and

Limited Maturity Fund, and a pension plan trustee currently

i The anticipated closing. date of the proposed transactions is

February 27, 1998.

holds, as record owner for various pension plans, more than 5% of

the shares of each of Ultra Short Trust and Limited Maturity

Trust. You represent that neither the brokerage firm nor the

pension plan administrator is otherwise affiliated with the

Funds. You represent that N&B Management is not aware of any

person ~ho, through the brokerage firm or pension plan

administrator, beneficially owns 5% or more of the shares of more

than one of the entities involved in the proposed transactions.

You also state that as of December 31, 1997, Neuberger &

Bermn Trus~ Company held, as trustee for the Neuberger & Bermn

Employees Pr~fit Sharing Plan (the "Plan"), 5.4% of the shares of

Limited Maturity Fund. Neuberger & Bermn Trust Company is a

wholly owned subsidiary of Neuberger & Bermn. You represent that the financial interest in these shares is held by the Plan

participants, and the largest individual interest amounts to less

than 1% of Limited Maturity Fund. You further represent that

plan investments are directed by individual participants, and

that neither Neuberger & Bermn nor any of its affiliated

entities has any financial stake in the operation of the Plan.

DISCUSSION
Section 17 (a) of the 1940 Act generally prohibits any affiliated person, or any affiliated person of an affiliated

person, of a registered investment company from knowingly purchi:s~ng securities or other proper~y from, or sell,ing2 securities or other property to~ the 2nvestment company. Under

certain circumstances, Rule 17a-8 under the 1940 Act exempts from

the prohibitions of Section 17 (a) a m&rger, consolidation, or

purchase or sale of substantially all of the assets involving

registered investment companies that may be affiliated persons

solely by reason of having a common investment adviser, common

directors and/or common officers. Under Rule 17a-8, the board of

directors of each affiliated registered investment company

participating in the transaction, including a maj ority of the

directors of each investment company who are not interesEed

persons of any registered investment company participating in the

2 Section 2 (a) (3) of the 1940 Act provides, in relevant part, that

"affiliated person II of another person means: any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities . of such other personi any person 5 per centum or more of whose outstanding

voting securities are directly or indirectly owned, controlled, or

held with power to vote, by such other personi any person directly

or indirectly controlling, controlled by, or under common control

with, such other personi or, if such other person is an investment

company, any investment adviser thereof.

transaction, must determine that (i) participation in the

transaction is in the best interests of that investment company,

and (ii) the interests of existing shareholders of that

investment company will not be diluted as a result of the

transaction. The findings, and the basis upon which the findings

were ma~e, must be recorded fully in the minute books of each

investment company.

You state that each Fund may be deemed to be affiliated with

the Fund into which it will reorganize because (i) the Funds

share a co~on investment adviser and common trustees and

officers, (i~) certain. investors are holders of 5% or more of the

outstanding shares of both of the participating Funds, or (iii)

Neuberger & Bermn Trust Company is a record holder of more than

5% of one of the participating Funds. You state that this share

ownership may render a 5% holder an affiliate of each Fund whose

shares it owns, which could result in each Fynd being deemed an

affiliate of an affiliate of the other Fund.

You believe that the proposed transactions should be

governed by Rule 17a-8,notwithstanding your assertion that the

Funds may be deemed to be affiliated in ways other than those

explicitly permitted under the Rule. You assert that the relief

requested is consistent with past no-action relief granted by the

staff in this area and the policies underlying Section 17 (a) and

Rule 1 7a - 8 .
You represent that no entity, that may be deemed"to be

affiliated with both Funds participating in a transaction has

both the financial incentive and the ability to influence the

3 You note that Ultra Short Fud and Limted Maturity. Fund eilso could be deemed to be affiliated, due to the master-feeder fund

structure, if the series of Income Fuds are viewed as separate

entities, and Magers Trust is viewed as a single entity, in

disregard of its separate series. Tht is, as a 5% owner of the

outstanding interests of Maagers Trust, each of Ultra.

and Limited Maturity Fud could be deemed an affiliate of Maagers Short Fund

Trust and, therefore, each Fud could be deemed an affiliate of an

affiliate of the other Fud. You state, however, that this

relationship arguably does not create an imermssible affiliation

between those Fuds if the series of
Magers Trust are viewed as separate entities.

4 In support of your assertion, you cite the staff i s positions in The Eaton Vance Group of Investment Companies (pub. avail. July 25,

1997) i Principle Preservation Portfolios, Inc., Prospect Hill Trust

(pub. avail. Jan. 11, 1996) i and Thomson McKinnon Global Trust

(pub. avail. Dec. 18, 1986).

term of the proposed transactions. 5 You represent that because

no shareholder vote will be obtained to effect the proposed

transactions, no 5% holder of the outstanding securities of the

participating Funds has the ability, through its voting

authority, to influence the terms of the proposed transactions.

