SEC Division of Investment Management staff letter: The Victory Funds and The Victory Portfolios

PUBLIC APR 2 4 1995

RESPONSE OF THE OFFICE OF Our Ref. No. 95 - 56 - CC

CHIEF COUNSEL The Victory Funds and The

DIVISION OF INVESTMENT Victory Portfolios

MAAGEMENT File Nos. 811-3378. 811-4852

Your letter of January 25, 1995 requests our assurance that

we would not recommend that the Commission take enforcement

action if certain series of The Victory Portfolios (the

"Portfolio") that are acquiring the 'assets and assuming the II ) liabilities of certain series of The Victory Funds (the II Fund use the acquired series' redemption credits under rule 24f-2

under the Investment Company Act of 1940 (" 1940 Act ") in calculating the registration fee owed under the Securities Act of

1933 (" 1 9 3 3 Ac t ") .
You state that on January 18, 1995, the trustees of the Fund

and the trustees of the Portfolio agreed to merge each of the 14

series of the Fund into corresponding series of the Portfolio

(the "Reorganization"). i Seven series of the Fund will merge

into existing series of the Portfolio. The other seven series of

the Fund (" the Acquired Series ") will merge into newly created shell series of the Portfolio (" the Acquiring Series "). Your no-

action request pertains to the latter transactions only. Each

Acquiring Series and its corresponding Acquired Series have the

same investment objectives and policies and are managed by the i same or affiliated investment advisers. 2 .

Rule 24f - 2 under the 1940 Act permits an open- end investment company to register an indefinite numer of securities under the

1933 Act. The rule requires funds that elect to register an

indefinite number of securities to file a notice every year

setting forth the number and amount of securities sold in the

past fiscal year. If the notice is filed within two months after

the close of the fund's fiscal year, the fund pays a registration

fee based on net sales, i. e., the aggregate price of the shares

sold by the fund during the year, reduced by a "redemption

credit II equal to the aggregate price of the shares redeemed

during the year. 3 i The Reorganization is scheduled to occur on June 2, 1995

and is subj ect to the approval of the shareholders of each series of the Fund.

2 Telephone conversation on March 6, 1995 between Barry A.

Mendelson of the staff and Jay G. Baris, counsel for the Fund and the Portfolio. 3 If the notice is not filed within the two,-month period,

the fee is based on gross sales, i. e., the aggregate price of the

shares sold by the fund during the year, without deduction of the

redemption credit.

• 2
  In a series of no-action letters, the staff has permitted an

acquiring fund to use the rule 24f - 2 redemption credits of an

acquired fund upon adoption of the acquired fund's registration

statement pursuant to rule 414 under the 1933 Act. 4 In 1985, the

staff stated that it would no longer respond to letters seeking

similar relief unless they presented novel of unusual issues. S

You contend that your letter presents a novel issue because the

Acquired Series will be merged into newly created shell series of

an existing fund that has its own registration statement and

therefore will not assume the acquired fund's registration

statement. We agree that your letter presents a novel and

important issue that warrants a staff response. 6

You believe that the treatment of redemption credits under

rule 24f -2 should not depend on whether an acquired fund is merged into a newly created shell fund (as was the case in previous letters) or into a newly created shell series of an existing fund (as here). You state that the practical effect of either transaction is the same, i.e., that a new fund or series

will succeed to all of the assets and liabilities of an acquired fund or series. 4 ~, Lowry Market Timing Fund, Inc. (pub. avail. Feb. 8,
1985) (reorganization of a Texas corporation into a Massachusetts
business trust); Delaware Fund, Inc. (pub. avail. May 5, 1983) (Delaware corporation to Maryland corporation); Colonial Option

Income Fund, Inc. (pub. avail. Mar. 21,1983) (Massachusetts

corporation to Massachusetts business trust); Gradison Cash

Reserves, Inc. (pub. avail. Oct. 29, 1981) (Maryland corporation

to Massachusetts business trust). Under rule 414, when an issuer

is merged into a shell entity (the successor) for the purpose of

changing the issuer's state of incorporation or form of

organization, the successor may adopt its predecessor's

registration statement as its own.

S CIGNA Aggressive Growth Fund, Inc. (pub. avail. Feb. 15,

1985); Lowry Market Timing Fund, Inc., supra note 4.

6 In 1987, the staff declined to respond to a no-action

request with facts and issues materially identical to those

presented here. Lazard Freres Institutional Fund, Inc. (pub.

avail. Jan. 27, 1987). The staff noted that it previously had

stated its views in this area and that Lazard's inquiry did not

present a novel or unusual issue. In our view, the facts here

and in Lazard are sufficiently different from the facts contained

in our prior letters (see note 4 supra and accompanying text) to

raise questions regarding the ability of the Acquiring Series and

the Lazard funds to rely on those letters. We therefore believe

it is appropriate for the staff to respond to this no-action

request.

