SEC Division of Investment Management staff letter: Scudder Investment Trust

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

DIVISION OF

INVESTMENT MANAGEMENT
March 23, 1994

Joseph R. Fleming, Esquire

Dechert Price & Rhoads

Ten Post Office Square - South

Boston, Massachusetts 02109-4603

RE: Scudder Investment Trust: Our Ref. No. 93-24-CC

Dear Mr. Fleming:

Your letter dated January 14, 1993, requests our assurance

that we would not recommend that the Commission take enforcement

action under section 30 (b) (1) of the Investment Company Act (the

"1940 Act") and Rule 30b1-1 thereunder if each of Scudder

Investment Trust, Scudder International Fund, Inc., and Scudder

Global Fund, Inc. (together, the "Funds"), Y files separate

Forms N-SAR for series that have different fiscal year ends

within the same Fund. 2J Form N-SAR was designed, in part, to

facilitate the Commission's ability to gather data regarding

series companies, but did not anticipate that series within one

series company might have different fiscal year ends. l/

Assuming that applicable law permits a Fund to have series with

different fiscal year ends, we would not object if the Funds file

their Forms N-SAR as described below.

certain items in the form do not require a separate response

on behalf of each series if the response would be the same for

some or all series. lj If the response to any such item is the

1/ Each Fund is a registered open-end series investment

company.
2J Both the 1940 Act and the rules thereunder are silent as to whether all series of a registered series investment company

must have the same financial reporting period. You state

that staggering the fiscal reporting periods of the series

achieves cost savings by spreading the accounting and

administrative workload over the entire calendar year.

l/ See Investment Company Act Release No. 14080 (August 14,

1984) (release proposing Form N-SAR) .

lj Form N-SAR allows a series company to indicate, at the top

of each page, whether the responses on that page relate to

all series or to one or more individual series. See Form

( continued. . . )

same for each series filing on a single Form N-SAR, then a Fund

may furnish a single response. That response would apply only to

those series filing on that Form N-SAR and not to series filing

on a separate Form N-SAR. á/

Items 20 through 23 (information relating to brokerage

commissions and other portfolio transactions) and item 26

(information relating to considerations which affected the

participation of broker or dealers or other entities in

commissions) require aggregate information for all series. The

Funds should continue to provide this information on an aggregate

basis, updating the aggregate information for each period for

which the form is filed. other than this aggregate information,

however, the responses on Form N-SAR should apply only to those

series with the same fiscal year end.

Of course, should the Commission amend Form N-SAR, the Funds

will b~ required to complete and file the amended form in

accordance with all applicable provisions contained in the form, guides, or instructions. Sincerely, (2)(;. \J U" '- (~ ,--e.:" ¿. - :Dcv

Barbara Chretien-Dar
Attorney lj (. . . continued) N-SAR, General Instructions, paragraph D (8). For example,

if the answers to Items 8 through 18 are identical for all

series (relating to the identity of the investment adviser,

administrator, principal underwriter, shareholder servicing

agent, independent public accountant, affiliated

broker/dealer, and custodian), only a single response on

behalf of all series is required.

á/ If the Funds are filing Form N-SAR electronically using

commission-provided software, you should contact Commission

staff in the Office of Financial Analysis at (202) 272-3784

for special instructions on how to respond to such items.

LAW OFFICES OF
4000 BELL ATLANTIC TOWER DECHERT PRICE & RHOADS 477 MADISON AVENUE NEW YORK, NY 10022-5891 1717 ARCH STREET (212) 326-3500 PH1LADELPHIA, PA 19103-2793 (215) 994-4000 TEN POST OFFICE SQUARE · SOUTH 214 CARNEGIE CENTER BOSTON, MA 02109-4603 PRINCETON, Nl 08540-6237 1500 K STREET, N.W. WASHINGTON, DC 20005-1208 (609) 520-3200 (202) 626-3300 52 BEDFORD SQUARE TELEPHONE: (617) 728-7100 LONDON WC1B 3EX, ENGLAD lWNTY NORTH MARKET SQUARE (071) 631-3383 HARRISBURG, PA 17101-1603 TELEX: 845324 . BARDEP PHA (717) 237-2000 FAX: (617) 426-6567 65 AVENUE LOUISE, BOX NO.4 1050 BRUSSELS, BELGIUM January 14, 1993 ~ ....-_úf (02) 535-5411 ......"."l--.-.' .,,)t ' -l- ,." A '.?ection Thomas S. Harman, Chief Counsel i , Division of Investment Management ,"":ulø 3C)V-\ - \ Securities and Exchange Commission ¡.~" \ i ,,'.;.01 (' 450 Fifth Street, N.W.