You fur!her represent that no entity that may be considered

affiliated with both of the Funds participating in the proposed

transactions has an impermssible financial interest in the

outcome of the transactions. You represent that each 5% holder

is a mere record holder and thus cannot be said to have a

financial s9rke in the proposed transactions through its

shareholdings .
On the basis of the facts and representations described

above and in your letter, and without necessarily agreeing with

your legal analysis, we would not recommend enforcement action to

the Commission under Section 17 (a) of the 1940 Act if, in

reliance on Rule 17a-8, one series of each of Income Funds and

Income Trust transfers substantially all of its assets to another

series ~f the same trust and then dissolves, as described in your

letter. Our response is based particularly on your

representations that (i) the Boards of each of Managers Trust,

Income Funds, and Income Trust, including all of the Trustees who

are not interested persons of Managers Trust, Income Funds, and

Income Trust, have determned that participation in the proposed

transactions is in the best interests of Managers Trust, Income

Funds, and Income Trust, and that the interests of e~isting

shareholders or interest holders of Managers Trust, Income Funds,

and Income Trust will not be diluted as a result of the proposed

transactions, (ii) the findings, and the basis upon which the

findings were made, have been appropriately recorded in the

minute books of Managers Trust, Income Funds, and Income Trust,

5 Telephone conversation between Alison M. Fuller and Arthur C.

Delibert on February 24, 1998. In your letter, you note that in

the release proposing Rule 1 7a - 8, the' Commssion explained that, when the affiliation between two investment companies is based upon

a person owning 5% or more of the outstanding securities of the

investment companies, II the. owner. . would be presumed to have certain potential abilities to influence the term of (the)

transaction, in which . . . he may have a particular financial

interest. II Investment Company Act Release No. 10886 (Oct. 2, 1979).
6 In agreeing not to recommend enforcement action, we analyzed

the proposed transactions as if they were mergers of certain

series of Income Funds, Income Trust, and Managers Trust. We

have not considered, and express no view on, whether a feeder

fund i s in-kind purchase or redemption of shares of an affiliated

master fund is within the scope of Section 17 (a) of the 1940 Act.

and (iii) no entity that may be deemed to be affiliated with both

Funds participating in a transaction has both the financial

incentive and the ability to influence the terms of the proposed transactions. Th~s response expresses the staff i s position on enforcement only and does not express any legal conclusion on the issues

presented. Because this position is based on the facts and

representations described above and in your letter, you should

note that any different facts or representations might require a

different COeclusion. fJ~Át .~
Alison M. Fuller
Attorney
..

1800 MASACHUSETI AVE, N.W:

2ND FLOOR

WASHIGTON, D.C. 20036-1800

TELEPHONE (202) 778-900 . FACSIME (202) 778-9100

ARTH C. DELIBE~T

(202) 778-902 delibea~k1.com
\

Securities and Exchange Commssion

Offce of Chief Counsel

Division of
Investment Management
Judiciar Plaz
450 Fifh Street, N.W.

Washington, D.C. 20549

Ladies and Gentlemen:
We are wrting on behal of our clients, Neuberger & Berman Income Funds ("Income Funds") and Neuberger & Berman Income Trust ("Income Trust'I), each a Delaware business trust registered as a diversifed, open-end managem~t investment company, and Income Managers Trust ("Managers Trust"), a New York common law trust register€?d as a diversifed, open-end management investment company. We request that the Staf of the Securities and Exchange Commssion conf that it would not recommend enforcement action under Section 17(a) of the Investment Company Act of 1940, as amended ("1940 Act"), if one series of each of Income Funds and Income Trust transfers substantialy al of its assets to another series of the same trust and then dissolves, as descrbed below, in reliance on Rule 17a-8 under the 1940 Act.
I. Facts

Organization. Each series of
Income Funds and Income Trust is a feeder fund e'Fund") in a master/feeder fund structre. Each Fund invests al of its net investable assets in a.

corresponding portfolio ("Portfolio") of Managers Trust, and each Portfolio invests in securities in accordance with an investment objective, policies, and litations identical to those of its

corresponding Funds. Neuberger & Berman Management Incorporated ("N&B Management") serves as the investment manager of each Portolio, as admistrator of each Fund, and as distributor of the shares of each Fund. Neuberger & Berman LLC ("Neuberger & Berman") . serves as sub-adviser to each Portfolio. Al of the voting stock ofN&B Management is owned by principals of Neuberger & Berman.

