[Federal Register Volume 60, Number 167 (Tuesday, August 29, 1995)]
[Notices]
[Pages 44909-44913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21361]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21318; 812-7734]


Consulting Group Capital Markets Funds and Smith Barney Mutual 
Funds Management Inc.; Notice of Application

August 23, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').


[[Page 44910]]

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: Consulting Group Capital Markets Funds (the ``Trust''), and 
Smith Barney Mutual Funds Management Inc.

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 proxy disclosure requirements set forth 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 
the Trust's investment adviser, The Consulting Group (a division of 
Smith Barney Mutual Funds Management Inc.) (the ``Manager''), to enter 
into sub-advisory agreements on behalf of the Trust without receiving 
approval by the Trust's shareholders, and permitting the Trust to 
disclose only aggregate sub-advisory fees for each series of the Trust 
in their prospectuses and other reports.

FILING DATES: The application was filed on June 6, 1991, and amended 
and restated on August 11, 1993, March 9, 1994, and August 23, 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 
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 September 18, 
1995, and should be accompanied by proof of service on the 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.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant, 222 Delaware Avenue, Wilmington, Delaware 19801.

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.

Applicant's Representations

    1. The Trust is a registered open-end management investment company 
organized as a Massachusetts business trust. The Trust is a series 
company currently consisting of thirteen operating series (each a 
``Portfolio'' and, collectively, the ``Portfolios'').\1\ Shares of the 
Portfolios are available exclusively to participants in TRAK 
Personalized Investment Advisory Service (``TRAK'') and are proposed to 
be made available to other investment advisory services offered by 
qualified professional asset managers. TRAK and other investment 
advisory services and the Trust are designed to relieve investors of 
the burden of devising an asset allocation strategy to meet their 
individual needs as well as selecting individual investments within the 
available asset categories.

    \1\Applicants also request relief with respect to any series of 
the Trust organized in the future and for any open-end, management 
investment company advised by the Manager, or a person controlling, 
controlled by or under common control with the Manager, in the 
future, provided that such investment company operates in 
substantially the same manner as the Trust and complies with the 
conditions to the requested order.
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    2. The Manager, a division of Smith Barney Mutual Funds Management 
Inc., is a registered investment adviser that is a wholly owned 
subsidiary of Smith Barney Holdings Inc., which in turn is a wholly 
owned subsidiary of Travelers Group Inc. The Trust has entered into an 
investment management agreement (the ``Management Agreement'') with the 
Manager who, in turn, has entered into an investment advisory agreement 
(``Advisory Agreement'') with one or more separate registered 
investment advisers (each, a ``Sub-Adviser'') to the Portfolios. It is 
the Manager's responsibility under the Management Agreement to select, 
subject to the review and approval of the board of trustees of the 
Trust (the ``Board''), Sub-Advisers who have distinguished themselves 
by able performance in their respective areas of expertise in asset 
management and to review their continued performance. Each Sub-
Adviser's responsibilities are limited to managing the assets held by 
the Portfolio it serves in accordance with the Portfolio's stated 
investment objectives and policies.
    3. Subject to the supervision and direction of the Board, the 
Manager provides to the Trust investment management evaluation services 
by performing initial due diligence on prospective Sub-Advisers for 
each Portfolio and thereafter monitoring Sub-Adviser performance 
through quantitative and qualitative analysis, as well as periodic in-
person, telephonic, and written consultations with Sub-Advisers. The 
Manager has responsibility for communicating performance expectations 
and evaluations to Sub-Advisers and ultimately recommending to the 
Board whether Sub-Advisers' contracts should be renewed, modified, or 
terminated. The Manager also is responsible for conducting all 
operations of the Trust except those operations contracted to the Sub-
Advisers or the Trust's custodian, transfer agent, or administrator. 
Each Portfolio pays the Manager a fee for its services, and the Manager 
in turn pays each Sub-Adviser a fee for the services it provides to the 
Portfolio.
    4. Smith Barney Mutual Fund Management Inc. (``Smith Barney Mutual 
Fund Management'') serves as the Trust's administrator and The Boston 
Company Advisors, Inc. (``Boston Advisors''), a wholly owned subsidiary 
of The Boston Company, Inc., serves as the Trust's sub-administrator. 
Pursuant to its administration agreement with the Trust, Smith Barney 
Mutual Fund Management provides senior executive management for the 
Trust and generally oversees and directs all aspects of the Trust's 
administration and operation. Boston Advisors calculates the net asset 
value of the Portfolios' shares and generally assists in various 
aspects of the Trust's administration and operation. Each Portfolio 
pays Smith Barney Mutual Fund Management a fee of the services provided 
by it and Boston Advisors. Boston Advisors is paid a portion of this 
fee.
    5. Purchases of shares of a Portfolio must be made through a 
brokerage account maintained with Smith Barney Inc. (``SB''). SB, 
through its Consulting Group division in its capacity as investment 
adviser to participants in TRAK, provides advisory services in 
connection with investments among the Portfolios by identifying the 
investor's risk tolerances and investment objectives, identifying and 
recommending in writing an appropriate allocation of assets among the 
Portfolios that conforms to those tolerances and objectives, and 
providing on a periodic basis a monitoring report to the investor 
containing an analysis and evaluation of the investor's TRAK account 
and recommending any appropriate changes in the allocation of assets 
among the Portfolios. Investors pay an annual fee for their 
participation in TRAK, which they may terminate at 

