"l'.,~"""".,. '". -6:'!.~:"''..J:.r.'...').. ''?.::.iW.e......~.,..~.

"l'.,~"""".,. '". -6:'!.~:"''..J:.r.'...').. ''?.::.iW.e......~.,..~.

~ ,'''. - 0: l" .,....,. '1' "

FE .. 1 19

~ ~~~~~ lt ~~ k~;;/~ .~.l ~~. ~.;.:~:.

I r'-~1~11J~J

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF INVESTMNT MAAGEMENT

Our Ref. No. 94-770-CC

The Victory Stock

Index Fund

File No. 811-4852

By letter dated November 29, 1994, you request the staff's

assurance that we would not recommend enforcement action to the

Securities and Exchange Commission (the "Commission") under

Section 12 (d) (3) of the Investment Company Act of 1940 (the

11 Investment Company Act "), or Rule 12d3 - 1 thereunder, if The

Fund

Victory Stock Index Fund (the 11

11 ) purchases shares of common

stock issued by an affiliated person of the Fund's investment

adviser.

The Fund is an open-end, diversified, management investment

company. The Fund's investment objective is to match the

investment performance of the Standard and Poor's 500 Composite

11 ). KeyCorp is a bank holding

company registered under the Bank Holding Company Act of 1956.

KeyCorp is the indirect parent of the Fund's investment adviser,

Society Asset Management, Inc. ("Asset Management "). As of

December 15, 1994, KeyCorp common stock represented approximately

.188% of the Index on a percentage basis, occupying the 145th

Stock Price Index (the 11

Index

largest position on the Index. KeyCorp's common stock is listed

on the New York Stock Exchange. As of November 30, 1994, KeyCorp

had a stock market capitalization of approximately $5.9 billion.

At that time, KeyCorp had approximately 245.9 million shares of

common stock outstanding and approximately 52,390 registered

shareholders. Keycorp's common stock has been represented on the

Index since March 1, 1994. Average daily trading volume for the

period ended November 30, 1994, was 550,770 shares. i Society

National Bank, a wholly-owned subsidiary of Keycorp and the

direct parent of Asset Management, serves as the Fund's

custodian, shareholder servicing agent, and sub-administrator.

The Fund attempts to duplicate the capital performance and

dividend income of the Index by investing primarily in the stocks

that compose the Index and secondarily in Index stock futures,

while minimizing transaction costs. Because the Fund attempts to

duplicate the investment results of the Index, no attempt is made

to manage the Fund in the traditional sense using economic,

financial, and market analysis, except as discussed below in

connection with the selection of substitute stocks to minimize

tracking error. The Fund may hold only a representative portion

of the stocks in the Index due to the illiquidity of some stocks

or other factors. The Fund may compensate for the omission of

certain stocks by purchasing stocks not included on the Index

that are similar to those omitted if Asset Management believes

those purchases will reduce "tracking error" (the difference

i

The data in this paragraph was provided in a telephone

conversation on December 16, 1994 between Edward J.

Rubenstein and Francoise M. Haan.

between the Fund's investment results before expenses and that of

the Index). To minimize tracking error when the Fund does not

hold all stocks in the Index in proportion to their Index

weighting, Asset Management may use statistical analyses in

selecting stocks. For liquidity, or in connection with engaging

in futures transactions, the Fund may hold cash, cash

equivalents, and/or U. S. government securities.

You state that the Fund desires to purchase shares of

KeyCorp common stock consistent with its policy of investing in

stocks represented on the Index. The Fund would purchase KeyCorp

common stock and would establish and maintain its position in

KeyCorp common stock approximately in proportion to the

percentage KeyCorp common stock represents on the Index.

Specifically, the Fund would not purchase or sell KeyCorp common

stock except in accordance with directions generated by computer

models designed to match the performance of the Index. Such

computer directions would provide that the Fund purchase KeyCorp

common stock and establish and maintain its position in KeyCorp

common stock only in approximate proportion to the percentage

KeyCorp represents on the Index, any variances being due to

stocks being added to or deleted from the Index before the Fund

has rebalanced its portfolio in accordance with the new Index

weightings. In addition, the Fund represents that any purchase

of KeyCorp common stock made in reliance upon no-action relief

from Rule 12d3-1 (c) would be in compliance with the provisions of

Rule 12d3 - 1 (a) and (b).