Neuberger & Berman Limited Maturity Bond Fund ("Limted Maturity Bond Fund") and Neuberger & Berman Ultra Short Bond Fund ("iltra Short Bond Fund") are series of Income Funds. Neuberger & Berman Limted Maturity Bond Trust ("Limited Maturity Bond Trust") and DC-202033.08 BOSTON - HARRISBURG. MIAMI -l'E\ ' YORK. PITTSBURGH. \ VASHINGTON

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Januai 29, 1998

Neuberger ~ Berman Ultra Short Bond Trust ("Ultra Short Bond Trust") are series of Income Trust. Under the master/feeder fund stctre, Ultra Short Bond Fund and Ultra Short Bond

Trust each invests substatialy al of its net investle assets in a corresponding portolio of

Managers Trust known as Neuberger & Berman Ultra Short Bond Portolio ("Ultra Short Bond Portolio"). Like~se, Limted Maturity Bond Fund and Limted Maturity Bond Trust each

invests substatialf al ofits net investable assets in Neuberger & Berman Limted Maturity Bond Portfolio elLimted Maturity Bond Portolio"), also a portolio of Mangers Trust. As of December 31, 1997, Limted Matuty Bond Fund had approxiately $252 mion in assets, and Limted Maturity Bond Trust had approxiately $41 mion. Ultra Short Bond Fund had approxiately $49 mion in assets, and Ultra Short Bond Trust had approxiately $11 mion. Expense ratios for the fisca yea ended October 31, 1997 were 0.65% for Ultra Short Bond Fund, 0.70% for Limted Maturity Bond Fund, 0.75% for Ultra Short Bond Trust, and 0.80% for Limted Maturity Bond Trust.! The same individuals comprise the Boards of Trustees of Managers Trust, Income Funds and Income Trust; these entities also share common executive offcers. Daiy pricing of each Fund's shares is done by State Street Ban & Trust Company, which serves as custodian and transfer agent for both the mater and feeder funds, using prices provided by outside pricing

servces approved by Income Managers Trust1s Board of Trustees. . .
Proposed Transaction. For simplicity, the' followig paragrph describes the reorgantion of Ultra Short Bond Fund into Limted Maturity Bond Fund; simultaneously, Ultra Short Bond Trust would be reorganed into Limted Maturity Bond Trust, using an identical procedure. On the closing date, Ultra Short Bond Fund would exercise its right to withdraw its assets from Ultra Short Bond Portolio. The Portolio would distribute these assets in kid. Ultra Short Bond Fund would then transfer substantialy al of these assets to Limted Maturity Bond Portolio in exchange for an interest in Limted Maturity Bond Portolio. Ultra ShortBond Fund would then contribute al of its assets (consistg essentialy of its interest in Limted Maturity Portolio) to Limted Maturity Bond Fund in exchange for shares of that Fund and that Fund's assumption of al of Ultra Short Bond Fund's liabilties. Ultra Short Bond Fund would then distrbute to its shareholders the shares of Limted Maturity Bond Fund in exchange for the investorsl shares òf Ultra Short Bond Fund; and Ultra Short Bond Fand and Portfolio would be dissolved. The anticipated closing date of the tranctions is February 27, 1998.

When the reorganations are completed, each person who had held shares in Ultra Short Bond Fund imediately before the reorganition would hold shares in Limited Maturity Bond Fund of exactly the same total value, and each person who had held shares in Ultra Short Bond Howevér, N&B Management has been reimbursing certai expenses for all of the Funds; the undertakg to do so is voluntar and may be termated by N&B Management on 60 days' notice

to the Fund.

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KIRKPATRICK & LoCKHART LLP

Trust ~eltiately before the reorgantion would hold shares in Limited Maturity Bond Trust of

, exactly the same tota value. The sae method used to valu~ each portoIio security before the transaction wi also be used afer the transaction. Whatever value is assigned to a secuty for

purposes of distributig the assets of Ultra Short Bond Portolio to its two feeder funds wi, of course, also be usf! in the simultaeous transfer of that security by the feeder fund to Limted Maturity Bond PoItolio.

