SEC Division of Investment Management staff letter: The Riverfront Funds, Inc.

NOV _ 8 1995

Our Ref. No. 95-511-CC

The Riverfront Funds,

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Inc.
DIVISION OF INVESTMNT MAAGEMENT File No. 811-6082

Your letter dated September 6, 1995 requests our assurance

that we would not recommend that the Commission take any

enforcement action against the Riverfront Funds, Inc., a

registered investment company (the "Company"), or The Riverfront

Stock Appreciation Fund, one of six series of the Company (the

"Fund" ) if (1) during the Fund's fiscal year ending September 30,

1995, the Fund's securities and similar investments are verified

once by its independent public accountants, .and (2) during the

Fund's fiscal period ending December 31, 1995, the Fund's

securities and similar investments are verified twice by its

accountants.
You state that the Company, on behalf of the Fund, has

entered into agreements with The Provident Bank (the "Bank")

pursuant to which the Bank will provide investment advisory,

custodial, depository, and fund accounting services to the Fund.

You further state that the Company has, since 1990, complied with

the verification requirements of Rule 17f -2 (f) under the

Investment Company Act of 1940 (the "1940 Act") with respect to

each of its other five series. i/

You state that the Company has entered into an Agreement and

Plan of Reorganization and Liquidation with MIM Mutual Funds,

Inc., another registered investment company ("MIM"), pursuant to

which three series of the Company, including the Fund, will

acquire all of the assets and assume all of the stated

liabilities of the six series of MIM (the "Reorganization"). In

contemplation of the Reorganization, the Fund was organized to

acquire all of the assets and assume all of the liabilities of

two series of MIM, the Stock Growth Fund and the Stock

Appreciation Fund (the "Acquired Funds"). The Fund had no assets

or liabilities and did not commence operations until completion

of the Reorganization, which was effected as of September 30,

i995 . i/ Under Rule 17f-2 (f), an investment company must have its

securities and similar investments verified by actual

examination by an independent public accountant at least

three times during each fiscal year. At least two of these

exainations must be at times chosen by the accountants

without prior notice to the fund. The staff has taken the

position that, where a bank serves both as custodian and

investment adviser to a fund, the requirements of Rule 17f￾2 (f) apply. See The Mutual Fund Group (pub. avail. Dec. 12,

1989) i Pegasus Income & Capital Fund, Inc. (pub. avail. Dec.

31, 1977).

You state. that, for purposes of performance and accounting

treatment, the Company and its independent accountants determined

that MIM Stock Appreciation Fund would be considered the survivor

of the Reorganization involving the Fund and the Acquired

Funds. 2/ The fiscal year end of MIM and each of the Acquired

Fuds is September 30. Therefore, the Fund had one-half day of operations prior to the end of its fiscal year during which it

was subj ect to the self - custody requirements of Rule 1 7f - 2. ~/ You further state that, following the Reorganization, the

Board of Directors of the Company is expected to change the

fiscal year end of the Fund from September 30 to December 31 in

order to conform the Fund's fiscal year with the other series of

the Company. Accordingly, the Fund's first full fiscal period

after completion of the Reorganization will be a three-month

period, from October 1, 1995 through December 31, 1995.

With respect to the Fund's fiscal year ending September 30,

1995, you represent in your letter that a regular verification of

the Fund's securities and other investments will be performed on Septemer 30, 1995 in connection with the Fund's fiscal year-end audit. You assert, however, that it would, for all practicable

purposes, be impossible to perform two additional "unannounced"

verifications on that day.

With respect to the Fund's fiscal period ending Dece~er 31,

1995, you believe that requiring three verifications within a

three-month period does not further the policies underlying Rule

17f-2 and imposes an unnecessary cost on Fund shareholders. You

propose to have one "surprise" verification, in addition to the

Fund's regular fiscal year-end verification.

We would not recommend enforcement action to the Commission

under Section 17 (f) or Rule 17f-2 (f) thereunder if (1) during the

fiscal year ending September 30, 1995, the Fund's securities and

similar investments are verified once by its accountants, such

verification being the Fund's regular fiscal year-end

ái We express no opinion with respect to your analysis of the

treatment of MIM Stock Appreciation Fund as the surviving

fund, as this is primarily a factual determination.

~ MIM and the Acquired Funds are not subj ect to Rule 1 7f - 2. As a result of the treatment of MIM Stock Appreciation Fund

as the surviving fund, the Fund will have had previous

operations when it was not otherwise subject to the self- custody rule.

