# OF THE OFFICE OF CHIEF COUNSEL

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

RESPONSE
DIVISION

OF THE OFFICE OF CHIEF COUNSEL
OF INVESTMENT MANAGEMENT

[Pub. Avail.: Oct. 8, 1996]
Our Ref No 96-259-CC
Pilgrim America Group Inc
File No 132-3

Your letter of May20 1996 requests 4ur assurance that we
would
to qhe Commission under
not recommend enforcement action
section
15a of the Investment Company Act of 1940 the

Act

if Pilgrim .Ameri4a Group Inc
pledges all of the outtanding voting
securities of its wholly owned subsidiary Pilgrim America
without obtaining approval of new
Investments Inc
contracts by the shareholders of the Pilgrim America
advisory
Group of Funds the

Investment

Company

Pilgrim AmericaTM

PAl

Funds

PAl serves as investment adviser to the Funds
Pilgrim
America and its affiliates have entered into
credit agreement
the Credit Agreement with First Bank Ntional Association
the
under which the Bank will loan funds to Pilgrim
America and its affiliates
for the loan
1/
As co11atexal
the Pledge
Pilgrim America will pursuant to
pledge agreement
Agreement pledge to the Bank all of the outstanding voting
with the Pledge
securities of PAl
You state that in accordance
Agreement the Bank would take possession of the certificates
PAls voting securities in order to perfect the
representing
Banks security interest in those securities You also state
however that Pilgrim America would retain all voting and other
rights with respect to the securities and the Pledge Agreement
would give the Bank no authority to take part in or influence
the management
of PAl or the Funds

Bank

Section 15a
of the Investment
Company Act states that
an investment advisory contract with
registred investment
for its automatic termination
company must provide in substance
in the event of its assignment
Section
of the
Investment
Company Act defines assignment to include
any
direct or indirect transfer or hypothecation
of
contract
or
chose in action by the assignor or of
controlling block of the
assignors outstanding voting securities by
security holder of

2a

The proceeds of the Credit Agreement will be used
other purposes
to finance the distribution of certain
shares of certain open-end Funds
You
2/
America

among
classes

state that the Pledge Agreement provides that Pilgrim
must not exercise or refrain from exercising any voting
rights if such action could reasonably be expected to have
material
adverse effect on the value of PAls securities
See
infra note

of

-2Rule 2a-6 under the Investment
the-assignor
Company Act
safe harbor from the definition of assignment for
provides
that does not result in
change of actual
any transaction
control or management
of the investment adviser to an investment

company
You maintain that Pilgrim Americas pledge of PAls
securities should not be considered
of
hypothecation
within
block of voting securities
the meaning of
controlling
result
in
section
and thus should not
an assignment
You also
triggering the application of section 15
maintain
if
the
is
considered
hypothecation
that even
pledge
of voting
the
is
not
securities
an assignment under rule
pledge
2a-6 because
it will not result
in any change
of actual
control
of PAl
or management
In enacting
the Investment
Company Act
Congress
found that the national public interest and the
specifically
interest of investors are adversely affected
when
control or
is
without
of investment companies
transferred
management
their
Section
was
the
consent of
15a
security holders 3/
intended to prevent such trafficking in investment advisory
contracts
Consistent with the purpose of section 15a
section
includes in the definition of assignment
transfers or hypothecations of
controlling block of the
transactions
that presumably would
assignors voting securities
transfer to another person the ability to control or manage an
investment adviser

2a

To

determine whether

there has been
transfer or
block
of
securities
for purposes
hypothecation
controlling
of section
it is necessary to look to section
of
the Investment
defines
the
control as
Company Act ./ which
ability to exercise
controlling influence over the management
or policies of
company and presumes such control when
person
owns more than 25s of
beneficially
companys voting securities
The definition of assignment in section
does not
include
in
however
fl changes
control but only those involving
the
transfer or hypothecation
of
controlling block of voting
of

2a

2a

2a

Section
./
declaration

1b
of

of

the

Investment

Company Act

findings

and

policy

3580 before
of the Senate Comm on
Hearings
on
Subcornm
and
76th
3d
Sess
253
Banking
1940 statement
Currency
Cong
of David
Schenker
4/