Board Consideration. The Boards of Trustees of Managers Trust, Income Funds and

Income Trust (each a "parcipatig investment company") (including al of those Trustees who

are not "interested persons" of any paricipating investment company, as that term is defied in
Section 2(a)(19) of
the 1940 Act) determed at a meeting held on September 24, 1997 that the proposed transactions were in the best interests of both the Ultra Short Bond and the Limted Maturity Bond series of each paricipating investment company, and that the interests of shareholders or interest holders in the Ultra Short Bond and Limted Maturity Bond series of each parcipating investment company would not be diluted as a result of the transactions. The Boards' determation was based on a number of factors, including the smal asset base of Ultra Short Bond Portolio and its faiure to attract new assets, the fact that the reorgantion would place investors' assets in another Neuberger & Berman Fund havig the most nealy simar investment strategy with a mium óf admistrative burdéii to shareholders, and that the proposed tranactions would be ta-neutral to investors. The Boards also considered the compatibilty -of the diferent investment objectives ånd strategies of the Ultra Short Bond entities and the Limted Maturity Bond entities, as a result of which the portolio resulting from the proposed transactions is not expeced to require any signcant restructrig. The Boards also considered the Funds' expense ratios, historical pedormance records and risk/return characteristics, and past growth in assets, as well as their future prospects. The Boards also considered alternatives to the proposed transactions, including simple liquidation of the Ultra Short Bond entities and maintaining the status quo. The Board noted that the transactons would increae the assets held by each of the Limted Maturity Bond entities, brigig them closer to the level at which the expense ratio borne by each shareholder would be reduced. Finaly, the Boards took note of the fact that N&B Management, as admistrator of the Funds, had capped the expenses of each paricipating Fund, and would thus bea much of the cost of the reorganations. The Boards' determation, as well as the factors considered in reachig its conclusions, have been appropriately recorded in the minute books of Managers Trust, Income Funds and Income Trust. The costs associated with effecting the proposed transactions are not signcant because a proxy solicitation and shareholder vote are not required to effect the transactions. The Trust Instruments of both Income Funds and Income Trust permt the proposed transactions to be effected without a shareholder vote, provided a majority of the Trustees determnes that the continuation of the series is not in the best interests of that series or its shareholders due to factors

KIRKPATRICK & LoCKHART LLP

Januai 29, 1998

or events ai..versely afecing the abilty of the series to conduct its business and operations in an "economicaly viable maner," which may include the inabilty of the series to maitan its assets at an appropriate siz. 2 In addition, the Declartion of Trut of Maagers Trust permts the Board of Trustees to dissolve a series of Managers Trust when there are no longer any interest holders in that series.

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5% Holders. Cert investors are record holders of 5% or more of the outstanding shares of both of the Funds to be involved in the proposed asset sales. Speccay, a brokerage fi operating a "fund supermarket" cuently holds, as record owner, more than 5% of the shares

of each of Ultra Short Bond Fund and Limted Maturity Bond Fund, and a pension plan trustee liewise currently holds, as recrd owner for varous pension plan, more than 5% of the shares of each of Ultra Short Bond Trust and Limted Maturity Bond Trust. Neither this brokerage fi

nor the pension plan admistrator is otherwse afated with the Funds. N&B Management is not aware of any beneficial owner though the brokerage fi or pension plan admistrator who

beneficialy own 5% or more of the shares of more than one of the entities involved. As of December 31, 1997, Neuberger & Bennan Trust Company held, as trustee for the Neuberger & Berman Employees Profit Sharg Plan (the ''Plan''), 5.4% of

the shares of
Limted Maturity Bond Fund. (Neuberger & Berman Trust Company is a wholly-owned subsidiar of Neuberger & Bermanl The fiancial interest in these slfes is held by the Piai paricipants, and the largest individual interest amounts to less than 1% of Limted Maturity Bond Fund. Plan investments are direced by individual paricipants. Neither Neuberger & Berman nor any of its afated entities has any fiancial stake in the operation of the Plan. n. Section 17(a) of the 1940 Act and Rule 17a-8 thereunder
Section 17(a) of the 1940 Act generaly prohibits an afated person, or an afated
person of an afated person, of a registered investment company from knowiglý purchasing securties or other propert from, or sellg secrities or other propert to, the investment

company. Congress adopted this Section to protect investment company shareholders by. 2 Under the Delaware Business Trust Act a Delaware business trust's governg instrument may provide for the sae of al the assets of a series of a business trust without a shareholder vote. DeL. Code An. Title 12 § 3806(b)(3). 3 The percentage held in the Fund by Neuberger & Bennan Trust Company, on behal of

the Plan may increase in the near future, with the distribution of year-end bonuses. In September 1997, when the Boards of the Trusts approved the proposed reorgantion, the Plan held only

4.5% of Limited Maturity Bond Fund. In addition, as of December 31, 1997, Neuberger & Berman Trust Company held 0.41% of Limted Maturity Bond Fund on behalf another client, and Neuberger & Berman held, as record owner on behal of its_clients, 3.5% of the shares of Limted Maturity Bond Fund.