Judiciary Plaza __.i 12hu! ty 3 -Q3 - 7t¡ , _......."'.:,.,,'.....-¡. Washington, D.C. 20549 Re: Scudder Investment Trust, Scudder International Fund,

Inc. and Scudder Global Fund. Inc.

Dear Mr. Harman:

I am writing on behalf of Scudder Investment Trust ("SIT"),

Scudder International Fund, Inc. ("SIF") and Scudder Global Fund,

Inc. ("SGF"), each of which is an open-end management investment

type advised by Scudder, Stevens & Clark,

Inc. (the series of such investment companies are referred to

herein collectively as the "Funds" and individually as a "Fund").

The Funds are registered under the Investment Company Act of

company of the series

1 9 4 0, as amended, (the II 1 9 4 0 Act n ) and their shares are registered under the Securities Act of 1933. The purpose of the

letter is to request that the staff of the Division of Investment

Management (the "Division") of the Securities and Exchange

Commission ("Commission") advise us that it would not recommend

that the Commission take any enforcement action under the 1940

Act if SIT, SIF and SGF each continues to file with the

Commission separate Form N-SAR reports for Funds that have

different fiscal years within the same series investment company.

I . BACKGROUN

SIT is a Massachusetts business trust and currently has two Growth series, Scudder Growth and Income Fund and Scudder Quality

Fund with fiscal year ends of December 31 and October 31,

respectively. SIF is a Maryland corporation and cur~ently has

three Funds, Scudder International Fud, Scudder Latin America

Fund and Scudder Pacific opportunities Fund, one of which Funds

. has a fiscal year end different from that of the other two Funds.

Scudder International Fund has a fiscal year end of March 31 and

the two other SIF Funds have a fiscal year end of October 31.

SGF is a Maryland corporation and currently has four Funds,

Scudder Global Fund, Scudder International Bond Fund, Scudder

Global Small Company Fund and Scudder Short Term Global Income

Fund, two of which Funds have a fiscal year end different from

that of the other two Funds. Scudder Global Fund and Scudder

International Bond Fund have a fiscal year end of June 30 and

Scudder Global Small Company Fund and Scudder Short Term Global

Income Fund have a fiscal year end of October 31. Each Fund's

taxable year currently ends on the same date as its fiscal year.

As permitted by the relevant organizational documents, the

Board of Trustees of SIT designated the financial and tax

reporting periods for each of its Funds at the time such Funds

were initially established, and the Boards of Directors of SIF

and SGF designated such periods for each of their respective

Funds at the time such Funds were initially established. Each

Fund, as a registered management investment company, uses Form

N-SAR to meet its periodic reporting obligations with the

Commission under Section 30 (b) of the 1940 Act and Rule 30b1-1

thereunder.
Because SGF, SIF and SIT have non-uniform reporting periods

among their respective Funds, separate reports on Form N-SAR have

been filed at different times by the Funds depending on when a

Fund's fiscal period ends. For example, Scudder Growth and

Income Fund's fiscal year ends on December 31 and, therefore, its

Form N-SAR filings generally have occurred in February and August

of each year. On the other hand, Scudder Quality Growth Fund,

the other series of SIT, has generally filed its Form N-SAR in

December and June, because this Fund has an October 31 year end.

