Securities and Exchange Commission (“SEC” or “Commission”).
Notice of an application for an order under sections 6(c) and 17(b) of the Investment Company Act of 1940 (“Act”) for an exemption from section 17(a) of the Act, under section 6(c) for an exemption from section 17(e) of the Act and rule 17e-1 under the Act, and under section 10(f) of the Act for an exemption from section 10(f).)
SUMMARY OF THE APPLICATION:
Applicants request an order to permit certain registered open-end management investment companies advised by several investment advisers to engage in principal and brokerage transactions with a broker-dealer affiliated with one of the investment advisers and to purchase securities in offerings underwritten by a principal underwriter of which one of the investment advisers is an affiliated person. The transactions would be between a broker-dealer or principal underwriter and a portion of the investment company's portfolio not advised by the adviser affiliated with the broker-dealer or principal underwriter. Applicants also request relief to permit a portion of the portfolio to purchase securities in offerings underwritten by a principal underwriter of which the investment adviser to that portion is affiliated if the purchase is in accordance with all of the conditions to rule 10f-3 under the Act, except for the provision that would require aggregation of certain purchases.
Frank Russell Investment Company (“FRIC”), Russell Insurance Funds (“RIF”), and Frank Russell Investment Management Company (“Adviser”).
the application was filed on August 24, 1999, and amended on December 1, 1999, and December 14, 2000.
HEARING OR NOTIFICATION OF HEARING:
An order granting the application will be Start Printed Page 2032issued unless the SEC orders a hearing. Interested persons may request a hearing by writing to the SEC's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the SEC by 5:30 p.m. on January 29, 2001, and should be accompanied by proof of service on applicants in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the SEC's Secretary.
Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-0609. Applicants, 909 A Street, Tacoma, WA 98402.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Bruce R. MacNeil, Senior Counsel, at (202) 942-0634, or Michael W. Mundt, Branch Chief, at (202) 942-0564 (Office of Investment Company Regulation, Division of Investment Management).End Further Info End Preamble Start Supplemental Information
The following is a summary of the application. The complete application may be obtained for a fee at the SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 (telephone (202) 942-8090).
1. FRIC is a Massachusetts business trust registered under the Act as an open-end management investment company with twenty-nine series. RIF is a Massachusetts business trust registered under the Act as an open-end management investment company with five series (each series of FRIC and RIF, a “Fund”). Shares of RIF's Funds are offered for sale only to insurance companies and to their separate accounts to fund variable insurance products.
2. The Adviser is registered under the Investment Advisers Act of 1940 (“Advisers Act”) and is a subsidiary of Frank Russell Corporation. The Adviser serves as investment adviser to each fund. The majority of the Funds are divided into two or more portions (each a “Segment”), and the assets of each Segment are invested pursuant to a particular investment style. The Adviser selects and monitors for each Segment a sub-adviser (“Money Manager”) that is registered under the Advisers act or is exempt from registration. None of the Money Managers (except by virtue of serving as Money Manager to a Segment) has any affiliation with the Funds, the Adviser, or any person that serves as promoter or principal underwriter to the Funds. Each Money Manager has complete discretion, within a Fund's objectives, policies and restrictions, over the management of its Segment and makes all decisions regarding the purchase and sale of securities for its Segment. The Adviser pays each Money Manager a fee out of the advisory fee received by the Adviser from the Fund.
(3). Applicants request relief to permit: (i) A broker-dealer registered under the Securities Exchange Act of 1934 that serves as a Money Manager or is an affiliated person of a Money Manager (the broker-dealer, an “Affiliated Broker-Dealer”; the Money Manager, an “Affiliated Money Manager”) to engage in principal transactions with a Segment that is advised by a Money Manager that is not an affiliated person of the Affiliated Broker-Dealer or Affiliated Money Manager (the Segment, an “Unaffiliated Segment” the Money Manager, an “Unaffiliated Money Manager”), (ii) an Affiliated Broker-Dealer to provide brokerage services to an Unaffiliated Segment, and the unaffiliated Segment to utilize such brokerage services, without complying with rule 17e-1(b) and (c) under the Act, (iii) an Unaffiliated Segment to purchase securities during the existence of an underwriting syndicate, a principal underwriter of which is an Affiliated Money Manager or a person of which an Affiliated Money Manager is an affiliated person (“Affiliated Underwriter”), (iv) a Segment advised by an affiliated Money Manager (“Affiliated Segment”) to purchase securities during the existence of an underwriting syndicate, a principal underwriter of which is an Affiliated Underwriter, in accordance with the conditions of rule 10f-3 under the Act, except that paragraph (b)(7) of the rule would not require the aggregation of purchases by the Affiliated Segment with purchases by Unaffiliated Segments.
