[Federal Register Volume 60, Number 110 (Thursday, June 8, 1995)]
[Notices]
[Pages 30321-30324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14002]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21108; 812-7689]
Frank Russell Investment Company, et al.; Notice of Application
June 2, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
[[Page 30322]] ACTION: Notice of Application for Exemption under the
Investment Company Act of 1940 (the ``Act'').
-----------------------------------------------------------------------
APPLICANTS: Frank Russell Investment Company (``FRIC''), Russell
Insurance Funds, Inc. (``RIF''), Frank Russell Investment Management
Company (``FRIMCo''), Frank Russell Company (``FRC''), and Russell Fund
Distributors, Inc. (``RFD'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act from the provisions of section 15(a) and rule 18f-2; and from
certain disclosure requirements set fort in item 22 of Schedule 14A
under the Securities Exchange Act of 1934 (the ``Exchange Act''); items
2, 5(b)(iii), and 16(a)(iii) of Form N-1A; item 3 of Form N-14; item 48
of Form N-SAR; and sections 6-07(2) (a), (b), and (c) of Regulation S-
X.
SUMMARY OF APPLICATION: Applicants seek a conditional order permitting
FRIMCo to enter into sub-advisory contracts without receiving prior
shareholder approval, and permitting FRIC and RIF (the ``Funds'') to
disclose only aggregate sub-advisory fees for each fund in their
prospectuses and other reports.
FILING DATES: The application was filed on February 19, 1991, and
amended and restated on December 20, 1993, April 15, 1994, May 3, 1995,
and May 10, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 27, 1995,
and should be accompanied by proof of service on the applicant, 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.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, D.C.
20549. Applicant, 909 A Street, Tacoma, Washington 98402.
FOR FURTHER INFORMATION CONTACT:
Mary Kay Frech, Senior Attorney, at (202) 942-0579, or C. David
Messman, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY 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.
Applicants' Representations
1. FRIC is a registered no-load, open-end management investment
company organized as a Massachusetts business trust. FRIC has twenty-
two separate series, each constituting a different investment
portfolio. All of FRIC's series follow the conventional practice of
paying their investment advisory fee from the series' assets. Ten of
FRIC's series require investors to pay an additional investment
services fee directly to their investment adviser, FRIMCo, for
shareholder services (the ``External Fee FRIC Funds'').\1\ The
remaining twelve series pay no investment services fee. FRIC's shares
are offered predominantly to institutional fiduciaries, such as bank
trust departments and registered investment advisers, which have
investment discretion over their clients' accounts. A limited number of
shares are offered to smaller institutional investors such as endowment
funds and to individual investors who have a direct, contractual
relationship with FRIMCo. Each investor in each of FRIC's series
executes an asset management services agreement with FRTAMCo, the
different forms of which reflect the different services required by
different categories of investors.
\1\ Investors in the External Fee FRIC Funds include (a) banking
institutions, broker-dealers, investment advisers, charitable
foundations, endowments, and qualified pension plans, including IRA
plans, which have negotiated and entered into a written agreement
with FRIMCo establishing the investment services fee to be paid
FRIMCo for assets invested in the External Fee FRIC Funds by those
entities both for their own account as well as on behalf of their
clients for whom they may be acting in either an agency or
discretionary capacity, and (b) individuals with investable assets
of $5 million or more, who have negotiated and entered into a
written agreement wit FRIMCo for all assets invested in the External
Fee FRIC Funds. Applicants also may make shares of the External Fee
FRIC Funds available to employees of FRC and its affiliates. These
employees will pay an investment services fee to FRIMCo which is
consistent for all employees.
---------------------------------------------------------------------------
2. RIF is a registered no-load, open-end management investment
company organized as a Maryland corporation. It is proposed to consist
of several separate series, each constituting a different investment
portfolio. RIF shares initially will be offered exclusively to
insurance separate accounts as the funding vehicle for variable and
fixed annuity and life insurance products. Each series of RIF follows
the conventional practice of paying FRIMCo an advisory fee from the
series' assets. The Funds' separate series are referred to herein as
the ``Portfolios.''
3. FRIMCo is a registered investment adviser, organized as a
Washington corporation. The Funds have engaged FRIMCo as their
investment adviser pursuant to an investment management agreement.