• 3
  We believe that a shell series that assumes the assets and

liabilities of an acquired fund should be able to use the

acquired fund's rule 24f-2 redemption credits if the two funds

have the same investment objectives and policies and the same or

affiliated investment advisers. In those circumstances, the

acquiring fund is continuing the acquired fund's business, and

each shareholder 'of the acquired fund, immediately after the

reorganization, would own the same pro rata interest in the same

portfolio of securities as he or she owned immediately before the 7 In this regard, your reorganization is similar reorganization. to a reorganization involving a change in domicile or

organizational form, circumstances in which the staff previously

has permitted an acquiring shell fund to use the redemption

credi ts of an acquired fund. 8

Accordingly, we would not recommend that the Commission take

enforcement action if each Acquiring Series uses the redemption

credits of the corresponding Acquired Series in calculating the

registration fees owed under the 1933 Act. Our position is based

on the facts and representations in your letter, and different

facts or circumstances might require a different conclusion.9

7 By contrast, when an acquired fund is reorganized into an

existing fund that is not a shell, the acquired fund's

shareholders receive interests in a new fund with a portfolio

different from that of the acquired fund. Thus, the acquiring

fund in such a reorganization generally would not be able to use

the acquired fund's 24f -2 redemption credits. See Scudder

Managed Reserves, Inc. (pub. avail. May 15, 1981). But see

Kemper Total Return Fund (pub. avail, Feb. 6, 1995) (staff

permitted acquiring funds that were not shells to use acquired

funds' redemption credits because the reorganizing funds had the

same investment obj ectives and policies, the same portfolio managers, and substantially the same portfolio securities) . 8 See, for example, the letters cited in note 4 supra.

9 The position taken herein does not affect the staff's

position that an open- end series fund may aggregate sales and

redemptions of all its series sharing the same registration

statement in calculating the filing fee owed the Commission under

rule 24f-2. See Generic Comment Letter from Carolyn B. Lewis,

Assistant Director, to Investment Company Registrants (Feb. 24,
1994) (Part I.E).

KRAMER, LEVIN, NAF'TALI5, NESSEN, KAMIN 8: FRANKEL 919 THIRD AVENUE ..f'THUR H. AUf'SES III RICHARD MARLIN NEW YORK. N,Y. 10022-3852 .JOSHUA M. BERMAN THOMAS 0_ BALLiETT THOMAS H. MORELAND JULES BUCHWALD MARTI N BALSAM ELLEN R. NADLER (212) 715-9100 HAIG M. CASPARIAN .JAY G. BARIS GARY P. NAFTALIS RUDOLPH" WINTER THOMAS E. CONSTANCE MICHAEL .J. NASSAU MEYER EISENBERG MICHAEL oJ. OELL MICHAEL S. NELSON ARTHUR D. EMIL KENNETH H ECKSTEIN MAURICE N. NESSEN SHERWIN KAMIN

CHARLOTTE ... FISCHMAN .JAY A. NEVELO,.F' MAXWELL M. RABS DAvie S. FRANKEL MICHAEL S. OBERMAN JAMES SCHREIBER MARVIN E. FRANKEL PAUL S. PEARLMAN RICHARD 5, WEISBROAT ALAN R. FRIEDMAN SUSAN oJ. PENRY.WILLIAMS COUNSEL CARL F'RISCHLlHG BRUCE RABB ROBERT M. HELLER ALLAN E. REZNICK M, FRANCES SUCHINSKY PHILIP S. KAUFMAN SCOTT S. ROSENBLUM DEBORA K. GROSMAN PETER S. KOLEVZON MICHELE D. ROSS C-HRISTIAN S. HERZECA KENNETH P. KOPELMAN MAX J. SCHWARTZ ALVIN D. KNOTT MICHAEL PAUL KOROTKIN HOWARD A. SOBEL PINCHAS MENDELSON ',f ARTHUR B. KRAMER STEVEN C. TODRY$ Aro .:tA DAVID ROBBINS KEVIN e_ LEBLANG ..EFFREY S. TRACHTMAN LYNN A. SAIDENBERG DAVID P. L£VIN D. GRANT VINGOE SECTION t .JONATHAN M. WAGNER EZRA G. LEVIN HAROLD P. WEINBERGER THOMAS A. WESTLE LARRY M. LOEB E llSK WYCKOFF. .JR. RULE 2.ll - ~ SPECIAL COUNSEL (1'1 MONICA C. LORD PUBLIC Ie I AUTOMATIC TELECOPI£R (2121 715-6000 AVAILABILIT Ot. ~ 'I e¡ 5 WRiTER'S DIRECT NUMBER (212) 715-7515