4. Applicants request that the exemptive relief apply to FRIC, RIF, or any existing or future registered open-end management investment company advised by the Adviser or a person controlling, controlled by, or under common control (within the meaning of section 2(a)(9) of the Act) with, the Adviser (including any successors in interest). Any investment company that currently intends to rely on the order is named as an applicant. The Adviser will take steps designed to ensure that any other existing or future entity that relies on the order will comply with the terms and conditions of the application.
Applicants' Legal Analysis
A. Principal Transactions Between Unaffiliated Segments and Affiliated Broker-Dealers
1. Section 17(a) of the Act generally prohibits sales or purchases of securities between a registered investment company and an affiliated person of, promoter of, or principal underwriter for such company, or any affiliated person of an affiliated person, promoter, or principal underwriter (“second-tier affiliate”). Section 2(a)(3)(E) of the Act defines an affiliated person to be any investment adviser of an investment company, and section 2(a)(3)(C) of the Act defines an affiliated person of another person to include any person directly or indirectly controlling, controlled by, or under common control with such person. Applicants state that an Affiliated Money Manager would be an affiliated person of a Fund, and an Affiliated Broker-Dealer would be either an Affiliated Money Manager or an affiliated person of the Affiliated Manager, and thus a second-tier affiliate of a Fund, including the Unaffiliated Segment. Accordingly, applicants state that any transactions to be effected by an Unaffiliated Money Manager on behalf of an Unaffiliated Segment of a Fund with an Affiliated Broker-Dealer are subject to the prohibitions of section 17(a).
2. Applicants seek relief under sections 6(c) and 17(b) to exempt principal transactions prohibited by section 17(a) because an Affiliated Broker-Dealer is deemed to be an affiliated person or a second-tier affiliate of an Unaffiliated Segment solely because an Affiliated Money Manager is the Money Manager to another Segment of the same Fund. The requested relief would not be available if the Affiliated Broker-Dealer (except by virtue of serving as a Money Manager) is an affiliated person or a second-tier affiliate of the Adviser, the Unaffiliated Money Manager making the investment decision with respect to the Unaffiliated Segment of the Fund, or any officer, trustee or employee of the Fund.
3. Section 17(b) of the Act authorizes the SEC to grant an order permitting a transaction otherwise prohibited by section 17(a) if it finds that the terms of the proposed transaction are fair and Start Printed Page 2033reasonable and do not involve overreaching on the part of any person concerned, and the proposed transaction is consistent with the policy of each registered investment company and the general purposes of the Act. Section 6(c) of the Act permits the SEC to exempt any person or transaction from any provision of the Act if the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policies and provisions of the Act.
4. Applicants contend that section 17(a) is intended to prevent persons who have the power to control an investment company from using that power to the person's own pecuniary advantage. Applicants assert that when the person acting on behalf of an investment company has no direct or indirect pecuniary interest in a party to a principal transaction, the abuses that section 17(a) is designed to prevent are not present. Applicants state that if an Unaffiliated Money Manager purchases securities on behalf of an Unaffiliated Segment in a principal transaction with an Affiliated Broker-Dealer, any benefit that might inure to the Affiliated Broker-Dealer would not be shared by the Unaffiliated Money Manager. In addition, applicants state that Money Managers are paid on the basis of a percentage of the value of the assets allocated to their management. The execution of a transaction to the disadvantage of the Unaffiliated segment would disadvantage the Unaffiliated Money Manager to the extent that it diminishes the value of the Unaffiliated Segment. Applicants further submit that the Adviser's power to dismiss Money Managers or to change the portion of a Fund allocated to each Money Manager reinforces a Money Manager's incentive to maximize the investment performance of its Segment.