FRIMCo as engaged, or will engage, one or more sub-advisers (``Money
Managers'') pursuant to an investment management agreement (``Portfolio
Management Agreement'') to exercise investment discretion over the
assets of each Portfolio. Each Portfolio, except for the money market
Portfolios and a real estate securities Portfolio, has two or more
Money Managers.
4. FRC, the parent company of FRIMCo, is a registered investment
adviser, organized as a Washington corporation. FRC provides portfolio
structuring and Money Manager evaluation services to FRIMCo, but
receives no separately stated fee from the Funds for its services.
5. RFD is a registered broker-dealer, organized as a Washington
corporation. RFD is a wholly-owned subsidiary of FRIMCo and serves as
the distributor of the Funds' shares.
6. In contrast to the majority of investment companies that have a
single organization serving as the manager/administrator and the
investment adviser, the Funds divide responsibility for corporate
management and investment advice between FRIMCo and the Money Managers.
The Funds employ a ``multi-style, multi-manager'' method of investment,
under which FRIMCo, using the consulting services of FRC, selects and
monitors for each Portfolio multiple Money Managers using a range of
manager styles.
7. FRIMCo performs internal due diligence on prospective Money
Managers for each Portfolio and thereafter monitors their performance
through quantitative and qualitative analysis, as well as actual
consultations with the Money Managers. FRIMCo has responsibility for
communicating performance expectations and evaluations to the Money
Managers, supervising compliance with the Portfolios' investment
policies and objectives, recommending to the board of directors of the
Funds whether Portfolio Management Agreements should be renewed,
modified, or terminated, and recommending to the Funds' directors the
addition of new Money Managers. For its services, FRIMCo receives a
management fee from the Portfolios. FRIMCo pays the Money Managers from
these fees.
8. In 1981, the SEC issued an order to permit the FRIC Portfolios
to hire and contract with Money Managers without
[[Page 30323]] obtaining shareholder approval through a proxy
solicitation, and to exempt the FRIC Portfolios from the requirement to
discuss the fees paid for FRIMCo to the Money Managers of the funds.\2\
In 1988, the SEC issued an order to exempt the RIF Funds from the
requirement to disclose the fees paid by FRIMCo to the Money Managers
of the RIF Portfolios.\3\ The requested order would supersede the 1981
and 1988 orders.
\2\ Investment Company Act Release Nos. 11944 (Sept. 21, 1981)
(notice) and 11986 (Oct. 14, 1981) (order). At the time of the 1981
order, FRIC had only seven portfolios, all of whose investors paid
an advisory fee directly to FRIMCo.
\3\ Investment Company Act Release Nos. 16309 (Mar. 9, 1988)
(notice) and 16351 (Apr. 7, 1988) (order).
---------------------------------------------------------------------------
9. Applicants request an exemption from section 15(a) and rule 18f-
2 to permit FRIMCo to enter into Portfolio Management Agreements with
Money Managers, other than Money Managers that are affiliated persons
(as defined in section 2(a)(3) of the Act) of the Fund for FRIMCo other
than by reason of serving as a Money Manager to one or more of the
Funds (an ``Affiliated Money Manager''), without such agreements being
approved by the shareholders of the applicable Partfolio. In lieu of
the shareholder voting requirement, applicants will provide
shareholders with an information statement that includes all the
information concerning a new Money Manager or Portfolio Management
Agreement that would be included in a proxy statement.
10. Applicants propose to disclose (both as a dollar amount and as
a percentage of a Portfolio's net assets) in the Funds' registration
statements and other public documents only the aggregate amount of fees
paid by FRIMCo to all the Money Managers of a Portfolio (``Aggregate
Fee Disclosure''). Aggregate Fee Disclosure means: (a) the total
advisory fee charged by FRIMCo to the Portfolio; (b) the aggregate fees
paid by FRIMCo to all Money Managers managing assets of the Portfolio;
and (c) the net advisory fee retained by FRIMCo with respect to the
Portfolio after FRIMCo pays all Money Managers managing assets of that
Portfolio. For any Fund that employs an Affiliated Money Manager,
``Aggregate Fee Disclosure'' also will include separate disclosure of
any fees paid to such Affiliated Money Manager.
Applicants' Legal Analysis
1. Section 15(a) makes it unlawful for any person to act as an
investment adviser to a register investment company except pursuant to
a written contract that has been approved by a majority of the
investment company's outstanding securities. Rule 18f-2 provides that
each series or class of stock in a series company affected by a matter
must approve such matter if the Act requires shareholder approval.
