SEC Division of Investment Management staff letter: The Capitol Mutual Funds and Nations Fund Trust

24 FEB 1994
-
Our Ref. No. 94-73-CC

The Capitol Mutual

Funds and Nations

Fund Trust

F CHIEF COUNSEL File Nos. S11-6030;

INVESTMENT MAAGEMENT S11-4305
Solely with respect to the availability of Rule 17a-S under

the Investment Company Act of 1940 (the "1940 Act"), and without

expressing any opinion on any other aspect of the proposed

reorganization, we would not recommend any enforcement action to

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

Mutual Funds and the Nations Fund Trust implement the proposed

reorganization described in your letter. 1/ Having stated our

views with respect to the availability of Rule 17a-S in

transactions involving registered investment companies that are

affiliated persons solely by reason of having investment advisers

.. that are under common control, we will no longer respond to .;reguestsfor no-action relief in this area unless they present

';nov:el .'Orunus al issues.
Edward J. Rubenstein

Attorney on Small Capitalization Fund (pub.

avail. Oct. 4, 1993); MFS Family of Funds (pub. avail. May 1/ See Smith Barney Shears

24, 1993); Shears on Lehman Hutton Group of Funds (pub.

avail. Oct. 7, 19S5).

1
:' ~ ,,';1.. MORRISON & FOERSTER ~. ~~. 't-:

SAN .tNCISCO ATTORNEYS AT LAW DENR LOS ANGELES , /....~:
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200 PESYVANIA AVENU, N.W.
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NEW YORK
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BRUSSELS
WALNU CRK TELEHONE (202) 88-150 HONG KONG PALO ALro TELEACSIM (202) 88-D63 roKYO TE 9030 MRN FOER WSH DIRCT DIAL NUER February 9, 1994 (202 LB87-1UO-""...,. ~. .......,.."";~ ..r

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L:~ect 1Qn
Thomas S. Harman, Esq.
Associate Director ¡~'ùCl (1 l( g .... .
Di vis~oi: of Investment Manag7m~r¡(' :ko a Secur7ties and Exchange commiss;iqPnnttyd- d-, l!"...,.,."'.d..... 450 Fifth Street, N. W. . ....__.~"'~L=---- . Washington, D. C. 20549

Re: The Capitol Mutual Funds and

Nations Fund Trust

Dear Mr. Harman:

We are writing with respect to the proposed reorganization of certain investment companies, the investment advisers of which are dire~t or indirect wholly owned subsidiaries of NationsBank Corporation, and the implications of these transactions under Section 17 (a) of the Investment Company Act of 1940, as amended (the "1940 Act") i and Rule 17a-8 under the 1940 Act. The proposed reorganization (the "Reorganization") will consist

of a transfer of substantially all of the assets and

liabilities of certain portfolios (the "Acquired Funds") of

The Capitol Mutual Funds (the "Capitol Funds") to certain

portfolios (the "Acquiring Funds") of Nations Fund Trust

(the "Trust") which have substantially similar investment

objectives and policies, as indicated below:

Portfolio of the Corresponding Fund

CaDi tol Funds of the Trust

Equity Portfolio.............. Nations Value Fund

Special Equity Portfolio...... Nations Special Equity Fund

Fixed Income Portfolio........ Nations Strategic Fixed

Income Fund

Maryland Tax Free Securities

Portfolio. . . . . . . . . . . . . . . . . .. Nations Maryland Intermediate Municipal Bond Fund

MORRISON & FOERSTER

Thomas S. Harman i Esq.
February 9, 1994

Page Two

Following the transfer of assets and liabilities by each

Acquired Fund in exchange for shares of the corresponding

Acquiring Fund, the Acquired Fund will be dissolved and

liquidated and the shares of the Acquiring Fund received by

the Acquired Fund will be distributed to the shareholders of

the Acquired Fund. On behalf of the Acquired Funds and the

Acquiring Funds (eachi a "Fund" and collectively i the "Funds"), we respectfully request your assurance that the

staff (the "Staff") of the Securities and Exchange

Commission (the "SEC") will not recommend that the SEC insti tute enforcement proceedings if the Reorganization is :ef:fected under the circumstances described below. As noted ê';beJ:OW.,;. the circumstances described below are virtually ':identical to those supporting the no-action position recently taken by the Staff in Smith Barney Shearson SDecial

Equities Fund: Smith Barney Shears on Small CaDitalization

Fund (pub. avail. October 4, 1993).