prohibiting . purchase or sae transacton when a par to the transaction has both the abilty and a pecuniar incentive to inuence the actions of the investment company. See Investment Company Act Releae No. 10886 (October 2, 1979), citing Heags on S.3580 Before a Subcomm. of the Senate Comm. on Bang and Currency, 76th Cong., 3d Sess., 17 (1940) ("Release 108861l Rule 17a-8\exempts from the Secion 17(a) prohibition a purchase and sae of substtialy

al of the assets involvig registered investment companes if they are afated solely by reaon of havig a common investment adviser, common direcors and/or common offcers, provided cert conditions are met. These conditions, as here relevant, are that the board of direcors of each of the afated registered investment companes parcipatig in the tranaction, including a majority of the directors of each investment company who are not interested persons of either of the paricipating registered investment companes, determe (1) that paricipation in the

transacton is in the best interest of that registered investment company; and (2) that the interest of existing shareholders of that investment company wi not be diluted as a result of effecting the transaction. Rule 17a-8 is based on the rationale that "when a merger involves investment

companes which are afated persons exclusively by vie of sharg common offcers, directors and/or an investment adviser, no person who is responsible for evaluating and approvig the terms of the transaction on behal of the varous parcipatig investment companes would have a signcant fiancial interest in improperly inuencing these term. II See Releae. l 0886 at n. 9.

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The Commssion has indicated that if an afation exists due to a person's owng 5% or more of the outstanding voting securities of one or móre investment. companes involved in a reorgantion, Rule 17a-8 may not apply. In such an instance, the owner may be presumed to

have the abilty to inuence the transaction and a paricular fiancial interest to do so. See Releae 10886 at n. 9. However, as discussed more fully below, the Stafhas grted no-action

relief under Section 17(a) and Rule 17a-8 where neither such fiancial interest nor the abilty to inuence the terms of the transaction existed in fact. See The Eaton Vance Group of Investment Companes (pub. avai. July 25, 1997) C'Eaton Vance"); Priciple Preservation Portfolios, Inc., Prospec Hi Trust (pub. avai. Jan. 11, 1996) ('IPriciple Preservation Portfolios

"); and Thomson McKion Global Trust (pub. avai. Dec. 18, 1986) ("Thomson McKion"). Whe the paricipating Funds may be deemed afated because they share a common investment adviser and common trustees and offcers, the Funds also may be considered afated because certai investors are holders of 5% or more of the outstading shares of both of the paricipating Funds, or because Neuberger & Berman Trust Company is a record holder of more than 5% of the shares of one of the Funds. This share ownership may render the 5% holder an afate of the Fund in which it owns shares, which could result in each participating Fund being

4 deemed an afliate of an afliate of the other.

4 Under Section 2(a)(3)(A) and (B) of

the 1940 Act, a person who owns 5% or more of the outstanding shares of a mutual fund is an afated person of that fund, and vice versa.

u.s. Securities and Exchange Commssion

Another possible source of prohibited afation is the master/feeder fund structre where each feeder fund invests al of its net investable assets in a corresponding master fund. Although Ultra Short Bond Fund and Limted Maturity Bond Fund invest in diferent series of Managers Trust, each of these Funds is a 5% owner of the outstanding interests of Managers Trust. Thus, Ultra Short Bond Fund and Limted Maturity Bond Fund may each be deemed an afate of

Managers Trust, aà therefore each may be deemed an afate of an afate of the other. S For the reaons set forth below, we believe that the proposed tranactions should

nevertheless be governed by Rule 17a-8. Providing the relief requested herein would be consistent with past no-action relief granted by the Staf in this area and the policies underlyig Secion 17(a) and Rule 17a-8. m Discussion A. Affliation Due to Share Ownership

We believe the proposed reorgantions described above should be governed by Rule

17 a-8 notwthstanding the fact that the Funds are afated in ways other than those permtted under the rule, because no entity that may be deemed afated with both Funds paricipating in a transaction has both the financial incentive and th~ abilty through its voting power to inuence the votes as to the proposed transactions. In Releae i 0886, the proposing releae to Rule 17 a-8, the Commssion explaied that "when the afation is based upon a person owng 5% or more of the outstanding securities (of the relevant entities) . . ., the owner. . . would be presumed to have certai potential abilties to inuence the terms of the transaction, in which. . . he may have a paricular fiancial interest." However, the Staf has granted no-action relief under Section

17(a) and Rule 17a-8 where neither such financial interest nor the abilty to inuence the terms of McKion. __ the transaction existed in fact. See Eaton Vance; Priciple Preservation Portfolios; and Thomson The policy concern ariculated by the Commssion in adoptig Rule 17a-8 and as applied to the present facts is that a 5% holder of the paricipating Funds may utile its voting authority .. to inuence the terms of the transactions. Pursuant to the terms of the Trust Instruments of both Income Funds and Income Trust, however, no shareholder vote is required to effect the proposed tranactions, and no such vote wi be obtaied. Thus, no 5% holder of the outstanding securities of the paricipating Funds has the abilty through its voting authority to inuence the terms of the proposed transactions, because there is simply no voting authority to exercise with respect to these transactions. As a result, an investor's voting authority is completely irelevant to infuencing the proposed transactions. 5 Neither Ultra Short Bond Trust nor Limit~d Maturity Bond Trust owns 5% or more of

the outstanding interests of
Managers Trust.