• 2

verificationi ~/ (2) during the Fund's three-month "stub"

fiscal period ending December 31, 1995, the timing of one

verification is chosen by the accountants without prior notice to

the Company or the Fund and the other is the Fund's regular

fiscal year-end verificationi 2/ and (3) in all subsequent

fiscal years of the Fund, three verifications will be made per

year in accordance with Rule 17f-2 (f) .
This response expresses the Division's position on

enforcement action only, and does not purport to express any

legal conclusions on the questions presented. Because this

position is based on the facts and representations made in your

letter, you should note that any different facts or circumstances

might require a different conclusion.
Á~ rt"
.4ftttlie S. Bej

At torney
4/ Because of the brief period between the receipt of your

request and the Fund's fiscal year end, we informed counsel

of this position in a telephone conversation between Natalie

S. Bej and Kristin H. Ives on September 28, 1995.

5/ See Morgan Stanley Emerging Markets Fund, Inc. (pub. avail.

Dec. 30, 1991) i The Sessions Group (pub. avail. March 26,

1990). In The Seven Seas Series Fund (pub. avail. May 26,

1988), the staff stated that, as a general matter, it will

not grant no-action relief under Rule 17f-2 (f) in situations

involving either (i) a change in a fund's fiscal year-end

during any year of operations, or (ii) a stub fiscal year of

six months or more for a fund's first fiscal year of

operations. As a result of the Reorganization, the Fund

will change its fiscal year-end to conform to the other

series of the Company. We believe that this distinguishes

the Fund from a fund with ongoing operations that decides to

change its fiscal year for operational purposes.

• 3
  (:
  ./

BAKER

&

HOSTETLER

COUNSELLORS AT LAw
CAITL SQUAR. SUI 2100 · 65 EA STA STR . COLUMUS. Dmo 43215-4260 . (614) 228-1541 . FAX (614) 462-2616 WRI's Dm DIA NUMER (614)

Investment Company Act of 1940

Rule 17f-2 (f)
AOT IcA
September 6, 1995 SECTION ___'- .'. ,n.
RULE n£-=,-i)
Jack W. Murphy, Esq. PUBLIC II J ~ J C) ç' . ; Off ice of the Chief Counsel AVAILABILITY~ Division of Investment Management Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 subj ect: The Ri verfront Funds. Inc. (the "Companv" )

Securities Act of 1933 Reqistration No. 33-34154.

Investment Company Act of 1940 File No. 811-6082

Dear Mr. Murphy:

We hereby request that you advise us that the Division of

Investment Management (the "Division") will not recommend that the

Securities and Exchange Commission (the "Commission") take action

against the Company or The Riverfront Stock Appreciation Fund, one

of six series of the Company (the "Fund"), if for both the Fund's

fiscal year ending September 30, 1995, and the Fund's fiscal period

ending December 31, 1995, the Fund's securities and similar

investments are not verified by its independent public accountants

each of the three times required under Rule 17f-2 (f) of the

Investment Company Act of 1940, as amended (the "1940 Act"). For

the reasons stated below, the verifications for the year ending

September 30, 1995, would include the Fund's regular year-end

verification only, and the verifications for the period ending

December 31, 1995, would include the Fund's regular year-end

verification and one chosen by the Company's independent public

accountants without prior notice.

BACKGROUND
The Company is a Maryland corporation which has registered as

an open-end, management investment company pursuant to the 1940

Act. The company's initial series were declared effective with the

Commission on or about August 9, 1990, and an amendment to the

Company's Registration Statement adding the Fund was declared

CLELA. Oii DE. COLORA HOU5lN. TE LoNG BEA. CAURN Los ANGEL. CAURN ÜR. FtRI WASHIGTN, D.C. (216) 621-0200 (303) 861-0600 (713) 751-1600 (310) 432-2827 (213) 624-2400 (407) 649-4000 (202) 861-1500

effective on July 6, 1995. The Company has engaged Ernst & Young

LLP as its independent public accountants for its fiscal year

ending December 31, 1995 .
The Company, on behalf of the Fund, has entered into an