See

See Dean Witter
also Wiliheim

cert

denied

382

Discover

Co

pub avail Feb

Murchison

342

F.2d

U.S

840

1965

33

37-39

2d

1993

Cir

-3securities

in determining
The relevant inquiry then
6/
is
there has been such
transfer or hypothecation
the
result of the
transferee or pledgee has as
sufficient voting
interest to enable
transaction assumed
or
person to exercise the ability to direct the management
policies of the adviser 1/

whether
whether

In

the

transactiondescribed

letter

in your

the

pledge

the

of

PAls securities is not accompanied by the right to vote those
shares 8/
transfer of voting
In the absence of
rights
pledge of securities ordinarily cannot be
within the meaning of section
assignment

considered

2a

an

Based on the facts
and representations in your letter
particularly your representations that Pilgrim America would
retain all voting and other rights with respect to the
securities and that the Pledge Agreement would give the Bank no
of PAl or
the management
authority to take part in or influence
the
Funds we would not recommend that the Commission take any
enforcement
action under section 15a if Pilgrim America pledges

Wiliheim

Murchison

342

F.2d at

40

This analysis is consistent with the legislative history of
the transfer or
the Investment
Company Act because without
of such
hypothecation
voting interest the abuses Congress
cannot occur
sought to prevent through section 15a
that the provision of the Pledge Agreement
right
Pilgrim America must not exercise any voting
manner as to have
material adverse effect on the
PAls voting securities will not limit significantly
Pilgrim Americas voting rights because it generally will be in
Pilgrim Americas best interests not to take any actions that
You also
would
adversely affect the value of PAls securities
state that although under the Pledge Agreement the Bank has the
default to cause the
right at any time even in the absence of
certificates
PAls voting securities to be
representing
transferred
of record into the name of the Bank or its nominee
this would not affect any of the rights retained by Pilgrim
America with respect to those securities
../

You

assert

providi.ig
in such
value
of

that

the Bank would have
the
In the
event of
default however
right under the Pledge Agreement to sell the securities of PAT
that the Bank holds as collateral
and could exercise all voting
The default would result
rights with respect to the securities
therefore in an assignment of PAls investment advisory
contracts
within the meaning of section
9/

-4PAI..s
securities without obtaining shareholder approval
You should note that different facts or representations might
different conclusion
require

Aot JaM
Sarah

WagntÆn

Attorney

10/

See

Management

Funds

Inc

Corporation

pub avail Aug 12
pub avail Sept

Because
we do not consider the pledge
within the meaning of section
assignment
it necessary
to analyze your request under

1976 Wall
1974
to

Street

constitute
we

rule

2a-6

do

an
not

find

LAW OFFICES
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75008

2a4 and 15a

Sections
of the

Investment

Company Act

1940 and Rule

May 20
Jack

Associate

Murphy

of

2a-6 thereunder

1996

Director and

Chief Counsel
Division

of

450

Investment

and Exchange

Securities

D.C

Re
Dear

Management
Commission

N.W

Fifth Street

Washington

20549

Advisory Contracts

of Investment

Assignment

Mr Murphy
On behalf

Investments

America

Inc

Group

of

America

Pilgrim

Investment

the
Funds the

of

Group

Manager

Inc

Pilgrim

and the

America

investment

Pilgrim

companies

in

America

the

Funds we are writing to seek assurance that the

Pilgrim
staff

of

The open-end
Funds currently consist of Pilgrim America MagnaCap Fund Pilgrim
America High Yield Fund Pilgrim Government Securities Income Fund Inc Pilgrim
America Masters Asia-Pacific Equity Fund Pilgrim America Masters MidCap Value

Fund

and

as the

Open-End

Pilgrim

MagnaCap
Pilgrim

Value

SOIffl-f

728-7100

AVENUE

65

NORTH THIJW SflEEf

HARRISBURG
717

SQUARE

HARTFORD Cr 06103-3702
860 524-3999

215 994-4000
il-IIRTY

OFFICE

BOSTON MA 02109-4603

326-3500

Fund

America Masters

Funds
are

each

America Masters

Fund

and

Pilgrim

LargeCap Value Fund collectively referred to
Pilgrim America High Yield Fund and Pilgrim America

series

of

Asia-Pacific

Pilgrim

Equity

America Masters

America

Investment

Funds

Inc and

Fund Pilgrim America Masters MidCap

LargeCap Value

Fund

are

each

series

of

continued..