During the course of the Commission's review of an N-SAR

filing for certain of the Funds, the Division staff requested

Robert Guerin of Scudder, Stevens & Clark, Inc. to cause to be

changed, within a reasonable period of time, the fiscal year of

certain Funds so that each series investment company in the

Scudder Group of Funds will have a uniform reporting period for

all series in that series investment company. Following furter

discussion with Division staff, the Fuds agreed to submit this request for no-action relief.
II. REQUEST FOR STAFF "NO-ACTION" POSITIOI1

On behalf of the Funds and Scudder, Stevens & Clark, Inc.,

we hereby request that the Division staff advise us that it would

not recommend that the Commission take enforcement action under

the 1940 Act if SIT, SIF and SGF each continues to file with the

Commission separate Form N-SAR reports for Fuds that have

different fiscal years within the same series investment

company. 1

III. DISCUSSION AN LEGAL ANLYSIS

A series investment company may be viewed, for purposes of

section 3 (a) of the 1940 Act, as multiple investment companies
under the umbrella of a single corporate or trust entity. 2
section 30(b) (1) of the 1940 Act requires every registered

investment company to file with the Commission "such information

and documents (other than financial statements) as the Commission

may require, on a semi-annual or quarterly basis, to keep

reasonably current the information contained in the registration

statement of such company . . ." Form N-SAR, adopted by the

Commission pursuant to its authority under section 30(b) (1), is a

semi-annual reporting form that every management investment

company registered under the 1940 Act must file with the

i. The no-action relief referred to above is also hereby

existing_Dr _future..---e investment

company for which Scudder, Stevens & Clark, Inc., (or an

affiliate thereof) acts as investment adviser and which

establishes Funds that hñve different fiscal years. SIT,

SIF and SGF are the only series investment companies in the

Scudder Group of Funds (including the investment companies

included in the AAP Investment Program from Scudder) that

requested for any

currently have series with split fiscal year ends.

2. Section 3 (a) of the 1940 Act defines an investment company

as any "issuer" that, among other things, is "in the business of investing, reinvesting or trading in . securities". section 2 (a) (22) defines an "issuer" in terms

of a "person", section 2 (a) (28) defines a "person" to

include a "company", and section 2 (a) (8) defines a "company"

to include a "trust, a fund, or any organized group of

persons whether incorporated or not. n In Prudential Ins.

Co. v. Securities and Exchange Commission, 326 F.2d 383, 387

(3d Cir. 1963), cert. denied, 377 U.S. 953 (1964), the Court

of Appeals for the Third Circuit rejected Prudential' s

argument that the statutory phrase" a trust, a fund, or any organized group of persons whether incorporated or not; . . ." refers only to recognizable business entities. But

see Batra v. Investors Research corporation, U.s. District

Court Western District of Missouri, No. 89-0528~CV-W-6 (Oct.

4, 1991), in which the court disagreed with defendants'

arguent that each series of a series investment company

constitutes an investment company under the 1940 Act.

commission, within 60 calendar days after the close of each 3 fiscal year and fiscal second quarter.

Series investment companies have customarily registered

all of their series under the 1940 Act using a single

registration statement, although registration of individual

series of a series investment company using separate Form N-1A

registration statements is not prohibited by statute, rule, Form

N-1A or published staff guidelines. Neither the 1940 Act nor

state law requires the series of a series management fnvestment company to have a uniform financial reporting period. Rule 30b1-1 only requires that a Form N-SAR be filed for every

registered management investment company within 60 calendar dars

after the close of each fiscal year and fiscal second quarter.

Under the rule, therefore, the point of reference for. determining

the date by which a Fund must file its Form N-SAR with the

commission is the fiscal year end of that Fund.

In the release adopting Form N-SAR, the Commission

specifically considered whether Form N-SAR, as proposed, should

be revised to allow a unit investment trust ("UIT") to designate

the reporting period for its series ¿ because a UIT could have

series with different fiscal years. In determining to reject

this approach, the commission provided the following rationale:

3. See Rule 30b1-1 under the 1940 Act.

4. In addition, each series of a regulated investment company

is treated as a separate corporation for federal income tax

purposes. See Section 851 (h) of the Internal Revenue Code

of 1986, as amended (the "Code"). A board of directors of a

series investment company can designate different taxable

year ends for individual series of a series investment

company because each series is treated as a separate

taxpayer under the Code.