2. Applicants state that primary responsibility for management of
the Funds, in particular, the selection and supervision of the Money
Managers, will be vested in FRIMCo, subject to oversight and approval
by the Funds' directors. Applicants argue that the multi-manager,
multi-style structure used by FRIMCo is clearly described in the Funds'
prospectuses, and that shareholders invest in the Funds expecting
FRIMCo to change Money Managers when appropriate. Applicants also
assert that requiring shareholders to approve every Money Manager
change would prevent FRIMCo from performing on a timely and effective
basis the principal function the shareholders are paying it to
perform--the selection, monitoring, and changing of Money Managers.
Applicants contend that requiring shareholder approval would not only
result in unnecessary administrative expense to a Portfolio, but could
result in harmful delays in executing changes in Money Managers that
FRIMCo and the Funds' directors may determine are necessary.
3. Section 15(a)(1) provides, in relevant part, that it is unlawful
for any person to act as an investment adviser to a registered
investment company except pursuant to a written contract which
``precisely describes all compensation to be paid thereunder.''
4. Items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A require the
Funds to disclose in their prospectuses the investment adviser's
compensation and the method of computing the advisory fee.
5. Item 3 of Form N-14, the registration form for business
combinations involving mutual funds, requires the inclusion of a
``table showing the current fees for the registrant and the company
being acquired and pro forma fees, if different, for the registrant
after giving effect to the transaction using the format prescribed'' in
item 2 of Form N-1A.
6. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the Exchange
Act. Item 22 of Schedule 14A sets forth the requirements concerning the
information that must be included in a proxy statement. Item
22(a)(3)(iv) requires a proxy statement for a shareholder meeting at
which a new fee will be established or an existing fee increased to
include a table of the current and pro forma fees using the format
prescribed in item 2 of Form N-1A. Items 122(c)(1)(ii), 22(c)(1)(iii),
22(c)(8), and 22(c)(9), taken together, require that a proxy statement
for a shareholder meeting at which an advisory contract is to be voted
upon shall include the ``rate of compensation of the investment
adviser,'' the ``aggregate amount of the investment adviser's fee,''
the ``terms of the contract to be acted upon,'' and, if a change in
fees is proposed, the existing and proposed rate schedule for advisory
fees paid to their advisers, including the Money Managers.
7. Item 48 of Form N-SAR provides that the Funds must disclose the
rate schedule for advisory fees paid to their advisers, including the
Money Managers.
8. Items 6-07(2) (a), (b), and (c) of Regulation S-X require that
the Funds' financial statements contain information concerning fees
paid to the Money Managers.
9. Applicants submit that it is consistent with the policy of the
Act and the protection of investors to exempt applicants from the
requirement to disclose individual Money Manager fees because
applicants believe that such disclosure is likely to inhibit or
eliminate FRIMCo's ability to negotiate fees below the Money Managers'
``posted'' fee schedules. Applicants argue that any advantage that
FRIMCo would gain in negotiating fee arrangements with Money Managers
would inure ultimately to the benefit of the shareholders of the
Portfolios because it would be possible for FRIMCo to pass the benefits
of a lower sub-advisory fee on to the Portfolios, although FRIMCo is
not legally or contractually obligated to do so.\4\ They also maintain
that the ability to negotiate fee reductions is a critical element in
their multi-style, multi-manager fund structure and the Funds' ability
to offer investors a multi-manager investment product at a price which
is competitive with single adviser funds.
\4\ Fund directors would be required to take the amounts paid by
FRIMCo to the Money Managers into account when assessing the
profitability of the advisory agreements to FRIMCo during the course
of their annual review of the Funds' management and sub-advisory
arrangements under sections 15 and 36(b) of the Act.
---------------------------------------------------------------------------
10. Applicants assert that because all shareholders of the Funds
will be fully advised of the fees charged by FRIMCo for its management
services (which include compensating the Money Managers), each
shareholder will have the information to determine whether, in its
judgment, the total package of [[Page 30324]] services is priced
reasonably in relation to the services and costs that the investor
could obtain elsewhere. Moreover, applicants believe that the Aggregate
Fee Disclosure will provide investors of each Portfolio with sufficient
and clear information to determine whether they are receiving good
value from FRIMCo and the Money Managers of that Portfolio and whether
to redeem their shares if dissatisfied.