Jack

Murphy Esq

May 20

1996

Page2
the

of Investment

Division

Commission under Section
if

in

America pledges

Pilgrim

connection

National
Credit

in

credit

enforcement

action

to the

15a of the Investment Company Act of 1940 the 1940 Act
of the

all

securities

outstanding voting

agreement and

certain

of the Investment

agreements between

related

Manager
Bank

First

the Bank and Pilgrim America dated as of April 28 1995 the
Agreement The proieeds of the Credit Agreement will be used among other
Association

to

finance

the

distribution

of

certain

the

Pilgrim

America Group

of

Funds the

purposes
funds

with

not recommend

would

Management

classes

of

shares

each

of

of

the

open-end

organized

as

Delaware

Funds

Open-End

Introduction

America

Pilgrim

and

corporations

investment

Investment

the

The Investment

Manager

Manager

are

as investment

serves

each

of the Funds

to each

manager

the Investment

Management
The Investment Management Agreements for Pilgrim America MagnaCap
Agreements
Fund Pilgrim America High Yield Fund and Pilgrim Government Securities Income Fund
to

pursuant

management

agreements

Inc

the Elite Series were approved
by shareholders of each of the Elite Series funds at
held
1995
The
Investment
on April
meetings
Management
Agreement for Pilgrim
America Masters
and