5. Applicants state that each Money Manager's contract assigns it responsibility to manage a Segment. Each Money Manager is responsible for making independent investment and brokerage allocation decisions on its own research and credit evaluations. Applicants represent that the Adviser does not dictate brokerage allocation or investment decisions to any Fund advised by a Money Manager, or have the contractual right to do so, except with respect to a Segment advised directly by the Adviser. Applicants contend that, in managing a Segment, each Money Manager acts for all practical purposes as though it is managing a separate investment company.
6. Applicants state that the proposed transactions will be consistent with the policies of the Fund, since each Unaffiliated Money Manager is required to manage the Unaffiliated Segment in accordance with the investment objectives and related investment policies of the Fund as described in its registration statement. Applicants also assert that permitting the transactions will be consistent with the general purposes of the Act and in the public interest because the ability to engage in the transactions increases the likelihood of a Fund achieving best price and execution on its principal transactions, while giving rise to none of the abuses that section 17(a) was designed to prevent.
B. Payment of Brokerage Compensation by Unaffiliated Segments to Affiliated Broker-Dealers
1. Section 17(e)(2) of the Act prohibits an affiliated person or a second-tier affiliate of a registered investment company from receiving compensation for acting as broker in connection with the sale of securities to or by the investment company if the compensation exceeds the limits prescribed by the section unless otherwise permitted by rule 17e-1 under the Act. Rule 17e-1 sets forth the conditions under which an affiliated person or a second-tier affiliate of an investment company may receive a commission which would not exceed the “usual and customary broker's commission” for purposes of section 17(e)(2). Rule 17e-1(b) requires the investment company's board of directors, including a majority of the directors who are not interested persons under section 2(a)(19) of the Act, to adopt certain procedures and to determine at least quarterly that all transactions effected in reliance on the rule complied with the procedures. Rule 17e-1(c) specifies the records that must be maintained by each investment company with respect to any transaction effected pursuant to rule 17e-1.
2. As discussed above, applicants state that an Affiliated Broker-Dealer is either an affiliated person (as Money Manager to another Segment) or a second-tier affiliate of an Unaffiliated Segment and thus subject to section 17(e). Applicants request an exemption under section 6(c) from section 17(e) and rule 17e-1 to the extent necessary to permit an Unaffiliated Segment to pay brokerage compensation to an Affiliated Broker-Dealer acting as broker in the ordinary course of business in connection with the sale of securities to or by such Unaffiliated Segment, without complying with the requirements of rule 17e-1(b) and (c). The requested exemption would apply only where an Affiliated Broker-Dealer is deemed to be an affiliated person or a second-tier affiliate of an Unaffiliated Segment solely because an Affiliated Money Manager is the Money Manager to another Segment of the same Fund. The relief would not apply if the Affiliated Broker-Dealer (except by virtue of serving as Money Manager to a Segment) is an affiliated person or a second-tier affiliate of the Adviser, the Unaffiliated Money Manager to the Unaffiliated Segment of the Fund, or any officer, trustee or employee of the Fund.
3. Applicants believe that the proposed brokerage transactions involve no conflicts of interest or possibility of self-dealing and will meet the standards of section 6(c). Applicants assert that the interests of an Unaffiliated Money Manager are directly aligned with the interests of the Unaffiliated Segment it advises, and an Unaffiliated Money Manager will enter into brokerage transactions with Affiliated Broker-Dealers only if the fees charged are reasonable and fair as required by rule 17e-1(a). Applicants also note that an Unaffiliated Money Manager has a fiduciary duty to obtain best price and execution for the Unaffiliated Segment.