VIA FEDERA EXPRESS

Securities and Exchange Commission

Division of Investment Management

450 Fifth Street, N. W.

Washington, D. C. 20549

Attention: Jack W. Murphy

Associate Director

Office of Chief Counsel

Re: The Victory Funds

(File Nos. 2-75736 and 811-3378)

The Victory Portfolios

(File Nos. 33 -8982 and 811-4852)

Dear Mr. Murphy:

The Victory Funds (the "Fund") and The Victory Portfolios

(the "Portfolio") are registered as no-load open-end management

investment companies under the Investment Company Act of 1940 (the

"1940 Act
II ). The Fund and the Portfolio are currently offering shares of beneficial interest to the public pursuant to continuous

offerings registered under the Securities Act of 1933 (the "1933

Act"). Both the Fund and the Portfolio are organized as business

trusts under the laws of the Commonwealth of Massachusetts.

As counsel for the Funds, we respectfully request that

the Staff of the Division of Investment Management (the "Staff")

KL2 : 74532.7

KRAER, LEVIN, NAFTALIS, NESSEN, KAMIN a FRANKEL

issue a letter stating that they would not recommend that the

Securities and Exchange Commission (the "-Commission") take any

action with regard to the use of Rule 24f-2 redemption credits as

described below, in connection with the proposed reorganization of

the Fund (the "Reorganization").
-.. I. FACTS

A. Background

The Fund currently has 14 series portfolios. Six series

of the Fund and all of the series of the Portfolio are managed by

Society Asset Management, Inc. ("SAMI"). The remaining eight

series of the Fund (other than The Victory Foreign Markets

Portfolio) are managed by Key Trust Company, an affiliate of SAMI.

Key Trust Company is the Business Manager for The Victory Foreign

Markets Portfolio. The Fund currently has seven trustees, six of

whom are also trustees of the Portfolio.

The Portfolio currently has 21 series funds, all of which

are managed by SAMI. The Portfolio currently has nine trustees,

six of whom are also trustees of the Fund.

At a Special Meeting of Trustees held on January 18,

1995, the trustees of each of the Fund and the Portfolio approved

an Agreement and Plan of Reorganization ( individually, a II Plan II and collectively, the "Plans") with respect to each of the series of

the Fund and certain series of the Portfolio. The Reorganization, subj ect to the approval of the shareholders of each series of the Fund voting separately, contemplates the reorganization of each of

the 14 series of the Fund, into corresponding series of the

Portfolio. The Reorganization is scheduled to occur after the

close of business on June 2, 1995.

Under the terms of the Reorganization, the following seven series of the Fund would merge into newly-created

corresponding series of the Portfolio: (1) The Victory Financial

Reserves Portfolio; (2) The Victory Fund For Income Portfolio; (3)

The Victory Government Bond Portfolio; (4) The Victory

Institutional Money Market Portfolio; (5) The Victory National

Municipal Bond Portfolio; (6) The Victory New York Tax-Free

Portfolio; and (7) The Victory Ohio Municipal Money Market

Portfolio. Upon the consummation of the Reorganization,

shareholders of each of the above series of the Fund would receive

an equal number of shares of the corresponding newly-created series

of the Portfolio.

KL2: 74532,7

KRAER, LEVIN, NAF"ALIS, NESSEN, KAMIN a FRANKEL

This request for no-action relief pertains only to these

seven series of the Fund that will be r~organized into newly-

created shell series of the Portfolio.

The remaining seven series of the Fund will merge into existing series of the Portfolio. i .,f After Reorganization (assuming approval by shareholders

of each of the series of the Fund), there will be 28 series of

shares of the Portfolio. Each of the series of the Portfolio would

have a common investment manager, administrator and distributor.

Under Massachusetts law, the seven newly-created series of

Portfolio, as the survivors in the Reorganization, will succeed to

all the assets and be subject to all the liabilities of the

corresponding series of the Fund.

The Portfolio plans to file two registration statements

on Form N-14, each containing a combined proxy statement and

prospectus to be sent to the respective shareholders of each series

of the Fund. The combined proxy statement and prospectus will seek

shareholder approval of the Reorganization and each Plan at a

special meeting of shareholders scheduled for April 28, 1995.