BACKGROUN
Description of the Funds and Their Servicing Relationships

The Acquired Funds are part of the Capitol Funds,

an open-end, diversified, management investment company

organized as a Massachusetts business trust. The Capitol

Funds currently consists of nine separate portfolios. The

Acquired Funds offer Class A Shares at net asset value to

Security Trust Company i N .A., its affiliates and

correspondents for the investment of assets for which they

act in a fiduciary capacity. Class B Shares are offered to

individual and institutional investors.

The Acquiring Funds are part of the Trust, an

open-endi diversified, management investment company

organized as a Massachusetts business trust. The Trust

currently consists of thirty- four separate investment

portfolios. In addition, the Trust is a part of the Nations

Fund Family i which consists of all funds of the Trust and

Nations Fundi Inc. i a separate investment company registered

under the 1940 Act. Trust A Shares of the Acquiring Funds

are offered at net asset value to bank trust departments and

other financial institutions acting on behalf of customers

having a qualified trust account at or a relationship with

the institution. Purchases of Investor A Shares of the

Acquiring Funds, which are subject to initial sales charges

may be made through banks i broker/dealers and other

financial institutions that have entered into agreements

i

\

MORRISON & FOERSTER
Thomas S. Harman i Esq.

February 9, 1994

Page Three
wi th the Trust. i/ Holders of Investor Shares of a fund of the Nations Fund Family can exchange their shares for shares

of another fund within the Nations Fund Family, subject to

certain restrictions described in the prospectuses of each

fund.
The Acquired Funds are advised by ASB Capital

Management Inc. ("ASBCM") and the Acquiring Funds are

advised by NationsBank of North Carolinai N .A. ("NationsBank"). NationsBank is a wholly-owned subsidiary

of NationsBank Corporation. In connection with the merger

'o£iMNCFinancial, Inc. with and into NationsBank

":3:Corporati:on,'!;ASBCM, which was formerly an indirect wholly cowned subsidiary of MNC Financial, Inc. i became an indirect

wholly-owned subsidiary of NationsBank Corporation.

Accordingly i NationsBank and ASBCM are under the common

control of NationsBank Corporation.

SEI Financial Services Company serves as the

distributor of the Acquired Funds and SEI Financial

Management Company provides administrative services and transfer agency services to the Acquired Funds. Security Trust Company i N .A. provides custodial services to the Acquired Funds. Stephens Inc. serves as the sponsor i distributor and administrator of the Acquiring Funds and The

Boston Company Advisors Inc. serves as the Acquiring Funds'

co-administrator. NationsBank of Texas, N .A. is the

custodian of the Acquiring Funds.

Currently, the Acquired Funds and the Acquiring

Funds have no trustees or officers in common. However i at a

special meeting of shareholders of the Capitol Funds (the

"Special Meeting of Shareholders") held for the purpose of

considering the Plani it is anticipated that a new slate of

trustees i comprised of the persons who currently serve as the trustees to the Trust, will be proposed for the Capitol

Funds i and that i if approved i the new trustees will in turn elect new officers for the Capitol Funds i comprised of the persons who currently serve as the Trust's officers.

Accordingly, assuming shareholder approval i the Acquired

Funds and the Acquiring Funds will have common trustees and

officers prior to the Reorganization.

i/ Besides offering Trust A and Investor A Shares i the

Acquiring Funds also offer Trust B, Investor Band

Investor C Shares.

MORRISON & FOERSTER
Thomas S. Harman, Esq.

February 9, 1994

Page Four
Proposed Reorganization

The Board of Trustees of the Capitol Funds and the

Board of Trustees of the Trust, including a majority of the

members of each of the Boards who are not "interested

persons," as such term is defined in Section 2 (a) (19) of the 1940 Act, of any Fundi have approved an Agreement and Plan

of Reorganization (the "Plan") with respect to the Funds.

The Board of Trustees of the Capitol Funds has determined to

recommend that each Acquired Fund's shareholders also

approve the Plan at. the Special Meeting of Shareholders.

The Plan need not be approved by the shareholders of the

Acquiring Funds.

The Reorganization will consist of the transfer of

substantially all of the assets and liabilities of each

Acquired Fund in exchange for shares of the corresponding

Acquiring Fund and the distribution, pursuant to the Plan,

of such shares to the shareholders of the Acquired Funds in

liquidation of the Acquired Funds. Shareholders of each

Acquired Fund will receive shares of the corresponding

Acquiring Fund equal in value to the shares of the class of

the Acquired Fund owned by such shareholder immediately

prior to the transaction. Holders of Class A Shares of each

Acquired Fund will receive Trust A Shares of the

corresponding Acquiring Fund and holders of Class B Shares

of each Acquired Fund will receive Investor A Shares of the

corresponding Acquiring Fund. Any front -end sales charge which would otherwise be applicable upon the acquisition of

shares of an Acquiring Fund will be waived with respect to

shares acquired in the Reorganization. No commission or

sales loads will be charged in connection with the

Reorganization. The result of the transfer of assets will

be that each Acquiring Fund will add to its portfolio

substantially all of the assets held by the corresponding

Acquired Fund on the date of consummation of the

Reorganization, and shareholders of each Acquired Fund will

become shareholders of the corresponding Acquiring Fund.