5. As defined in Form N-SAR, the term "fiscal year" means the

fiscal year of the registrant. A "registrant", for purposes

of Form N-SAR, is the investment company filing the report

or on whose behalf the report is filed. As stated above,

each series of a series investment company may be viewed as

an investment company for purposes of Section 3 (a) of the

1940 Act. consequently, the relevant fiscal year for an N￾SAR filing is the fiscal year of the particular series on

whose behalf the report is filed. \

6. Investment Company Act Release No. 14299 (Jan. 4, 1985),
   note 7.

. . . The Commission believes that a uniform

reporting period should be designated for all UIT

registrants to provide comparable information with

respect to this type of registrant. since UIT

trustees usually calculate distributions and

expenses as of the close of the calendar year,

general instruction A has been revised to provide

that all UITs are required to file the form for

the twelve-month period ending December 31.

(Emphasis supplied.) 7 ..
Only with respect to UITs, did the Commission require a

uniform reporting period to be designated by an investment

company with multiple series in connection with Form N-SAR.

Separate treatment of UITs, requiring filings to be made on a

calendar year basi.s, reflects the fact that UITs are different

from registered management investment companies. A UIT, whether

or not it has separate series, is not a separate taxable entity

for federal income tax purposes. As noted above, each series of

a management investment company is a separate taxpayer and must

meet separately the requirements of Subchapter M of the Code in

order to qualify as a regulated investment company (ltRIC") for

favorable tax treatment. Initial or continuing qualification as

a RIC often drives the selection or change of a series' fiscal

year.
There are currently 58 portfolios in the Scudder Group of

Funds (including individual series) with aggregate net assets of

over $30 billion. The Scudder Group has intentionally staggered

the fiscal reporting periods of these portfolios to spread the

accounting and administrative workload over the entire calendar

year. By staggering the portfolios' fiscal year ends " management

avoids having to add staff at peak work periods, the additional

cost of which would be borne in part by the portfolios and their

shareholders in the form of higher fund auditing fees. In

addition, to the extent that Scudder, Stevens & Clark, Inc.

currently bears the cost of fund accounting and administrative

personnel, any increase in time costs are likely to result in

pressure for higher management fees.

If the Division staff were to deny this request for no-

action relief, the Funds would be required to take one of two

courses of action. Ei ther each series of each Scudder series

investment company would conform its fiscal year and taxable year

to a uniform period for that Scudder series investmeht company,

7. Id.

or, more likely, certain Funds would be reorganized into

separately organized investment companies to maintain the

staggered accounting cycle for fund financial and tax reporting

purposes that is currently in place for the Scudder Group.

Ei ther option would be costly and burdensome for the Funds, as

explained below.

If the Funds were to reorganize into separate investment

companies, each such reorganization would require the approval of

shareholders of the series affected by such reorganization

transaction. The estimated average cost of holding a shareholder

meeting for a Fund, including printing and mailing of proxy

material, is approximately $100,000, an expense which would be

borne by that Fund and its shareholders. Furthermore, each

reorganization would have to be structured so as to qualify as a

nonrecogni tion transaction for federal income tax purposes.

Similarly, having the existing series conform their fiscal

years to a uniform period also will create additional costs and

burdens for the Funds,because it will result in the series

conforming their taxable years as well. 8 In general, a

taxpayer's taxable year must coincide with its fiscal year. 9 If,

however, a taxpayer changes its annual accounting period, the new

accounting period will become the taxpayer's taxable year only if

the taxpayer obtains prior approval from the Commissioner of the

Internal Revenue Service. Code Section 442. In the case of the

Funds, it would not be feasible to maintain fiscal years which

differ from the Funds' corresponding taxable years. Such a

practice would create reconciliation, dividend reporting and

compl iance issues. Furthermore, and perhaps more importantly,

where a Fund's fiscal and taxable years coincide, the audit

8. Section 441 of the Code defines a "taxable year" as the

basis on which a taxpayer must compute taxable income for

Federal income tax purposes.

