Investment Company Act of 1940
Section 17(a) and Rules 17a-7 and 17a-8
GuideStone Financial, et al.

December 27, 2006

Your letter dated December 27, 2006 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") against GuideStone Financial Resources of the Southern Baptist Convention ("GuideStone Financial"), GuideStone Capital Management ("GuideStone Management"), and the Real Estate Securities Fund and the Global Bond Fund (collectively, the "Unregistered Funds) under section 17(a)(1) of the Investment Company Act of 1940 (the "1940 Act") if, under the circumstances described below and without obtaining an order from the Commission under the 1940 Act, the Unregistered Funds sell portfolio securities to affiliated, newly created series of the Guidestone Funds (the "Trust") in exchange for shares of the newly created series (the "New Series").

Facts

You state the following: GuideStone Financial is a non-profit, non-stock corporation whose sole member is the Southern Baptist Convention. GuideStone Financial sponsors, maintains and/or administers various employee benefit plans for employees of churches and organizations controlled by, or associated with the Southern Baptist Convention. GuideStone Financial invests most of the employee benefit plan assets in series of the Trust, a registered open-end investment company, managed by GuideStone Management (a controlled affiliate of GuideStone Financial).¹ GuideStone Financial also invests some of the employee benefit plan assets in certain investment pools, including the Unregistered Funds, that are exempt from registration as investment companies pursuant to section 3(c)(14) of the 1940 Act.² The Unregistered Funds are managed by one or more sub-advisers who are responsible for the selection of the securities in which the Unregistered Funds invest and are otherwise unaffiliated with the Unregistered Funds, GuideStone Financial or GuideStone Management.

GuideStone Financial intends to engage in transactions by which all of the assets of each Unregistered Fund will be transferred to a corresponding New Series in exchange for shares of a New Series, whereupon the Unregistered Fund will distribute the shares of the corresponding New Series pro rata to its holders and terminate (a "Transaction"). You explain that each Transaction essentially entails a merger (as defined in rule 17a-8 under the 1940 Act) of an Unregistered Fund with a corresponding New Series whereby the New Series will be the surviving company.

Each New Series has the same investment objectives, investment policies and portfolio managers as its corresponding Unregistered Fund. GuideStone Financial believes that the plan participants would best be served through the use of the New Series, which will offer plan participants the added protections of the 1940 Act. The Transactions would allow the Unregistered Funds to sell portfolio securities to the New Series in exchange for shares of the New Series without the need to incur the costs of liquidating and reducing those investments to cash in order to purchase New Series shares.³

You represent that the Transactions will be effected consistent with the following representations (the "Representations"):

1. The Transactions will comply with the terms of paragraphs (b),⁴ (c), (d), (e), (f) and (g) of rule 17a-7 under the 1940 Act and the provisions of rule 17a-8 under the 1940 Act (as these provisions apply to a merger between an unregistered fund that is eligible to rely on the rule and a registered investment company);⁵
    
2. The in-kind consideration accepted by each New Series will consist of securities that are appropriate, in type and amount, for investment by the New Series in light of its respective investment objectives and policies;⁶
    
3. The Unregistered Funds and the New Series have the same procedures for determining their net asset values and will follow those procedures in determining the amount of shares.⁷ The board of trustees of the Trust (the "Board") approved the procedures for the New Series. The approved procedures also include the preparation of a report by an independent evaluator to be considered by the Board in assessing the value of any securities (or other assets) for which market quotations are not readily available, that sets forth the fair value of each such asset as of the date of the transaction. The independent evaluator would be a person who has expertise in the valuation of securities and other financial assets and who is not an interested person, as defined in section 2(a)(19) of the 1940 Act, of the Unregistered Funds or any affiliated person of the Unregistered Funds (other than the New Series);
    
4. The redemptions from the Unregistered Fund will be effected simultaneously with the purchases by each corresponding New Series;
    
5. The New Series will effect the Transactions pursuant to procedures adopted by the Board, including a majority of those trustees who are not "interested persons" of the Trust within the meaning of section 2(a)(19) of the 1940 Act ("Independent Trustees"), that are reasonably designed to provide that the Transactions are conducted in a manner consistent with (2) through (4) above;
    
6. The Trust will maintain and preserve for a period of not less than six years from the end of the fiscal year in which the Transactions occurred, the first two years in an easily accessible place, a copy of its in-kind purchase procedures, as well as other records for the in-kind purchase setting forth a description of the composition of each Unregistered Fund's investment portfolio (including each asset's value) immediately prior to the in-kind purchase, a description of each portfolio security delivered in connection with the in-kind purchase, the terms of the in-kind purchases, the information or materials upon which the asset valuations were made, and a description of the composition of each New Series's investment portfolio (including each asset's value) one month after the in-kind purchase;
    