The management of the Acquired Funds intends to dissolve the

Acquired Funds following the Reorganization.

Reasons for the Reorganization

In determining whether to approve the

Reorganization and, in the case of the Acquired Funds,

whether to recommend approval of the Reorganization to

shareholders, the Boards of the Capitol Funds and the Trust

(including the independent Board members) inquired into a

.

MORRISON & FOERSTER
Thomas S. Harman, Esq.

February 9, 1994

Page Five

number of matters and considered the following factors,

among others: (i) the terms and conditions of the

Reorganization and whether it would result in a dilution of

the existing shareholders' interests; (ii) the comparability

of each Acquired Fund's investment objective, strategy and

policies with those of its corresponding Acquiring Fund, as

well as the views of the investment advisers to the Acquired

Funds and the Acquiring Funds that any differences between

the investment policies and restrictions of each Acquired

Fund and its corresponding Acquiring Fund should not

appreciably increase investment risks; (iii) the experience

~and "resources of NationsBank with respect to providing

"inv:estment"~management services, and the similarity between

the Acquired Funds', and the Acquiring Funds' respective distribution, administrative, transfer agency, shareholder

service and custody arrangements; (iv) the projec.ted expense

ratios, and information regarding fees and expenses of the

Acquired Funds, the Acquiring Funds and other similar funds;

(v) the absence of federal tax consequences to the Funds or

their shareholders resulting from the Reorganization; and

(vi) other factors deemed relevant.

In reaching the decision to approve the

Reorganization, the respective Board of each of the Capitol

Funds and the Trust concluded that the Reorganization is in

the best interests of each Fund's shareholders and would not

resul t in the dilution of the shareholders' interests. Each

Board's conclusion was based on a number of factors,

including the following: (1) the Reorganization should

eliminate any duplication of services that currently exists

as a result of the Funds' separate operations; (2) combining

the assets of the Acquired Funds with the assets of the

Acquiring Funds should lead to reduced expenses, on a per-

shares basis, by allowing fixed and relatively fixed costs

to be spread over a larger asset base; ~/ and (3) higher

asset levels should enable the Acquiring Funds to purchase

larger individual portfolio investments or other quantities

~/ Because the Nations Special Equity Fund is a newly

organized fund which will have minimal assets at the time of

the Reorganization, combining the assets of this fund with

the Special Equity Portfolio will not immediately result in

higher asset levels. However, it is anticipated that higher

asset levels will result over time because the Nations

Special Equity Fund is part of a broader overall family of

portfolios and because its asset-based fee levels are lower

in the aggregate than those of the Special Equity Portfolio.

l
MORRISON & FOERSTER
Thomas S. Harman, Esq.

February 9, 1994

Page Six

that may result in reduced transaction costs and provide the

opportunity for greater portfolio diversity.

LEGAL ANALYSIS

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

affiliated person, of a registered investment company from

knowingly purchasing securities or other property from, or selling securities or other property to, the investment . company or a company controlled by it. This section was

includeddin the 1940 Act largely to protect shareholders by

prohibi ting 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. See Hearings on S. 3580 Before a Subcomm. of the

Senate Comm. on Banking and Currency, 76th Cong., 3d Sess.,

17 (1940). Where two investment companies have in common an

investment adviser, directors, and/or officers, the

companies may be considered to be under common control and,

therefore, affiliated persons of each other; thus, their

merging, consolidating or combining could be considered to

be a prohibited purchase or sale under Section 17 (a) of the 1940 Act. See Investment Company Act Release No. 10886

(Oct. 2, 1979) (proposing rule 17a-8 ("Proposing Release"))

at n. 5.

Rule 17a-8 under the 1940 Act excepts from the

prohibitions of Section 17 (a) mergers or consolidations of

registered investment companies that are affiliated persons

solely by reason of having a common investment adviser,

common directors, and/or common officers, provided that

certain conditions are satisfied. Rule 17a-8 is based on

the rationale that "when a merger involves investment

companies which are affiliated persons exclusively by virtue

of sharing common officers, directors and/or an investment

adviser, no person who is responsible for evaluating and

approving the terms of the transaction on behalf of the

various participating investment companies would have a

significant financial interest in improperly influencing

these terms." Id., at text accompanying note 9.