Section 12 (d) (3) of the Investment Company Act generally

prohibits an investment company from purchasing securities issued

by a broker, dealer, investment adviser, or underwriter. Rule

12d3 - 1 exempts purchases of these securities from the

prohibitions of Section 12 (d) (3) under certain circumstances.

Paragraph (c) of Rule 12d3-1, however, prohibits an investment

company from purchasing securities issued by its investment

adviser, promoter, principal underwriter, or any affiliated

person thereof. Because KeyCorp is an affiliated person of the

Fund's investment adviser, the Fund's proposal falls within the

prohibition of Rule 12d3 - 1 (c) .

The staff previously has issued letters under Rule

12d3-1 (c) permitting an S & P 500 Index fund to purchase

securities issued by an affiliated person of the fund's

investment adviser or principal underwriter. 2 The staff's

position was based on (1) the fact that the fund's investment

obj ective was to match the performance of the S & P 500 Index,

2

See Kidder Peabody ,Investment Trust (pub. avail. May

14, 1993) i Dreyfus Index Fund, et al. (pub. avail. Mar.

31, 1992) i IBM Mutual Funds, Inc. (pub. avail. May 18,

1990) .

2

which is an un~ffiliated, broad-based stock index representing

500 companiesi and (2) the staff's view that the non-volitional

nature of the index fund's purchases reduced the likelihood that

the selection of the fund's portfolio securities would be made in

the interest of the fund's investment adviser or principal

underwri ter, rather than the fund's shareholders.

Accordingly, we would not recommend that the Commission take

enforcement action under Section 12 (d) (3) or Rule 12d3-1

thereunder if the Fund holds KeyCorp common stock as described in

your letter. This position is based on the facts and

representations in your letter, particularly that:

(1) the Fund's investment objective is to match the

investment performance of the Index, which is an

unaffiliated, broad-based index representing 500 companies i

(2) the Fund will purchase KeyCorp common stock and maintain

its position in KeyCorp common stock only in the approximate

percentage that KeyCorp is represented on the Indexi and

(3) any purchase of KeyCorp common stock will be in

compliance with Rule 12d3 - 1 (a) and (b).

Different facts or representations may require a different

conclusion. This letter expresses the Division's position on

enforcement action only and does not purport to express any legal

conclusions on the issues presented.

Having stated our views with respect to the ability of an

index fund to make certain non-volitional purchases of securities

issued by an affiliated person of the fund's investment adviser,

promoter, or principal underwriter, to replicate the performnce

of an unaffiliated, broad-based index such as the S & P 500

Index, we will no longer respond to requests for no-action relief

in this area unless they present novel or unusual issues.

J. Rubenstein

Counsel

of Chief Counsel

3

Cf. Defined Asset Funds (pub. avail. Aug. 17, 1992)

(declining to take no-action position where fund would

invest 10% of its assets in each of ten stocks) .

3

ROPES & GRAY

(~NE INTERNATIONAL PLACE

1001 PENNSYLVANIA AVENUE, N. W.

SUITE 1200 SOUTH

WASHINGTON, D. C. 20004

~STON, MASSACHUSETTS 02110-2624

17) 951-7000

TELECOPIER: (617) 951-7050

(202) 626 - 3 900

TELECOPIER: (202) 626-396\

30 KENNEOY PLAZA

PROVIOENCE, R. I. 02903

(401) 455-4400

TELECOPIER: (401) 455 -4401

November 29 ~ 1994

ACT

i:4 - L/o

SECTION l ~ ~ I

VIA MESSENGER

Ms. Dorothy Donohue

Associate Director

Securities and Exchange Commission

Division of Investment Management

RULE / !À ­

~~i~~BILITY ~/7If~

450 Fifth Street, N. W.

Washington, D.C. 20549

Re: The Victory Stock Index Fund (formerl v the Society

Stock Index Fund)

Dear Ms. Donohue:

~

On behalf of The Victory Portfolios (formerly The Society

Funds), a Massachusetts business trust (the "Trust"), we would

appreciate your advice that the staff of the Division of

Investment Management (the "Staff") of the Securities and

Exchange Commission (the "Commission") will not recommend any

enforcement action to the Commission under Section 12 (d) (3) of

the Investment Company Act of 1940, as amended (the U1940 Actu)

or Rule 12d3 -1 thereunder, if The Victory Stock Index Fund (the

"Fund") invests in shares of common stock issued by KeyCorp as

,

described below. This letter ana the relief requested is

substantially similar to the letter on behalf of the Dreyfus

Index Fund (pub. avail. March 31, 1992), which received a

favorable response from the Commission.

As more fully explained below, Rule 12d3 - 1 may be

interpreted so as to prevent the Fund, which invests in stocks

represented in an index that includes KeyCorp common stock, from

investing in KeyCorp stock because Society Asset Management, Inc.

("Asset Management"), an indirect wholly-owned subsidiary of

KeyCorp, serves as investment adviser for the Fund or for other

registered investment companies . Given that purchases of KeyCorp

stock by the Fund would be essentially non-volitional as it would

be driven by computer models and not by individual decisions

based on economic or financial analysis, we believe that the

proposed purchases of KeyCorp common stock by the Fund, as

.f

,\

ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 2

described in this letter, are not inconsistent with Section

12 (d) (3) and not contrary to the policies underlying the adoption

of Rule 12d3 - 1.

I . Backqround

A. The Fund

The Society Stock Index Fund is an open-end, diversified,

management investment company, known as an index fund. Its goal

is to provide investment results that match the investment

performance of the Standard & Poor's 500 Composite Stock Price

Index (ns&p 500"). As of February 28, 1994, the Fund had net

assets of $64,572,177.

Asset Management is the investment adviser for the Fund.

Society National Bank, a wholly-owned subsidiary of KeyCorp and

the parent of Asset Management, serves as Custodian for the Fund.

The Fund is in compliance with the requirements of Rule 1 7f-2

under the 1940 Act.

B. Investment Obiectives and Policies of the Fund

The investment obj ecti ve of the Fund is to seek to match the

investment performance of the S&P 500. The Fund will attempt to

duplicate the capital performance and dividend income of the S&P

500 by investing primarily in the stocks which comprise the S&P

500 and secondarily in S&P stock futures, while minimizing

transaction costs. Because the Fund attempts to duplicate the

investment results of the S&P 500, no attempt is made to manage

the Fund in the traditional sense using economic, financial, and

market analysis (except as discussed below in connection with the

selection of substitute stocks to minimize tracking error). The

Fund may hold only a representative portion of the stocks in the

Index due to the illiquidity of some stocks or other factors.

The Fund may compensate for the omission of certain stocks by

purchasing stocks not included on the S&P 500 that are similar to

those omitted if Asset Management believes those purchases will

reduce "tracking error" (the difference between the Fund's

investment results (before expenses) and that of the S&P 500) .

To minimize tracking error when the Fund does not hold all stocks

in the S&P 500 in proportion to their index weighting,

AssetManagement may use statistical analyses in selecting stocks.

For liquidity, or in connection with engaging in futures

transactions, the Fund may hold cash, cash equivalents, and/or

U. S. Government Securities.

\ ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 3

Because of the Fund's investment obj ecti ve, securities may

be purchased, retained, and sold by the Fund when such

transactions would not be consistent with traditional investment

criteria. Adverse performance ordinarily will not result in the

elimination of a stock from the Fund's portfolio. The Fund will

remain fully invested in common stocks even when stock prices are

generally falling. In addition, Asset Management may eliminate

one or more securities or elect not to increase the Fund's

position in such securities notwithstanding the continued listing

of such securities on the S&P 500 in the following circumstances:

(i) the stock is no longer publicly traded, as in the case of a

leveraged buyout or merger; or (ii) an unexpected adverse

development occurs with respect to a company, such as bankruptcy

or insolvency.

The Fund currently does not purchase KeyCorp common stock.