Pilgrim

Asia-Pacific

th Masters

of

America Masters MidCap Value Fund
Fund the Masters Series was approved

Pilgrim

LargeCap Value

sole shareholder of each

by the

Fund

Equity

America Masters

funds by written

Series

on June

consent

27

1995

The Investment
turn

owned

the

company

services

business

Investment
of

the

America

of

Pilgrim

Distributor
Pilgrim

Group

Management

of

of which

Through

primarily

Manager
close

wholly owned

is

subsidiary

shares

Express America

as

Manager

wholly owned

is

began

the

management

serving

America

the

Investment

Distributor

to

Inc

affiliates

Corporation

1995

the

and distribution

the

subsidiary

in

Manager
and

Corporation

of investment

with

Funds of certain

Acquisition

of Pilgrim

the

Pilgrim

Prior

publicly

the

in

in

System
financial

companies

The

of the Elite Series

funds

acquisition

America

of the
to

which

National Market

for each

connection

Manager

Open-End

NASDAQ

America

Express America engages

as Investment

on April

its

traded on the

subsidiaries

its

business

and

Express

are

of Pilgrim

subsidiary

America Holdings

Securities

Inc

of the

former

Acquisition

Pilgrim

as investment

adviser

assets

the

Group Inc served

by Express

...continued

America Masters

Pilgrim
Pilgrim

Series Inc

America Group of Funds are
Bank and Thrift Fund Inc

America

Funds

The

closed-end

investment

companies in the
Pilgrim America Prime Rate Trust and Pilgrim
collectively

referred

to

as

the

Closed-End

Jack

Murphy Esq
20

May

1996

Page3
Funds

to the

not

each

and

6c-10

Fund has implemented

Bank whereby the Bank
sale of certain

the

America

Pilgrim

Investment

and

Management

no-action

and

the

the

that

purpose

to cause

default

nominee

although

the

would

not

Pilgrim

Manager

respect
refrain

from exercising

any voting

adverse

on the

Under
offered
sold

the

subject

front-end

In

that

security

Open-end

Class
to

the

agreement

this

right at

Pilgrim

15a

Section

this

voting

would

to the

Bank

for the

for purposes

of the

any

time

even in the absence
name of the Bank

voting

could

reasonably

systems

America

must

three

sales charge

and Class

also

not

have

to
with

or

to have
material

shares are

of

shares are

Class
shares

on Class

or

rights

or any

classes

of

exercise

be expected

securities

Manager

imposed

respect

other consensual

America

that

with

rights

but Pilgrim

front-end

and

by

with

securities

all

pricing

than

Agreements
Board of

the

securities

and

multi-class

less

the

under

the

Pilgrim Americas

sold

is

of

America would submit

of

action

with

Manager

Management

of the

of record into the

Investment

of the

America

securities

an assignment

Agreements

Manager

deferred sales charge

that

Bank

if

rights

are

any

retain

securities

value

contingent

sales charge

regard

will

Funds

shares

affect

agreement

Bank would merely hold the
loan
Pilgrim America

interest in
the

lending

for the

to be transferred

Investment

effect

the

collateral

has

the

issue

this

security

the

the Investment

that Pilgrim

the

of the Credit
of

pledge

accordance

the

financing

terms for Pilgrim

Investment

Management
Fund in

Investment

the

The Bank

to

material

as

Banks

America

securities

the

Pledge Agreement

certificates

compliance

pledge of all of the

to

pursuant

Funds and

the

views on

staffs

the

this

regarding

structure

each

of

Manager

Uniform Commercial Code.3
the

negotiation

the

might be deemed

this

between

Investment

representing

of perfecting

the

has not yet pledged

Pilgrim America agreed

Investment

certificates

Agreement with

favorable

most

Bank

of the

shareholders

terms of the

the

of the

Credit

the

During

Manager

the

provide

of concern

new

Bank and

the

Under

these

options

Investment

the

Agreements

request seeking

securities

its

various

consent

of

approval

require

Consequently

sole

the

into

entered

2a4 An assignment would terminate

Directors/Trustees

deliver

of

because

Manager

Investment
Section

with

system

among other things that Pilgrim Americas

would

Agreement

Pledge

have

Funds shares

Open-End

securities

voting

in

pricing

funds to be used for among other purposes

considered

and concluded

arrangements
outstanding

parties

multiple-class

1940 Act.2

the

affiliates

its

lend

will

classes of the

the

Agreement

under

18f-3

America and

Pilgrim

are

Corporation

other

Each Open-End
with Rules

and Pilgrim Management

Inc

America Investments

Pilgrim
with

affiliated

are

sold

with

shares

entered

into

related

Jack

Murphy Esq

May 20

1996

Page4
The Pledge Agreement

thereof

part

solely to protect

does

Agreement

interest in the

its

not

Investment

Manager

Managers

voting

to exercise

any other

In the

and

therefore

securities

event

Bank

the

grant

influence

of

authority

of the

Funds

to take

of default and does

the

the

certain

are

The Pledge
of the

management

Investment

the

in

rights

not grant

Bank any

the

of the Investment

or control

Bank would have

Bank

securities

in

part

no voting

confers

over the management

default

conferred on the

Manager

any

absence

the

in

the powers

states that

collateral

rights as specified

right

Manager
Credit

the

in

Agreement and the Pledge Agreement including the right to sell the Investment Manager
seurities
and to exercise all voting rights with respect to these securities
Our request for
no-action
default
of title

relief

Investment

Investment

Manager

securities

Act and

in

the

event

any

from

particular

Funds

or interpretive

However

the

promulgated

staff

of the

Commissions

multiple

class pricing

the

to issue guidance

recent

adoption
it

structures
with

below we believe

its

no-response

policy

of

Rules

and

would

c-1O

that

no longer
of Rule 2a-6

will

it

this

and

the

be extremely useful to the mutual

is

not the
that

in

type
light

proliferation

of

fund industry

for

issue

to this specific

respect

securities

We also believe

18f-3

the

Bank

Managers

regarding the application

requests

as discussed

1940

the

received

Presumably

of policy

matter

as

that

position

Fund

the

Investment

of shareholders of the

be deemed

2a4 of

each

unless

upon

rights

by the Bank

would

presumably

Agreements
Board and shareholders

its

its

or retention

Agreements under Section

to the

no-action

transaction

default

respect

its

exercises

securities

these

with

rights

announced

has

staff

of issue for which

staff

terminate

voting

prior approval

to routine

respond

would

after

Bank

the

Manager

Management

of this assignment

exercise

The

to

this

approval

would not

Investment

of the

which

prior to

period

sale of the

to the

without

the

to

In addition any

an assignment

prior

limited

is

Discussion

15a sets

Section

contract

advisory

investment
event

advisory

of its

assignment

of the

assignors

Pilgrim

Manager
the

registered

contract

could

is

contract

for

defined

in

Section

in

action

securities

by

its

in

automatic

2a4
by the

every investment

15a4 states that an

Section

company

substance

in

or chose

outstanding voting

Manager

Nevertheless

we believe

for purposes

of Section

in

investment

must be included

as

termination in the

any direct or indirect

assignor or of

controlling

holder of the

assignor

security

Americas pledge of all of the outstanding voting securities of the Investment
be deemed
of
block of the voting
securities of
hypothecation
controlling