KIRKPATRICK & LoCKHART LLP

The'Sta granted no-acton relief under Secion 17(a) in Eaton Vance under directly analogous facts. The Staf noted that the advisets discretonar votig authority with respect to 5% or more of the shares of cert feeer fuds parcipatig in the reorgantions was

irelevant, because the trsactons would be effeced without a shaeholder vote. Like the 5% holders in the present cae, the adviser in Eaton Vance, therefore, did not have the abilty to

inuence the termì of the reorgantions becse no votig authority existed for it to exercise with respec to the proposed trasactons. Simarly, in Priciple Preservation Portolios and Thomson McKion, the Staf indicated that afations due to common shae ownership do not necssay preclude application of the exemption aforded by Rule 17a-8, even where a shareholder vote is required to effec the transactions, as long as the 5% holder does not have the abilty to exercise its votig authority. In

Priciple Preservation Portolios, the Sta grted no-acton relief despite the fact that the adviser held discretionar voting authority with respect to 5% of the shares of the afected investment companes, because the adviser passed through such voting power to the accunt owners and thus exercised no voting authority with respect to those shares. Likewise, in Thomson McKion, the Staf apparently was inuenced by the fact that the distbutor, who was the nomial owner of more than 5% of the shares of the funds paricipating in the reorgantion at issue, could vote those shares only in' accrdance with instructons from the beneficial owners and refraied from . voting the shares where the beneficial owners did not prO\de votig inructions.

In addition to havig no voting authority to inuence the outcome of the proposed transactions, no entity that may be considered afated ~th both of the paricipating Funds has an impermssible fiancial interest in the outcome of the tranctions. Each 5% holder is a mere record holder and thus caot be sad. to have a fiancial ste in the proposed transactions

through its shareholdings.
The brokerage fi operating the fund supermarket, which is the record owner of more

than 5% of Ultra Short Bond Fund and Limted Maturity Bond Fund, . has no fiancia interest in those shares. Rather, it merely holds the shares for its accunt holders, which are the true beneficial owners of the shares. The same is tre of the pension plan trustee: it is merely tne record owner of the shares, and has no fiancial interest in them. Likewise, Neuberger & Berman Trust Company, which currently holds just over 5% of the shares in Limted Maturity Bond Fund, has no fiancial interest in the proposed reorgantions, becuse it merely holds the shares as trustee for the Plan. As noted above, the fiancial interest in these shaes is held by the Plan paricipants, and the largest individual interest amounts to less than 1% of Limted Maturity Bond Fund; Plan investments are directed by individual paricipants, and neither Neuberger & Berman nor any of its afliated entities has any financial stake in the operation of the Plan.6

6 The facts of

the present case are thus fundamentally diferent from those of New England Mutual Life Insurance Co. (pub. Avai. June 3, 1987). In that cae, the staf declined to provide no-action assurance because beneficial ownership of more than 5% of one of funds involved

u.s. Secunties and Exchange Commssion

Thtf, the concern expressed in Release 10886 by the Commssion in proposing Rule 17a￾8, namely, that a person owng 5% or more of the outstading securities of the paricipating funds would be presumed to have the abilty to inuence the term of the transaction in which he may have a paricular fiancial interest, is simply not present under these circumstaces. In granting no-action relief under Secion 17(a), the Staf in Thomson McKion apparently accepted petitionel's argument that the distnbutor, which nomialy owned 5% or more of the outstanding shares of the funds paricipating in the reorgantion, had no pecuniar incentive to support or oppose the reorgantions, becuse the distbutor was a mere owner of recrd rather

than a beneficial owner.
We recognie that N&B Management, along with investors, may receive a benefit from the proposed transactions. Specifcay, the combinations wi eliate the expense of maitaing Ultra Short Bond Fund, Trust and Portfolio as separate series (i.e., fund accunting, legal, audit, shareholder reporting, custodial expenses, etc.), producing economies of scae in the remaig Funds and makg them more marketle, and eliating the need for further expense reimbursements with respect to Ultra Short Bond Fund and Trust. The Commssion has concluded that such benefits are fully compatible with the use of Rule 17a-8. In proposing the Rule, the Commssion expressly recogned that an investment

adviser may enjoy economies of scale in seivg a single merged or consolidated investment