Because NationsBank and ASBCM are not a single

entity, but instead are affiliates, the express terms of the

exemption provided by Rule 17a-8 might appear to be

inapplicable to the Reorganization. Nevertheless, because

ASBCM and NationsBank are under common control, the

condition of Rule 17a-8 that reorganizing funds have a

"

MORRISON & FOERSTER
Thomas S. Harman, Esq.

February 9, 1994

Page Seven

"common" investment adviser should be deemed to have been

met. In this regard, the application of Rule 17a-8 to a

si tuation involving the merger of funds having investment

advisers under common control would appear to be wholly

consistent with the policy of Rule 17a-8, as expressed by

the SEC in the Proposing Release, that "no person who is

responsible for evaluating and approving the terms of the

transaction on behalf of the various participating

investment companies would have a significant financial

interest in improperly influencing these terms." See

Investment Company Act Release No. 10886 (Oct. 2, 1979), at

text accompanying note 9.

The Reorganization complies with the other

conditions for reliance on Rule 17a-8 because the Board of

Trustees of the Capitol Funds and the Board of Trustees of

the Trust, including a majority of the members of each Board

who are not interested persons of any Fund, have determined

that the Reorganization would be in the best interests of

the Acquired Funds' shareholders and the Acquiring Funds'

shareholders , respectively, and that no dilution of

shareholders' financial interests would result from the Reorganization. In addition, these findings and the bases therefor have been or will be recorded fully in the minutes

of each respective Fund. Finally, if, as expected, the

Capitol Funds have elected new Trustees (identical to the

Trust's current group of Trustees), who have, in turn,

elected new officers (identical to the Trust's current group

of officers) prior to the date of the Reorganization, the

Acquired Funds and the Acquiring Funds would have common

directors and officers, thereby satisfying the two other

conditions for reliance on Rule 1 7a-8 .¿i

As noted above, the Staff has recently issued a

favorable no-action response under Section 17 (a) of the 1940

Act in circumstances virtually identical to those described

in this letter. Specifically, in Smith Barney Shearson

SDecial Equities Fund: Smith Barney Shears on Small

CaDitalization Fund (pub. avail. October 4, 1993), the Staff

stated that it would not recommend enforcement action under

¿I If the new Trustees and officers are not in place prior

to such time, the other two conditions for reliance on

Rule 17a-8 would be irrelevant because the affiliation

between the Acquired Funds and Acquiring Funds would not

have been caused by the existence of common directors or officers.

4
MORRISON & FOERSTER
Thomas S. Harman, Esq.

February 9, 1994

Page Eight
Section 17 (a) with respect to a reorganization between two

funds where the advisers to the funds were under common

control and the funds otherwise complied with the provisions

of Rule 1 7a-8. This position is also consistent with

positions taken by the Staff previously in similar

circumstances. See, ~.g., Shearson Lehman Hutton GrouD of

Funds (pub. avail. October 7, 1988) (Staff stated that it

would not recommend enforcement action under Section 17 (a) of the 1940 Act with respect to a reorganization between two

funds where the investment adviser of one fund was the sub-

investment adviser of the other fund, and the investment

advisers of both funds were under common control); ~ also,

MSF Family of Funds; MSF Lifetime Investment Program (pub.

.:iavai'l'. . May 24, 1993) (Staff stated that it would not recommend enforcement action under Section 17 (a) of the 1940

Act with respect to a reorganization between two funds where

the investment adviser of one fund was a wholly-owned subsidiary of the investment adviser of other fund) . CONCLUSION In view of the foregoing, we believe that the

Reorganization would be fully consistent with both the terms

of and the polic~es underlying Rule 1 7a-8. Accordingly, we

respectfully request your assurance that the Staff will not

recommend that the SEC institute enforcement proceedings if

the Funds proceed to consummate the Reorganization under the

circumstances described above.

A registration statement on Form N-14 (File No. 33
74334) relating to the Reorganization was filed on

January 24, 1994 and is expected to become effective on or

about February 23, 1994. Accordingly, we would very much

appreciate your earliest consideration of this matter.

''
MORRISON & FOERSTER
Thomas S. Harman, Esq.

February 9, 1994

Page Nine
Pursuant to Release No. 33-6269 (Dec. 5, 1980), we

enclose the original and seven copies of this letter. If

further clarification or amplification of any of the facts

or issues discussed in this letter is required, please do

not hesitate to call Robert Kurucza, at (202) 887-1515, or

me, at the number indicated above.

Very truly yours,

cc: Robert M. Kurucza

Mark Williamson

Steven W. Duff
Theodore o. Johnson

Robert M. Kurucza

Q15321