Investment Advisory Agreement and an Amended and Restated

custodian, Fund Accounting and Recordkeeping Agreement with The

Provident Bank, Cincinnati, Ohio (the "Bank"), pursuant to which

the Bank will provide investment advisory and custodial, depository

and fund accounting services, respecti vely , to the Fund. The

Company has, since August 1990, complied with the verification

requirements of Rule 17f-2 with respect to each of its other five series. The Company has also entered into an Agreement and Plan of

Reorganization and Liquidation dated as of June 26, 1995 (the

"Plan"), with MIM Mutual Funds, Inc. ("MIM"), another open-end,

management investment company. Pursuant to the terms of the Plan,

three series of the Company, including the Fund (collectively, the

"Acquiring Funds"), will acquire all of the assets of the six

series of MIM (collectively, the "Acquired Funds"), in exchange for

the assumption of such Acquired Funds' liabilities and a number of

full and fractional Investor A shares of the relevant Acquiring

Funds of the Company having an aggregate net asset value equal to

such Acquired Funds' net assets (the "Reorganization"). In

contemplation of the Reorganization, the Fund was organized to

acquire all of the assets and liabilities of the Stock Appreciation

Fund and the Stock Growth Fund of MIM. The Fund currently has no

assets or liabilities and will not commence operations until

completion of the Reorganization. The Company filed a Registration

Statement on Form N-14 in connection with the Reorganization with

the Commission on July 18, 1995, which became effective on August

17, 1995.

A Special Shareholders' Meeting of MIM will be held on

September 27, 1995, to vote upon the Reorganization. If approved

by MIM's shareholders, it is currently anticipated that the

Reorganization will be effected as of September 30, 1995.

In preparation for the acquisition by the Fund of all of the

assets and liabilities of the MIM Stock Appreciation Fund and the

MIM Stock Growth Fund, the Company and its independent accountants

have determined that, for purposes of performance and accounting

treatment, the MIM Stock Appreciation Fund will be considered the

survivor. Such determination was based upon an analysis of all

relevant factors, including that the Fund will have investment objectives, policies and practices which are substantially identical to those of the MIM Stock Appreciation Fund, the

portfolio manager of the MIM Stock Appreciation Fund will become

the portfolio manager of the Fund after the Reorganization, the

portfolio manager intends to continue managing the Fund after the

Reorganization in the same manner as he had managed the MIM Stock

Appreciation Fund, and, as between the MIM Stock Appreciation Fund

and the MIM Stock Growth Fund, the MIM Stock Appreciation Fund has

significantly greater assets. See,~, North American Security

Trust (available August 5, 1994). The fiscal year end for MIM and

each of its Acquired Funds is September 30. The current custodian

for all series of MIM is not affiliated with such series'

investment adviser or MIM.

As a result of the treatment of the MIM stock Appreciation

Fund as the survivor of the Reorganization involving the Fund, the

MIM Stock Appreciation Fund and the MIM Stock Growth Fund, the

Company and its accountants have determined that a full audit of

the Fund will be necessary as of the close of business on

September 30, 1995. In addition, in order to cause the Fund's

fiscal year thereafter to conform with the other series of the

Company, the Company's Board of Directors is expected to change the

fiscal year end of the Fund to December 31, thereby creating for

the Fund a short fiscal period ending December 31, 1995.

Thereafter, all series of the Company will have the same fiscal

year end, December 31.

Rule 17f-2 (f) of the 1940 Act applies to registered investment companies which maintain in their own custody their securities and

similar investments, and generally provides that during any fiscal

year an independent public accountant must verify such company's

securities and similar investments at least three times a year, at

least two of which shall be at the selection of the accountant

without prior notice to the company. The Commission's staff has

interpreted Rule 17f-2 (f) as also applying to a registered

investment company whose investment adviser also serves as its

custodian. Peqasus Income & Capital Fund. Inc. (available December

31, 1977); Carneqie-Cappiello Growth Trust (available August 8,

1985) .
Rule 17f-2 is clear as to its application to full fiscal

years. Whether the Rule requires three audits in the Fund's first

fiscal year during which it becomes subject to Rule 17f-2 or during

short fiscal periods, however, is unclear.

DISCUSSION AND ANALYSIS

Upon completion of the Reorganization, the Fund will have one-

half day of operations prior to the end of its fiscal year during

which it is subject to the self-custody requirements of Rule 17f-2.