As of March 15, 1994, KeyCorp common stock represented

approximately .235% of the S&P 500 on a percentage basis,

occupying the 111th largest position on the S&P 500.

C. KevCoro and Subsidiaries

KeyCorp is a bank holding company registered under the Bank

Holding Company Act of 1956, as amended, and is headquartered at

127 Public Square, Cleveland, Ohio 44114. As of March 1, 1994,

KeyCorp had an asset base of approximately $57 billion, equity

capital of approximately $4.4 billion, over 1,300 retail banking

offices in 18 states from Maine to Alaska, and investment

management and trust businesses in 16 states. KeyCorp's major

business activities include providing traditional banking and

associated financial services to consumer, business, and

commercial markets. Its non-bank subsidiaries include investment

advisory, securities brokerage, insurance, bank credit card

processing, and mortgage leasing companies. KeyCorp' s common

stock is listed on the New York Stock Exchange. As of March 15,

1994, KeyCorp had a stock market capitalization of approximately

$7.9 billion. At such date, it had approximately 241.6 million

shares of common stock outstanding and approximately 57,346

registered shareholders. 1 Its common stock has been represented

on the S&P 500 since March 1, 1994. Average daily trading volume

for the period ended March 15, 1994, was 250,000 shares.

1 Society Corporation and KeyCorp merged on March 1, 1994.

The number of registered shareholders reflects both Society

Corporation and KeyCorp shareholders prior to the merger date.

\ ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 4

Society National Bank, a national banking association

organized under the laws of the United States, is a wholly-owned

subsidiary of KeyCorp and KeyCorp' s lead bank subsidiary.

Society National Bank serves as the Fund's Sub-Administrator,

Shareholder Servicing Agent, and Custodian.

Key Brokerage Company, Inc., a subsidiary of Key Bank USA

National Association, is a broker-dealer registered with the

Securities and Exchange Commission under Section 15 of the

Securities Exchange Act of 1934, as amended (U1934 ActU) .

Society Investments Inc., a subsidiary of Society National

Bank, is a broker-dealer registered with the Securities and

Exchange Commission under Section 15 of the 1934 Act.

Asset Management, a wholly-owned subsidiary of KeyCorp Asset

Management Holdings, Inc., which in turn is a wholly-owned

subsidiary of Society National Bank, is registered as an

investment adviser with the Commission. Asset Management has

served as the investment adviser and/or subadviser to the Trust

since January 1, 1993. Prior to that date, Society National Bank

served as adviser and subadviser to the Trust (then known as The

Emblem Fund). Asset Management advises and manages over $17

billion in assets, and provides a full range of investment

management services to personal and corporate clients.

D. Prooosed Purchases of KevCoro Common Stock

The Fund desires to purchase shares of KeyCorp common stock

consistent with its policy of investing in stocks represented in

the S&P 500. Purchases and sales of KeyCorp common stock would

be made in accordance with the directions generated by the

computer models utilized by Asset Management to assist in

matching the performance of the segment represented by the S&P

500, and would not be made on the basis of any fundamental or

technical analysis of, or other similar specific information

concerning, KeyCorp. Thus, the Fund would purchase KeyCorp

common stock and would establish and maintain its position in

KeyCorp common stock approximately in proportion to the

percentage KeyCorp common stock represents on the S&P 500. The

Fund would not acquire KeyCorp shares except in a manner

consistent with the following conditions:

i. The Fund would not purchase or sell KeyCorp stock except

in accordance with directions generated by computer models

designed to match the performance of the S&P 500. Such computer

directions would provide that the Fund purchase KeyCorp common

stock and establish and maintain its position in KeyCorp common

\ ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 5

stock only in approximate proportion to the percentage KeyCorp

common stock represents on the S&P 500, any variances being due

to stocks being added to or deleted from the S&P 500 before the

Fund has rebalanced its portfolio in accordance with the new S&P

500 weightings.

2. The Fund would not effect brokerage transactions through

Key Brokerage Company, Inc. or Society Investments Inc.