Proxies will be solicited for the special meeting pursuant to

Section 14 (a) of the Securities Exchange Act of 1934 (the "1934

Act") and Section 20 (a) of the 1940 Act. The combined proxy

statement and prospectus with respect to each series to be

distributed in connection with such solicitations will contain all

material information necessary for shareholders of each series of

the Fund to make informed judgments on the approval or disapproval

of the Reorganization.

i The following seven series of the Fund would merge into existing

series of the Portfolio: (1) The Victory U. S. Treasury Money Market Portfolio

would be merged into The Victory U. S. Government Obligations Fundi (2) The

Victory Short-Term Government Income Portfolio would be merged into The Victory

Limited Term Income Fundi (3) The Victory Corporate Bond Portfolio would be

merge0 into The Victory Investment Quality Bond Fudi (4) The Victory Equity

Portfolio would be merged into The Victory Growth Fundi (5) The Victory Equity

Income Portfolio would be merged into The Victory Value Fundi (6) The Victory

Aggressive Growth Portfolio would be merged into The Victory Special Growth Fundi

and (7) The Victory Foreign Markets Portfolio would be merged into The Victory

International Growth Fund. Upon the consummation of the Reorganization,

shareholders of each of the above series of the Fund would receive an equal

number of shares of corresponding existing series of the Portfolio.

KL2 : 74532 . 7

KRAMER, LEVIN, NAI'ALlS, NESSEN, KAMIN a FRANKEL

The Portfolio has filed Post-Effective Amendment No. 19

to its Registration Statement on Form N-1A on or about December 23,

1994, to create the seven new series. 2 It is expected that this

Post-Effective Amendment will become effective with respect to the

seven series at the time the Registration Statements on Form N-14

become effective.
'4
The costs of the Reorganization will be borne by SAMI or

its affiliates. A condition precedent to the Reorganization will

be the receipt by the Fund of an opinion of counsel to the effect

that the Reorganization will not result in the recognition of any

gain or loss for Federal income tax purposes to the Fund or its

shareholders.
In the event the Reorganization with respect to one or

more series of the Fund is not approved because a required two-

thirds shareholder vote is not obtained with respect to a

particular series, the Fund would continue to exist as a legal

entity. For this reason, in connection with the Reorganization,

shareholders of the Fund will also be asked to approve a slate of

trustees for a term commencing prior to the Reorganization. The

proposed slate of trustees is the same as the slate of trustees of

the Portfolio as will exist at the time of the Reorganization.

Subject to shareholder approval, the trustees of the Fund would

then be the same as the trustees of the Portfolio at the time of

the Reorganization. Shareholders of the Fund will also be asked to ratify the selection of independent certified public accountants.

B. Reasons for the Reorganization

At the Special Meeting of Trustees held on January 18, 1995, the Board of Trustees of the Fund and the Portfolio separately determined, among other things, that (i) the

Reorganization is in the best interests of the shareholders of each

series of Fund and each series of the Portfolio, respectively; and

(ii) the Reorganization will not result in the dilution of the interests of any shareholders. The Reorganization would

consolidate investment management, distribution, administration,

legal and compliance services and will result in the existence of

a single Board of Trustees and a common investment manager for all

of the series. The trustees considered, among other things, the

relative benefits to the shareholders of each of the Fund and the

Portfolio, that SAMI or its affiliates will pay for the cost of the

Reorganization, and that for a certain period, assuming current

2 Post-Effective Amendment No. 19 would also create an eighth series i which

will not be a part of the Reorganization.

KL2: 74532.7

KRAMER, LEVIN, NAFïALlS, NESSEN, KAMIN a FRANKEL

asset levels, the overall expense ratio of each series of the

Portfolio into which the series of the Fund will merge will be no

greater than the lesser of (i) the gross expense ratio now currently in effect with'respect to the series of the Fund, or (ii) the expense levels established pursuant to previous undertakings of

SAMI. ...
II. LEGAL CONSIDERATIONS

The Reorganization raises an issue under the 1940 Act that has been the subj ect of numerous favorable no-action responses by the Staff in similar circumstances: the retention of redemption

credits to which the disappearing company is entitled pursuant to

Rule 24f -2 under the 1940 Act. In fact, the Staff declined to

review a no-action request which presented facts similar to those

herein, on the basis that the facts did not present a novel

question or issue. See,~., Lazard Freres Institutional Fund, Incorporated (available February 26, 1987). We believe that a novel question is presented by the Reorganization insofar as the

disappearing series of the Fund are being acquired by newly-created

shell series of an existing registered investment company rather

than newly-created shell corporations or business trusts that are

not registered under the 1933 Act or 1940 Act and assume the

acquired companies' registration statements. For the reasons

discussed below, we believe that the Staff's conclusions in

previous letters also apply to the facts presented in this letter.