In addition, the Fund's first full fiscal period after the

completion of the Reorganization will be from October 1, 1995 through December 31, 1995. If Rule 17f-2 (f) 's requirements are interpreted as being applicable to such time periods, then the

Fund's securities and similar investments must be verified six

times during the period of September 30, 1995 through December 31,

1995.
We believe for the one-half day, September 30, 1995, that the

Fund will be subject to Rule 17f-2 during its current fiscal year,

requiring two additional verifications, other than the one regular

verification in connection with the Fund's fiscal year-end audit, does not further the policies underlying Rule 17f-2 (f) and, thus, imposes an unnecessary cost on Fund shareholders and would be, for

all practicable purposes, impossible to do.

with respect to the Fund's fiscal period ending December 31,

1995, we also believe that requiring three verifications within

such a short period of time as three months does not further the

policies underlying Rule 17f-2 and, thus, imposes an unnecessary

cost on Fund shareholders with limited additional benefits.

In The Seven Seas Series Fund (available May 26, 1988), the

Office of the Chief Counsel of the Division stated that it would

not recommend enforcement action against The Seven Seas Series Fund

under circumstances similar to those of the Fund in that The Seven

Seas Series Fund's initial fiscal period was four months. The only

differences between the facts of The Seven Seas Series Fund and

those of the Fund are that the Fund, as a result of being the

survivor of the Reorganization, will have had previous operations

but was not otherwise subj ect to the self-custody rules of Rule

17f-2 and that the fiscal period of the Fund will be three months

rather than the fourth months of The Seven Seas Series Fund.

While the staff in The Seven Seas Series Fund letter did not

give any specific advice with respect to initial fiscal periods in

the Fund's particular circumstances, in footnote no. 2 the staff did provide that "( a) s a general matter, the staff will not grant no-action relief in situations involving either a change in a

fund's fiscal year-end during any year of operations or a stub

fiscal year of six months or more for a fund's first fiscal year of

operation. "
While arguably the Fund's situation involves a change in the

Fund's fiscal year, such a change is necessitated by the Reorganization. In addition, we believe that the Fund's situation is sufficiently different from that of a fund already subject to

Rule 17f-2 with ongoing operations which decides to change its

fiscal year for operational purposes to warrant an exception to the

policy stated in such footnote no. 2. The change in the Fund's

fiscal year to December 31 is needed in order to realize some of

the economies anticipated by the Reorganization. It would be

difficult and expensive to have one series of the Company with a

fiscal year end different from that of the other five series of the

Company. Thus, the change in the Fund's fiscal year end is

necessitated by the effects of the Reorganization and not by some

other operational consideration over which the Company has control.

The staff has stated that it is a principal policy of the 1940 Act, as expressed generally in section 1 (b) (5) and specifically in
section 17 (f), to ensure that securities owned by investment

companies are subj ect to adequate independent scrutiny. Peqasus

Income & Capital Fund, supra. This policy is accomplished by

requiring verification of the holding of investment companies by

independent public accountants and, in the case of self-custody, an

additional two surprise inspections by those accountants to reduce

the likelihood of embezzlement and larceny.

In the case of the Fund, the policy of independent scrutiny

would not be compromised by reducing the number or required

verifications from three to one for the Fund's fiscal year ending

September 30, 1995, and by reducing the number of required

verifications from three to two for the Fund's fiscal period ending

December 31, 1995. Three verifications, one a surprise and two at

the end of the Fund's fiscal year ending September 30, 1995 and the

end of the Fund's fiscal period ending December 31, 1995, are

adequate in a three-month and one-half day period to protect the

Fund's shareholders. Three additional verifications would increase the cost to shareholders with only nominal, if any, addi tional benef its.

CONCLUSION
Based on the discussion and analysis set forth above, we

respectfully request that the Division not recommend that the

Commission take action against the Company or the Fund if, (1) for

the Fund's fiscal year ending September 30, 1995, the Fund's

securities and similar investments are verified one time by its

accountants, such verification being the Fund's regular year-end

verification, and (2) for the Fund's fiscal period ending December

31, 1995, the Fund's securities and similar investments are

verified two times by its accountants, one being a surprise

verification and the other being the Fund's regular year-end

verification. In all subsequent fiscal years of the Fund, three

verifications will be made in accordance with the requirements of Rule 17f-2 (f) .

In order to avoid the costs associated with additional

verifications, we would appreciate your prompt attention to this

matter. If we can be of any assistance in expediting your review

or may answer any questions you may have, please do not hesitate to

call us collect at (614) 228-1541.

Yours very truly,
~E2(~
Kristin H. Ives