II. Apolicable Provisions of the 1940 Act and Rules Thereunder

Section 12 (d) (3) of the 1940 Act bars investment by a

registered investment company in a security issued by, among

other entities, an investment adviser of an investment company or

an investment adviser registered under the Investment Advisers

Act, such as Asset Management. Although Section 12 (d) (3) does

not specifically preclude investment in affiliates of these

entities or the acquisition of indirect interests in these

entities, it could be argued that, in many instances,

effectuation of the underlying purposes of Section 12 (d) (3)

requires application of the Section to affiliates and indirect

interests. Due to KeyCorp' s indirect ownership of Asset

Management, investment by the Fund in KeyCorp' s common stock

could be said to result in the acquisition by the Fund of

indirect interests in Asset Management in contravention of

Section 12 (d) (3). Therefore, acquisitions by the Fund of KeyCorp

common stock may be deemed to be prohibited under that Section

absent a rule or order to the contrary.

III. Discussion

Rule 12d3-1 (c), as recently amended, bars investments by a

registered investment company in, among other persons, its

adviser or principal underwriter or an affiliated person of those

entities.2 KeyCorp, through its indirect ownership of all of the

outstanding shares of Asset Management, may be considered an

affiliated person of Asset Management, the investment adviser to

the Fund. Thus, the Fund would be barred from purchasing shares

of KeyCorp common stock.

2 In September, 1993 the Commission adopted amendments to

Rule 12d3-1. See Investment Company Act ReI. No. 19716, 54 SEC

Docket 2190.

..

ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 6

The Commission in its release adopting the recent amendments

to Rule 12d3 - 1, addressed the issue of eliminating or amending

for index funds Rule 12d3-1's prohibition on the purchase of

securi ties of the acquiring fund's investment adviser,

underwriter, promoter or their affiliated persons. 54 SEC Docket

at 2193. The Commission noted that the issue was "worthy of

further examination" but declined to take action in the

rulemaking. Id.

Accordingly, it is our understanding that the Commission did

not intend to change the standards for granting no-action relief

to index funds. We therefore have premised the relief sought in

this letter on two letters granting no-action relief to index

funds, Dreyfus Index Fund (pub. avail. Mar. 31, 1992) and IBM

Mutual Funds (pub. avail. May 18, 1990), which relief was granted

pursuant to the predecessor Rule 12d3 - 1.

Prior to the 1993 amendments, the operation of Rule 12d3­

i (c) barred investments by a registered investment company in,

among other persons, its adviser or principal underwriter or an

affiliated person of those entities which affiliated person

itself was a "securities related business. n

Subparagraph (d) (3) of Rule 12d3-1, which was deleted in the

amendment process, defined a "securities related business" as "a

person who directly or indirectly is a broker, a dealer, engaged

in the business of underwriting, an investment adviser registered

under the Investment Advisers Act of 1940, as amended, or an

investment adviser to a registered investment company."

A company could be "indirectly" a broker or investment

adviser, within the meaning of "securities related business" in

subparagraph (d) (3) of Rule 12d3-1, if it owned even a single

share of the adviser or of a parent company of the adviser. The

effect arguably would have precluded an investment company from

investing in an affiliate of its adviser that directly or through

intermediary companies had any ownership interest in the adviser,

regardless of how much or how little of the affiliates' revenues

were generated from, or its assets were represented by, the

adviser of which it is an affiliate. Thus, the superseded

subparagraph (c) of Rule 12d3-1, arguably precluded the Fund from

investing in KeyCorp common stock since (1) Asset Management may

be considered an affiliated person of KeyCorp because KeyCorp

owns indirectly all of the outstanding shares of Asset

Management; and (2) by virtue of its indirect ownership interest

in Asset Management, KeyCorp would be deemed to be engaged in a

"securities related business."

ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 7

Thus, the interpretations under both the amended and the

superseded subparagraph (c) of Rule 12d3-1 would preclude an

index fund whose investment adviser or principal underwriter is

included in, or is affiliated with a company included in, that

index, from ever achieving its investment objective -- namely,

tracking the performance of a stock index - - since the fund would

have to omit certain securities. However, because of the nonvolitional nature of investment decisions made for the Fund, as

well as the capitalization of KeyCorp and the liquidity of its

common stock, the conflicts of interest that Rule 12d3-1 was

apparently designed to prevent are not present. The Fund

represents that any purchase of KeyCorp common stock made in

reliance upon No-Action relief from Rule 12d3-1 (c) would be in

compliance with the provisions of Rule 12d3-1 (a) and (b).