Investment

not result

of

that

provisions

must provide

Assignment

or hypothecation

transfer

block

with

forth certain

any

change

and
that

thus

the

could

proposed

15a4 Since
of actual

result

in

an assignment

transaction

should

pledging the stock

control

or

management

under

Section

15a4

not be deemed an assignment

of the
of the

Investment
Investment

Manager

would

Manager

this

Jack

Murphy Esq

May 20

1996

Page5
pledge

would fall

Finally

the

proposed

Rule 2a-6 provides
of actual

control

not an assignment
time

certain

such

2a-6

not

investment

to

staff

engage
indicates

control

of corporate

statement

the

the

Pledge

block

within

investment

in

company

recognition

of voting

in

engage

which

--

of the adviser.4

management

the

structure

in

could

company

controlling

an assignment

as

in

the

may be

securities

Rule

Absent

the

meaning

advisory

contract

2a-6

of Section
with

the

that

the

Manager

Manager

as

controlling

the

the

structure

could

adviser
structure

--

Rule be Jimited solely to modifications

the

would

Rule

Rule

the

in

adcpting

constitute

was designed

to

release

that

an assignment

would be read

the

is

influence

not

to

include

this

encompass

more

terms

in

change

of actual

control

Under

would

merely

hold

voting

securities

result

Bank

for the
defined

loan and would
in

over the

Section

the

not have

2a9 of

management

the

Company Act Rel No

10809

Aug

1979

Re No

11005

Jan

1980

Company Act

of

of

company

proposing Rule

at

the

the

any control over the
1940 Act as the power

or policies

Id
Investment

would

structure

collateral

Control

investment

Commissions statement

the

demonstrating that

pledge would

Agreement

of corporate

of corporate

modifications

particularly
intend

an

that

and therefore

Manager

modifications

release

would not result in any

Rule 2a-6 primarily was intended

Although

addressed

that

securities

InvestmenL

of the

proposing
--

Moreover

further

the

Investment

pledge of the voting

management

of corporate

Investment
exercise

2a-6 was adopted

corporate

receiver

Investment

to

or

control
to
or management
Commission was concerned
that

modifications

the

or

proposed

Commission did not

actual

that

Further
of

control

automatically

transactions

type of transaction
than

of

positions

structure

transferring
indicates

indirect transfer

safe harbor of Rule

the

certain

that

the

no-action

Commissions
in

of

might be viewed

that

squarely within
codify

modifications

actual

to an investment

adviser

Rule

to an investment

adviser

not result

company.5

actual

in

the

terminating

We believe
fall

direct or
affect

15a4

of Section

particularly

transaction

2a4 thereby

change

--

to involve

would

but which

Of

For Purposes

does

that

transaction

investment

of the

or management

that

things

time an investment

transactions

considered

other

among

for purposes

to

An Assignment

15a4

Section

that

15a

Section

that

concerns

policy

Not Be Deemed

of Stock Should

The Pledge

is

of the

not raise any

would

pledge

Act

1940

the

by Rule 2a-6 under

provided

to address

was designed

change

the safe harbor

within

squarely

The

2a-6

Murphy Esq

Jack

1996

20

May
Page6

most important aspect of determining corporate control is the ability to elect
Since the Bank will have no voting rights with respect to the Investment
Manager
to

prior

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Jack

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May 20

1996

Page7

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Jack

Murphy Esq

May 20

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Page8
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Jack

Murphy Esq

May 20

1996

Page9
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Jack

Murphy Esq

May 20

1996

Page

10

want

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pub

pub avail

18 1985

and Heine

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useful

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of

financing

pub avail

Jan

avail

pledge

with the

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Jan 21 1986

Securities

6c-1O and

connection

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2a-6.18

would be extremely

as to whether

Templeton
Benzak Salomon
March

corollary

issue presented

Capital

avail

no-action

of

Management
Counsel
Ltd pub

1987

the

whether

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of course

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as

of

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determination

issued

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in

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not

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set

are

understandably

ascertain

has occurred

context

of

guess the significance

reorganizations.4

corporate

management

to address

difficult

of having to second

position

June

1986

Spears

Scudder Stevens

Clark

Corporation

22

pub avail Feb 25

1985
15

16

18

Nikko

Jnternational

Advisers Act Rel

Investment

Advisers Act

Rel

No 1034 Sep

We note that the staff has issued several
non-response

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24

1995

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202a1-1

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area since

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Co

Discover

Witter

1993

Company Act Rel Nos
Collectively
multiple

individual

1987

June

avail

1986

Mutual Benefit

policy

pub avail Feb
19

No 1013 Feb 20 1986

Investment

its

Company pub

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class

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20915

Rules

pricing
relief

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permit

systems

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open-end

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companies

to

company

to

Jack

Murphy Esq

May 20

1996

11

Page

distribution

multiple

class

Sections

15a4

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obvious

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used

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to date

Conclusion

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issue

review

outstanding voting

described

above

in

Division

of

is

and

Investment

Commission under

to the

securities

connection

accordance

copies

with Securities

of this no-action

Anderberg

at

No 6269 Dec

Please contact

request

202

Rel

Act

626-3384

if

you have

the

with

any

James
Pilgrim

Thomas
Dorsey

Hennessy Esq
America Investments
Kelly

III

Whitney

Esq

Inc

1980

undersigned
questions

matter

cc

language

and does not

positions

to address

potentially

that

assurance

recommend

America pledges
the

designed

is

within

squarely

of

the

Section

Investment

entering

into

the

we have

enclosed

Agreement
In

seven

would

falls

staff

we

Therefore
Management

Section

relief

requested

with the

generally

concerns

the

Sincerely

yours

Jeffrey

Puretz

at
or

202 626-3358
comments

on

or
this

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A81fb36a767c7b4f2. Public record. Not legal advice.