C. Purchases of Securities From Offerings With Affiliated Underwriters
1. Section 10(f) of the Act, in relevant part, prohibits a registered investment company from knowingly purchasing or otherwise acquiring, during the existence of any underwriting or selling syndicate, any security (except a security of which the company is the issuer) when a principal underwriter of the security, or an affiliated person of the principal underwriter, is an officer, director, member of an advisory board, investment adviser or employee of the company. Section 10(f) also provides that the SEC may exempt by order any transaction or classes of transactions from any of the provisions of section 10(f), if and to the extent that such exemption is consistent with the protection of investors. Rule 10f-3 under the Act exempts certain transactions from the prohibitions of section 10(f) if specified conditions are met. Paragraph (b)(7) of rule 10f-3 limits the securities purchased by the investment company, or by two or more investment companies having the same investment adviser, to 25% of the principal amount of the offering of the class of securities.
2. Applicants state that each Money Manager, although under contract to manage only a Segment of a Fund, is Start Printed Page 2034considered an investment adviser to the entire Fund. As a result, applicants believe that all purchases of securities by an Unaffiliated Segment from an underwriting syndicate a principal underwriter of which is an Affiliated Underwriter would be subject to section 10(f).
3. Applicants request relief under section 10(f) from that section to permit an Unaffiliated Segment to purchase securities during the existence of an underwriting or selling syndicate, a principal underwriter of which is an Affiliated Underwriter. Applicants request relief from section 10(f) only to the extent those provisions apply solely because an Affiliated Money Manager is an investment adviser to the Fund. The requested relief would not be available if the Affiliated Underwriter (except by virtue of serving as Money Manager) is an affiliated person or a second-tier affiliate of the Adviser, the Unaffiliated Money Manager making the investment decision with respect to the Unaffiliated Segment of the Fund, or any officer, trustee or employee of the Fund. Applicants also seek relief from section 10(f) to permit an Affiliated Segment to purchase securities during the existence of an underwriting syndicate, a principal underwriter of which is an Affiliated Underwriter, provided that the purchase will be in accordance with the conditions of rule 10f-3, except that paragraph (b)(7) of the rule will not require the aggregation of purchases by the Affiliated Segment with purchases by an Unaffiliated Segment.
4. Applicants state that section 10(f) was adopted in response to concerns about the “dumping” of otherwise unmarketable securities on investment companies, either by forcing the investment company to purchase unmarketable securities from its underwriting affiliate, or by forcing or encouraging the investment company to purchase the securities from another member of the syndicate. Applicants submit that these abuses are not present in the context of the Funds because a decision by an Unaffiliated Money Manager to purchase securities from an underwriting syndicate, a principal underwriter of which is an Affiliated Underwriter, involves no potential for “dumping.” In addition, applicants assert that aggregating purchases would serve no purpose because there is no collaboration among Money Managers, and any common purchases by an Affiliated Money Manager and an Unaffiliated Money Manger would be coincidence.
Applicants agree that any order granting the requested relief will be subject to the following conditions:
1. Each Fund relying on the requested order will be advised by an Affiliated Money Manager and at least one Unaffiliated Money Manager and will be operated in the manner described in the application.
2. No Affiliated Money Manager, Affiliated Broker-Dealer, or Affiliated Underwriter (except by virtue of serving as Money Manager to a Segment of a Fund) will be an affiliated person or a second-tier affiliate of the Adviser, any Unaffiliated Money Manager, or any officer, trustee, or employee of a Fund.
3. No Affiliated Money Manager will directly or indirectly consult with any Unaffiliated Money Managers concerning allocation of principal or brokerage transactions.
4. No Affiliated Money Manager will participate in any arrangement whereby the amount of its sub-advisory fees will be affected by the investment performance of an Unaffiliated Money Manager.
5. With respect to purchases of securities by an Affiliated Segment during the existence of any underwriting or selling syndicate, a principal underwriter of which is an Affiliated Underwriter, the conditions of rule 10f-3 under the Act will be satisfied except that paragraph (b)(7) will not require the aggregation of purchases by the Affiliated Segment with purchases by Unaffiliated Segments.Start Signature
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland,
1. The Adviser, even when directly exercising investment control over a Fund or Segment, is not a Money Manager for purposes of the requested relief.Back to Citation
2. The term “successors in interest” is limited to entities that result from a reorganization into another jurisdiction or change in the type of business organization.Back to Citation
[FR Doc. 01-650 Filed 1-9-01; 8:45 am]
BILLING CODE 8010-01-M