A. Adverse Imoact on Abilitv to Achieve Investment

Obi ecti ve

In proposing the amendment to the predecessor Rule that

ultimately was superseded by Rule 12d3-1, the Commission stated

that while Section 12 (d) (3) "may have been designed to protect

investment companies from entrepreneurial risks, and from being

managed in the interests of affiliated persons or more generally

in the interests of brokers, dealers, underwriters and investment

advisers, evidence indicates that today the section often

prevents investment companies from making investments that may be

in the best interests of their shareholders. n Investment Co. Act

Release No. 13,725, 29 SEC Docket at 796. Indeed, permitting the

Fund to invest in KeyCorp common stock would benefit the Fund and

its shareholders by facilitating the Fund's achievement of its

investment objective.

B. Absence of Potential Conflicts of Interest

Section 12 (d) (3) has been viewed by the Staff as designed to

curtail interrelationships between investment companies and

brokers, dealers, underwriters, and investment advisers, and as

eliminating, in practice, potential conflicts of interest and

certain reciprocal practices between investment companies and

securities related businesses. 54 SEC Docket at 2191-92.

For example, an investment adviser could advise a fund to

invest in the stock of an affiliate of the adviser, even if such

investments were not in the fund's best interests. Another

example would be a broker-dealer advising customers to invest in

a particular fund because that fund. invested in securities of the

broker-dealer or an affiliate. None of these potential conflicts

of interest could occur in this case given that the Fund is an

),

ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 8

index fund and purchases of KeyCorp stock by the Fund would be

non-volitional.

C. Protection of Investors

In imposing the qualitative conditions contained in Rule

12d3-1 upon an investment company's acquisitions of securities of

issuers engaged in securities related businesses, the Commission,

in its release proposing the amendments to Rule 12d3-1, observed

that, in drafting Section 12 (d) (3), Congress was apparently

concerned with an investment company's maintaining the liquidity

of its portfolio and preventing investment companies from

exposing their assets to the entrepreneurial risks of securities

related businesses. Investment Company Act ReI. No. 19204, 53

SEC Docket 432, 435. "In 1940, securities related businesses,

for the most part, were organized as private partnerships. By

investing in such businesses, investment companies exposed

themselves to potential losses which were not present in other

types of investments; if the business failed, the investment

company as a general partner would be held accountable for the

partnership's liabilities." Id.

The Commission noted that "in light of changes in the

ownership structure of most securities related businesses since

1940, the concern regarding the unusual risks of investment in

such businesses is adequately addressed by prohibiting the

acquisition of general partnership interests. Today, many if not

most securities firms are organized not as general partnerships,

but in corporate form. Aside from general partnership interests,

investments in securities issued by securities related businesses

need not be subject to any special standards not applicable to

investments in other businesses, except to address the potential

for conflicts of interest and reciprocal practices." Id. at 436.

As discussed in Section I. C. above, KeyCorp is a corporation

whose common stock is listed on the New York Stock Exchange and

is actively traded in the United States. As a result, the risks

that prompted enactment of Section 12 (d) (3) are not present.

Accordingly, we believe that the proposed purchases of

KeyCorp common stock by the Fund, under the conditions described

above, are not inconsistent with Section 12 (d) (3) of the 1940 Act

and not contrary to the policies underlying the adoption of Rule

12d3-1 under the 1940 Act. We request the Staff's concurrence

that it will not recommend any enforcement action if the Fund

purchases KeyCorp common stock in accordance with the conditions

enumerated in Section I. D.

.i"

ROPES & GRAY

Ms. Dorothy Donohue

November 29, 1994

Page 9

Should members of the Staff have any questions or comments

regarding this letter, they should contact Alan G. Priest at

(202) 626-3925 or Francoise M. Haan at (202) 626-3913.

cc: Mr. Edward J. Rubenstein

Ms. Karen Haber

Eve C. Brunswick, Esq.

AGP Irme: 7003018