[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]



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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'').

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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.
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    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).
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    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.
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    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