11. Section 6(c) authorizes the Commission to exempt persons or
transactions from the provisions of the Act to the extent that such
exemptions are 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. Applicants assert that the section
6(c) standards for exemption are met.
Applicants' Conditions
Applicants agree that the following conditions may be imposed in
any order of the Commission granting the requested relief:
1. Each Fund will disclose in its registration statement the
Aggregate Fee Disclosure.
2. FRIMCo will not enter into a Portfolio Management Agreement with
any Affiliated Money Manager without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Portfolio.
3. At all times, a majority of the Funds' directors or trustees
will be persons each of whom is not an ``interested person'' of the
Funds as defined in section 2(a)(19) of the Act (``Independent
Directors''), and the nomination of new or additional Independent
Directors will be placed with the discretion of the then existing
Independent Directors.
4. When a Money Manager change is proposed for a Portfolio with an
Affiliated Money Manager, the Funds' directors or trustees, including a
majority of the Independent Directors, will make a separate finding,
reflected in each applicable Fund's board minutes, that such change is
in the best interests of the Portfolio and its shareholders and does
not involve a conflict of interest from which FRIMCo or the Affiliated
Money Manager derives an inappropriate advantage.
5. Independent counsel knowledgeable about the Act and the duties
of Independent Directors will be engaged to represent the Independent
Directors of the Funds. The selection of such counsel will be placed
within the discretion of the then existing Independent Directors.
6. FRIMCo will provide the Funds' directors, no less frequently
than quarterly, information about FRIMCo's profitability on a per-
Portfolio basis. Such information will reflect the impact on
profitability of the hiring or termination of any Money Manager during
the applicable quarter.
7. Whenever a Money Manager is hired or terminated, FRIMCo will
provide the Funds' directors information showing the expected impact on
FRIMCo's profitability.
8. FRIMCo will provide general management and administrative
services to the Funds, and, subject to review and approval by their
directors will: (a) set the Funds' overall investment strategies; (b)
select Money Managers; (c) allocate and, when appropriate, reallocate
the Portfolios' assets among Money Managers; (d) monitor and evaluate
the performance of Money Managers; and (e) ensure that the Money
Managers comply with the Funds' investment objectives, policies, and
restrictions.
9. Each RIF Fund will obtain the consent of its sole shareholders
before relying upon the order with respect to shareholder approval of
Money Manager changes. Existing Portfolios of the FRIC Funds will
proceed promptly (within one year) to obtain shareholder approval to
operate the Portfolios in accordance with the order, but, prior to the
holding of the shareholder meeting, will continue to operate in
accordance with the 1981 order. Portfolios of the Funds created after
the issuance of the order will disclose their reliance on the order in
their prospectuses and will have such reliance approved by consent of
their sole shareholder.
10. Within 60 days of the hiring of any new Money Manager or the
implementation of any proposed material change in a Portfolio
Management Agreement, FRIMCo will furnish shareholders all information
about a new Money Manager or Portfolio Management Agreement that would
be included in a proxy statement, except as modified by the order with
respect to the disclosure of fees paid to the Money Managers. Such
information will include Aggregate Fee Disclosure and any change in
such disclosure caused by the addition of a new Money Manager or any
proposed material change in a Portfolios's Management Agreement. FRIMCo
will meet this condition by providing shareholders, within 60 days of
the hiring of a Money Manager or the implementation of any material
change to the terms of a Portfolio Management Agreement, with an
information statement meeting the requirements of Regulation 14C and
Schedule 14C under the Exchange Act. The information statement also
will meet the requirements of Schedule 14A, except as modified by the
order with respect to the disclosure of fees paid to the Money
Managers.
11. No director, trustee, or officer of the Funds or FRIMCo will
own directly or indirectly (other than through a polled investment
vehicle that is not controlled by any such director, trustee, or
officer) any interest in a Money Manager except for (a) ownership of
interests in FRIMCo or any entity that controls, in controlled by, or
is under common control with FRIMCo; or (b) ownership of less than 1%
of the outstanding securities of any class of equity or debt of a
publicly-traded company that is either a Money Manager or an entity
that controls, is controlled by, or is under common control with a
Money Manager.
12. The Funds will disclose in their prospectuses the existence,
substance, and effect of any order granted pursuant to the application.
By the Commission.
Johathan G. Katz,
Secretary.
[FR Doc. 95-14002 Filed 6-7-95; 8:45 am]
BILLING CODE 8010-01-M