The more common approach is not being used for the

Reorganization simply because it will not accomplish the desired

organizational goal of aligning all series portfolios into one

registrant. In substance and as a matter of public policy,

however, we believe there is no difference between (i) a

reorganization in which an existing registered investment company

is acquired by a newly-formed shell company that assumes the

existing fund's registration statement and (ii) a reorganization in

which a series of an existing registered investment company is

acquired by a newly-created shell series of another registered

investment company that assumes all the assets and obligations of the acquired fund, including those under its registration statement, as a matter of law.

KL2: 74532,7

KRAMER, LEVIN, NAFTALIS, NESSEN, KAMIN a FRANKEL

Reqistration Fees under the 1933 Act

Rule 24f-2 (c) under the
1940 Act provides that when a

Rule 24f-2 Notice of an open-end investment company is filed within

two months after the close of a fiscal year, the 1933 Act

registration fee to be paid at the time of the filing of such

amendment may be 'computed by reducing the maximum aggregate

offering price of the securities being registered by the maximum

aggregate price of the securities of the same class redeemed or

repurchased by the issuer in that fiscal year (with a provision to

avoid duplication of benefits under Rule 24e-2 (a) ). A declaration

pursuant to Rule 24f-2 is currently in effect for each of the Fund

and the Portfolio.

Where reorganizations have been effected by transferring

assets of investment companies to newly-created shell companies,

the shell companies have been permitted to adopt the disappearing

companies' registration statements pursuant to Rule 414 under the

1933 Act and to succeed to its obligations and redemption credits

under Rule 24f-2. See,~., the Lowry Market Timing Fund, Inc.

(available February 8, 1985) i Massachusetts Financial Development

Fund, Inc. (available January 10, 1985); Frank Russell Investment

Company (available December 3, 1984); Scudder Common Stock Fund,

Inc. (available October 10, 1984); United States Gold Shares, Inc.

(available September 17, 1984) i Ivy Fund, Inc. (available March 5,

1984) i Lutheran Brotherhood Money Market Fund, Inc. (available

April 11, 1983) i and Colonial Option Income Fund, Inc. (available

March 21, 1983).

In Lazard Freres Institutional Fund, suora, the Staff was

presented with issues similar to those presented in this letter.

The Staff, however, declined to provide no action relief. The

Staff indicated that "on a number of occasions, (it) has stated its

views II on these issues. The Staff stated that it "will no longer

respond to letters in this area unless they present novel or

unusual issues." Although it would be reasonable to interpret the

Staff's position in Lazard Freres that similar treatment would be

appropriate under these circumstances, it did not specifically

acknowledge that such treatment is appropriate.

We believe there is a distinction between the facts

presented here and the facts presented in the previous cases where

the Staff has given no-action relief. Specifically, in the instant

case, each disappearing series will be merged into newly-created

shell series of the existing Portfolio, which has registered the

shares of those series and its other existing series. For this

reason, it would be inappropriate for the Portfolio, as the

surviving entity, to adopt the merged Fund's registration statement

KL2 : 74532,7

KRAMER, LEVIN, NAF'TALIS, NESSEN, KAMIN a FRANKEL

even though, as discussed above, the surviving series of the

Portfolio will, as a matter of Massachusetts law, succeed to all

the assets and liabilities of the corresponding disappearing series

of the Fund.

The differences in the specific facts, however, do not change the underlying analysis made by the Staff in previous letters, because the practical effect of the transaction is the same, that is, that the surviving series of Portfolio will succeed (Ji to all assets and liabilities and indeed the operations of the corresponding series of disappearing Fund. Therefore, we believe it is appropriate under the circumstances and consistent with both Rule 24f-2 and prior Staff no-action letters referred to above for the surviving series of the Portfolio to be treated as successors to the disappearing series of the Fund for all purposes of Rule 24f-2 including without limitation the "redemption credits" of the Fund.
III. CONCLUSION

In light of the foregoing, we hereby request that the

Staff concur with our. position by stating that they will not

recommend that the Commission take action if the Reorganization is

effected as outlined above and the newly-created series are treated

for purposes of Rule 24f-2 under the 1940 Act as having succeeded

to the obligations and redemption credits of the disappearing

series of the Fund.

If you have any questions with respect to this letter or

need any additional information, please call Aviva Grossman at 212 715-7514 or the undersigned at 212-715-7515.

Very truly yours,

KL2: 74532,7