7 The Commssion did not conclude from tms, however, that such a benefit to the company. adviser should cause Rule 17a-8 to be unavaiable. Rather, it conditioned avaiabilty of the rule on the board of directors makg determations designea to ensure that the transaction is in the best interests of the investment company and its shareholders. Simarly, in grantig no-action relief in Eaton Vance despite the fact tht the reorgantions at issue might have resulted in the adviser receiving such benefits, the Staf apparently accepted that "the Advisets interest in these reorgantions (was), as a practica matter, identical to its interest as a 'common adviser,' which is expressly permtted by Rule 17a-8,1I and that such mutual benefits to the adviser and the shareholders did not create the tye of confct that the legislature sought to address in adopting

Section 17(a).8

(continued... .) rested with the insurance company that was the sponsor of both mergig funds and co-issuer of their shares. 7 Release 10886 at n.lO. The Commssion went on to acknowledge that "These economies

may be particularly significant when the investment adviser would otherwse exceed paricular expense limitation undertakgs, resulting in dimshed investment advisory fees or even the

necessity to compensate the investment companies." Release 10886 at n. 10.

8 See also Principal Preservation Portfolios. In addition, of course, no Neuberger & Berman

entity wil have any opportnity to exercise any voting authority in connection with the present

transactions, as the Funds wil not seek any shareholder vote. Thus, regardless of any benefit

u.s. Securities and Exchange Commssion

~ B. Affliation Due to Master/Feeder Structure As mentioned above, another possible source of prohibited afation arses as a result of

the master/feeder fund structure under which the feeder funds invest al of their net investable assets in separate series of the sae master fund. Ultra Short Bond Fund and Limted Maturity Bond Fund each il\vests al of its net assets in a diferent series of Maagers Trust; likewise, Ultr Short Bond Trust and Limted Maturity Bond Trust invest their respecve net assets in the same two series of Managers Trust. As mentioned above, Ultra Short Bond Fund and Limted Maturity Bond Fund each holds more than 5% of the outstanding interests in Maagers Trust. Rule 17a-8, which of course was adopted prior to the development of the master/feeder structre, does not specifcaly address the afations that are inerent in such a structre. In

addressing the implications of afations due to the master/feeer strctre under Rule 17a-8, the Staf has indicated a wigness to permt transactions under Rule 17a-8 despite ths tye of

afation. See Eaton Vance and Priciple Preservation Portolios. As explaied below, we

believe it is consistent with the Stafs previous no-action positions as well as the policies

~nderlyig Section 17(a) and Rule 17a-8 to permt the proposed trsactions to go forward

despite any possible afations due to the master/feeder structre of the parcipating Funds. In Eaton Vance, the Staf explained that the concern to which Secon 17(a) and Rule 17 a-8 are addressed were not implicated, despite any, potential afation resulting from the

master/feeder structure, because: (1) the reorgaitions did not involve any shareholder vote; (2) the reorganiations did not involve the master fundSš (3) the feeer funds had no abilty to

inuence the terms of the reorgantions; and (4) the feeer funds had no paricular fiancial interest in the reorganations.9 Each of the factors relied upon by the Staf in granting the no￾action relief requested by Eaton Vance are present under the facts of the proposed transactons. First, as mentioned above, the proposed transactions do not requie a vote of shareholders at

either the master fund or feeder fund leveL.

(continued. . . .)

realed in accordance with the policies underlyig Rule 17a-8, no par wi have both the

incentive and the abilty to inuence the tenns of the proposed transactons. 9 We note as a prelimiar matter that there ia arguably no impermssible afation under
Section 17(a) with respect to each feeder fund's investments in its corresponding master fund. In
the present case, two diferent series of
Income Funds each owns more than 5% of
Income Managers Trust; to fid an impermssible afliation, one has to consider the series of Income Funds as separate entities, but consider Income Managers Trust as a monolithic entity, in disregard of its separate series. In contrast, Eaton Vance and Pricipal Preservation Portfolios both involved reorganizations where each participating feeder fund owned in excess of 5% of the . same series of a master fund. As a result, in those letters, both feeder funds may have been deemed afliated with that series oJ the master fund and therefore afates of afliates of one

another. .