9 . Section 44 i (b) requires a taxpayer's taxable year to

coincide with the taxpayer's "annual accounting period", if

that period is a calendar or fiscal year. For this purpose,

taxpayer's "annual accounting period" is the annual period

which the taxpayer regularly uses to compute income in

keeping its books. Code Section 441(c). A "fiscal year" is

an accounting period which ends on the last day of any month

other than December: a "calendar year" is an anpual

accounting period which ends on December 31. Còde Section

441(d), (e). Accordingly, a taxpayer which keeps its books

on the basis of a fiscal year generally must use that period

as its taxable year for Federal income tax purposes.

performed by the Fund's independent accountants in connection

wi th the preparation of the Fund's annual report to shareholders

helps to insure the integrity of the calculations used for

Federal income tax reporting purposes. Accordingly, if required

to change their fiscal years, the Funds would also seek to change

their taxable years.

As mentioned above, a taxpayer generally must obtain prior

approval from the Commissioner of the Internal Revenue Service to

change its annual accounting period and adopt a new taxable year.

Code Section 442; Treas. Reg. § 1.442-1(~) (í). To do so, the

taxpayer must file an application on Form 1128 (Application to

Adopt, Change or Retain a Tax Year) with the Commissioner by the

15th day of the second calendar month following the close of the

resul ting short taxable year. To secure such approval, taxpayers

generally must identify a substantial business purpose for the change. Furthermore, appr0val will not be granted unless the taxpayer and the Commissioner agree to the terms, condi tions and

adjustments under which the change will be effected.

certain corporations 10 may change their annual accounting period without prior approval if they satisfy certain filing

requirements and meet certain other conditions. Treas. Reg.

§ 1.442-1 (c). One of the conditions is that the corporation has

not changed its annual accounting period during the ten-calendar￾year period ending with the calendar year in which the resulting

short period begins.

Corporations which cannot satisfy the conditions for a

change of annual accounting period without prior approval may be

eligible for an expedited approval procedure. Revenue Procedure

92-13, I.R.B. 1992-3 (Jan. 6, 1992). This expedited procedure is

not available, however, if, among other things, the corporation

has changed its annual accounting period during the six-calendar￾year period ending with the calendar year in which the resulting

short period begins.

10. As used here, the term "corporation" includes both state law

corporations and unincorporated entities (such as business

trusts) that are classified as associations taxable as corporations for federal income tax purposes. To qualify for the favorable tax status accorded to RICs under the

Code, an entity must be classified as a domesti6 corporation

for federal income tax purposes. Each Fud qualifies as a RIC under the Code, and intends to continue to do so in the future.

The availability of automatic or expedited procedures for

changing annual accounting periods is valuable to a RIC. For

example, a RIC may seek to effect such a change if it foresees

difficulty in satisfying the quarterly diversification tests

imposed by subchapter M of the Code for a given quarter. By

requiring a RIC to change its fiscal reporting period, the

Commission would be denying the RIC the availability of an

expedi ted or automatic procedure for the next six or ten years,

as the case may be. Furthermore, in the case of a RIC which

already has used one of these procedures within the last six or

ten years, another change could be effected only with prior

approval obtained from the Internal Revenue Service through the

formal application procedure, rather than through the automatic

or expedited procedure. The formal procedure necessarily is the most costly and time consuming of the three available procedures.

Also, until the application is ultimately approved or denied, the

RIC cannot be certain of its current accounting period. Such

uncertainty is undesirable for any length of time, since the

requirements imposed by subchapter M of the Code for

qualification as a RIC are applied on the basis of the RIC' s accounting period. For the reasons stated above, we ask that the requested no-

action relief be granted. If you need further information

concerning this request, please contact the undersigned at

(617.) 728-7161 or Sheldon A. Jones at (617) 728-7123. If for any

reason you do not concur in our conclusions, we respectfully

request a conference with the Division staff prior to any adverse

written response to this letter.

In accordance with Securities Act Release No. 6269, an

original and seven copies of this request are enclosed.

Sincerely,
~ Q.9-~

Joseph R. Fleming

SAJ / lml

cc: Lawrence A. Friend

Chief Accountant,