7. GuideStone Management will, consistent with its fiduciary duties, disclose to the Independent Trustees the existence of, and all of the material facts relating to, any conflicts of interest between GuideStone Management and the New Series with regard to the Transactions to facilitate the ability of the Independent Trustees to evaluate and approve the Transactions; and
    
8. GuideStone Management will bear the costs associated with the Transactions.

Analysis

Section 17(a)(1) of the 1940 Act, in relevant part, prohibits any affiliated person of a registered investment company (a "first-tier affiliate"), or any affiliated person of such person (a "second-tier affiliate"), acting as principal, from knowingly selling any security or other property to the registered investment company.⁸ Section 17(a) was designed to prevent self-dealing and other forms of overreaching of a registered investment company by its affiliates.⁹ In particular, the section protects investors by prohibiting "a purchase or sale transaction when a party to the transaction has both the ability and the pecuniary incentive to influence the actions of the investment company."¹⁰

Section 17(a)(1) may be interpreted to prohibit the Transactions because the Unregistered Funds would act as principals in the Transactions, and because the Unregistered Funds and the New Series may be deemed to be affiliates of each other.¹¹ The Transactions raise the concerns underlying section 17(a)(1) of the 1940 Act because GuideStone Financial and its affiliates may use their influence to cause the New Series to accept unwanted portfolio securities, and to issue its shares to the Unregistered Fund in exchange for consideration (i.e., portfolio securities) that is of lesser value than the shares issued.¹²

You state that the Unregistered Funds cannot rely on rule 17a-8 under the 1940 Act, which exempts mergers between registered investment companies, and between registered investment companies and certain affiliated entities (namely, bank common and collective trust funds and insurance company separate accounts, collectively the "Specified Entities"). You acknowledge that the Unregistered Funds are not Specified Entities. The Commission has addressed on a case-by-case basis through the exemptive process the mergers of registered investment companies with non-Specified Entities, and has imposed conditions to those mergers that address the possibility of overreaching by the non-Specified Entities.¹³ Those conditions require compliance with all of the requirements of rule 17a-8 under the 1940 Act (other than with respect to Specified Entities). In addition, the conditions require compliance with the requirements of rule 17a-7 under the 1940 Act (except for rule 17a-7(a)'s requirement that the merger be for cash payment).¹⁴

You contend that the Transactions would not raise the concerns underlying the prohibitions of section 17(a) of the 1940 Act if they are conducted pursuant to the Representations because they are consistent with the conditions in the orders and address the concerns underlying section 17(a). For instance, the Representations require scrutiny of the in-kind consideration to ensure that it is appropriate, in type and amount, for investment by each New Series in light of its investment objectives and policies. In addition, the Unregistered Funds and New Series would comply with all of the conditions of rule 17a-8 under the 1940 Act which, among other things, require an independent evaluator to value the assets to be transferred for which market quotations are not readily available.

On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against GuideStone Financial, GuideStone Management or the Unregistered Funds under section 17(a)(1) of the 1940 Act if the Unregistered Funds sell portfolio securities to the New Series without obtaining an order from the Commission under the 1940 Act in the manner described in your letter. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion. Specifically, our position is limited to mergers of a non-Specified Entity and a newly created registered investment company without shareholders, other than the investment adviser or its affiliates.¹⁵

Endnotes

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¹ You state that the trustees of the Trust ("Trustees") shall refuse any investment in a series if, after such investment, GuideStone Financial would not hold with authority to vote, or indirectly control the vote of, at least 60% of any series' shares.

² Section 3(c)(14) of the 1940 Act excepts certain church plans from the definition of investment company.

³ You represent that the Transactions will not result in a taxable event for investors in the Unregistered Funds or for investors in the New Series.

⁴ You note that the staff has provided no-action assurances with respect to the pricing requirements of rule 17a-7(b) under the 1940 Act. See, e.g., Federated Municipal Funds (pub. avail. Nov. 20, 2006) ("Federated") and United Municipal Bond Fund (pub. avail. July 30, 1992 and Jan. 27, 1995). You represent that certain assets of an Unregistered Fund may be transferred to the corresponding New Series, pursuant to the Transaction, consistent with the representations in those prior positions.

⁵ In addition, you represent that GuideStone Management has determined that participation in the Transactions would be in the best interests of the Unregistered Funds. See generally Federated (addressing, among other things, the duty of loyalty as it applies in connection with transactions between two clients of an investment adviser effected in reliance on rule 17a-7 under the 1940 Act).

⁶ You represent that all of the portfolio securities being sold to the New Series by the Unregistered Funds are consistent with this Representation.