Sedbnd, the master funds have little role to play in the reorgantions that is not in the

ordiar cOurse of their business. To effec the reorgantions, the Ultra Short feeder funds wi withdraw their assets from Ultra Short Bond Portolio and transfer those assets to Limted Maturity Bond Portolio, which wi in return issue interests in the Portfolio to those feeer funds. Thus, the only role of Ultra Short Bond Portolio is to comply with its obligations under the 1940 Act i.e., to hono~the feeder fundsl redemption orders10; and the only role of Limited Maturity

Bond Portfolio is to issue interests in return for the assets trsferred to it by the Ultr Short

11 Bond feeder funds.

10 The Board of

Trustees of the master fund has determed that it would be in the best interest of Ultra Short Bond Portolio, its interestholders and their shareholders to effect these redemptions in kid rather than in cah. The Board made this determation based on (1) the disruption to the Portfolio's investment program that would be caused by liquidation; (2) the transaction costs that would be involved in liquidation (and later replacement of the positions by Limted Maturity Bond Portfolio); (3) the potential market impact of potential ta consequences of liquidation. liquidation; and (4) the 11 We recogne that a question may arse as to the propriety of Ultra Short Bond Portolio effectg the redemptions in kid, rather than in cah. Viewed from a certai perspective, the

Ultra Short Bond feeder funds may be deemed to be purchasing the assets held by the Portfolio and payig for these assets in kid, i.e., with the interests they hold in the Portfolio. Likewise, the Portolio may be deemed to be sellg its assets and reciVig the Portfolio interests that were held by the Ultr8¡ Short Bond feeder funds as consideration. Viewed from this perspective, the proposed transactions may involve the purchase and sae of securities between afiated investment companes in violation of Secon 17(a). It has been suggested that one Fund might obta an advantage over the other if a security held by the master fund has an unrecogned long-term potential value not reflected inJts current market price. Such an advantage would be impossible to acquire in the present transaction because in effecting the redemptions, Ultra Short Bond Portfolio will allocate each position between the two redeemig feeder funds as nealy as possible on a pro rata basis, except for cert appreciated positions that represent assets intialy contributed to the Portfolio by Ultra

Short Bond Fund (for ta reasons, these wi be alocated entirely to that Fund; they represent less than 2/1 Oth of one percent of the Portolio). As noted above, the same method used to value each portolio security for purposes of its withdrawal from Ultra Short Bond Portfolio will be used for

purposes of its transfer to Limited Maturity Bond Portolio.
We also do not believe there is any policy reason to apply Section 17(a) where the so￾caled "purchase" and "sale" are merely steps in a reorganation such as this one. Neither Ultra Short Bond Fund nor Ultra Short Bond Trust has any abilty or incentive to gain any advantage over the other in the withdrawal of assets from the Pnrtolio. Imediately afer the withdrawal, both of these feeder funds wil transfer their assets to Limted Maturity Bond Portfolio in exchange for interests in that portfolio. Thus, to the extent a security held by Ultra Short Bond Portfolio may have some unrecogned long-term potential value not reflected in its current

.t u.s. Secunties and Exchange Commssion

Thi, the feeder funds are not seekig to inuence the terms of any merger in which the

master fund would parcipate; rather, the feeder funds wi simply withdraw their assets from one master fund and reinvest them in another. Finally, the feeder funds have no paricular financial interest in the proposed transactions. Rather, the proposed transactions are expected to benefit the feeder fund shareholders by eliating or reducing costs associated with maintaing two separate series and by incr~asing the size and, hence, the investment flexibilty of the resulting Portfolio. For these reaons, any potential afation resulting from a feeder fund1s ownership

interest in the master fud clearly does not give rise to the concern expressed by the legislature in adopting Secion 17(a) tht an afated person havig both the abilty and the pecuniary incentive might inuence the actons of investent companes involved in a reorgantion.

---

In conclusion, we believe the proposed transactions are consistent with the policies underlying Section 17(a) and Rule 17a-8. There is no nsk that an afated person possessing the fiancial incentive to inuence the terms of the proposed transactons wi have the voting authority to do so. We therefore ask that the staf conf that it will not recommend

enforcement action under Section 17(a) of the 1940 Act if the proposed transactions are implemented in reliance on Rule 17a-8, as described above. Than you in advance for your consideration of tlu request. If you have any questions or would like any additional inormation or documents, please cal Arhur C. Delibert at (202) 778 9042 or Lori L. Schneider at (202) 778-9305. Sincerely, ~ c. ~~'à..",~ Arhur C. Delibert (continued....) market pdce, the investors in both feeder funds would share in that value followig the reorganiation, in the same proportion, relative to one another, as they would have if the reorganation had been effected by a simple merger of the Portolios. Finaly, we do not believe the application of
Section 17(a) to this situation is consistent with the Commssion's long-standing approach to treat master and feeder funds as one combined
entity. (See "Hub-and Spoke Funds: A Report Prepared by the Division of Investment Management," Apri 15, 1992, at p.3.) The use of
Section 17(a) seems especially inappropnate where the master and feeder funds are under common sponsorship. In economic reality, such
feeder funds are simply an alternative to the more common multiple class arrangement; that is, they are mere conduits for investor interests, and have no inerent economic interest of their own.