⁷ You represent that the values determined by each Unregistered Fund for the portfolio securities that comprise the in-kind consideration will be the same as the values used by the New Series in determining the amount of shares issued to the corresponding Unregistered Fund because each Unregistered Fund and corresponding New Series uses the same procedures to value their portfolio securities. You represent that, therefore, the Unregistered Funds will effect their part of the Transactions consistent with the requirements of rule 22c-1 under the 1940 Act although they are not subject to that rule.

⁸ See section 2(a)(3) of the 1940 Act defining "affiliated person" of another person. First- and second-tier affiliates are referred to collectively as "affiliates."

⁹ See Investment Company Mergers, Investment Company Act Release No. 25259 (Nov. 8, 2001).

¹⁰ See Mergers and Consolidations Involving Registered Investment Companies, Investment Company Act Release No. 10886 (Oct. 2, 1979), citing Hearings on S.3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong. 3d Sess., at 256-259 (1940).

¹¹ You indicate that the Unregistered Funds and the New Series may be deemed to be first-tier affiliates of each other pursuant to section 2(a)(3)(C) of the 1940 Act because they may be deemed to be under the common control of GuideStone Financial.

¹² See, e.g., Exemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and Certain Affiliated Persons Thereof, Investment Company Act Release No. 11136 (Apr. 21, 1980) at n.11 and accompanying text.

¹³ See MMA Praxis Mutual Funds, Investment Company Act Rel. Nos. 26472 (June 23, 2004) (notice) and 26500 (July 20, 2004) (order); PBHG Funds, Investment Company Act Rel. Nos. 26092 (July 1, 2003) (notice) and 26148 (Aug. 12, 2003) (order); Stratigos Fund, Investment Company Act Rel. Nos. 25839 (Dec. 2, 2002) (notice) and 25879 (Dec. 20, 2003) (order). In those orders, the Commission granted exemptive relief pursuant to section 17(b) of the 1940 Act to certain entities that were relying on the exclusions from the definition of investment company in sections 3(c)(1), 3(c)(7) and 3(c)(11) of the 1940 Act to allow them to transfer all or substantially all of their assets in exchange for shares of newly created registered open-end investment companies. You contend that similar relief should be available for other entities that are excepted from the definition of investment company by other provisions of the 1940 Act, including, as relevant here, section 3(c)(14) of the 1940 Act. We agree.

¹⁴ Rule 17a-7 provides conditional relief from the prohibitions of section 17(a) of the 1940 Act. Paragraph (a) of rule 17a-7 provides that a transaction occurring in reliance on the rule must be "a purchase or sale, for no consideration other than cash payment against prompt delivery of a security for which market quotations are readily available." You acknowledge that the Unregistered Funds cannot conduct the Transactions in reliance on rule 17a-7 under the 1940 Act because the Transactions will not entail "cash payment against prompt delivery of a security for which market quotations are readily available" (as required by rule 17a-7(a)), but rather will entail the payment of in-kind consideration for fund shares. See generally Investment Company Act Rel. No. 25666 (July 18, 2002) (the "2002 Release") at fn 31. In the 2002 Release, the Commission indicated that funds should not rely on certain prior staff no-action positions ("No-Action Positions") under section 17(a) of the 1940 Act and rule 17a-7 thereunder with respect to the merger of a registered investment company with an unregistered investment company in a transaction involving non-cash consideration. We note that the Representations provide greater protection from the abuses that section 17(a) of the 1940 Act was designed to address than the representations in the No-Action Positions (e.g., the Representations require compliance with rule 17a-8 under the 1940 Act, including the use of an independent evaluator to assist in assessing the value of any assets to be transferred for which market quotations are not available).

Our position in this letter is not limited to Non-Specified Entities that, like the Unregistered Funds, are not registered with the Commission as investment companies in reliance on the exclusion from the definition of investment company in section 3(c)(14) of the 1940 Act.

¹⁵ Our position in this letter is not limited to Non-Specified Entities that, like the Unregistered Funds, are not registered with the Commission as investment companies in reliance on the exclusion from the definition of investment company in section 3(c)(14) of the 1940 Act.

We note that, in the context of amendments to rule 17a-8 under the 1940 Act, the Commission stated that mergers between registered investment companies and affiliated entities that are not Specified Entities must either comply with rule 17a-7 or rule 17a-8 or the parties must seek exemptive relief. See the 2002 Release at fn. 31 and accompanying text. The Unregistered Funds, the New Series, GuideStone Financial and GuideStone Management, however, represent that they generally will comply with the requirements of both rule 17a-7 and 17a-8 under the 1940 Act, except as explained above, and will also comply with the Representations which enhance the requirements of the rules. See Representations 2, 3, 6, 7, and 8. In addition, you note that the Unregistered Funds propose to transfer assets into newly created investment companies that do not have any other shareholders. Thus, the potential for overreaching the shareholders of a registered investment company (i.e., the New Series) is significantly diminished.

Incoming Letter

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/2006/guidestone122706-17a.htm