[[Page 44911]]
any time. Termination of a TRAK account must be accompanied by a 
redemption order for all Portfolio shares held in the account.
    6. Applicants request an order permitting the Manager to enter into 
Advisory Agreements for the Portfolios without obtaining shareholder 
approval, including new Advisory Agreements necessitated because a 
prior Advisory Agreement terminated as a result of an assignment (as 
defined in section 2(a)(4) of the Act). Although shareholders will not 
vote on Sub-Adviser changes, applicants will provide shareholders with 
an information statement that includes all the information about a new 
Sub-Adviser or Advisory Agreement that would be included in a proxy 
statement. The Management Agreement between the Manager and the Trust 
would in all cases be subject to the shareholder voting requirements of 
the Act.
    7. Applicants propose to disclose (both as a dollar amount and as a 
percentage of a Portfolio's net assets) in the Trust's registration 
statement and other public documents only the aggregate amount of fees 
paid by the Manager to all the Sub-Advisers of a Portfolio (``Aggregate 
Fee Disclosure''). Aggregate Fee Disclosure means: (a) the total 
advisory fee charged by the Manager with respect to each Portfolio; (b) 
the aggregate fees paid by the Manager to all Sub-Advisers managing 
assets of each Portfolio; and (c) the net advisory fee retained by the 
Manager with respect to each Portfolio after the Manager pays all Sub-
Advisers managing assets of the Portfolio. The ``Aggregate Fee 
Disclosure'' also will include separate disclosure of any fees paid to 
any Sub-Adviser who is an affiliated person (as defined in section 
2(a)(3) of the Act) of the Trust or the Manager other than by reason of 
serving as a Sub-Adviser to a Portfolio (an ``Affiliated Sub-
Adviser'').

Applicants' Legal Analysis

    1. Section 15(a) makes it 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 and which 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 Trust, in particular, the selection and supervision of the Sub-
Advisers, is vested in the Manager, subject to oversight and approval 
by the Board. Applicants point out that the cover page of the Trust's 
prospectus makes clear that the Manager is the primary service provider 
to the Trust. Applicants argue that the distinctly different structure 
of the Trust renders the identity of a Sub-Adviser of a Portfolio less 
relevant to the investment decisions of shareholders of that Portfolio. 
Applicants believe that investors who seek the investment advice of 
Consulting Group or any other professional asset manager typically have 
determined that they are unwilling to assume the burden of selecting an 
appropriate mix of investment media to attain their investment 
objectives, let alone the appropriate money manager or managers to make 
specific investments in accord with those objectives.
    3. Applicants also assert that the ability to enter into Advisory 
Agreements without shareholders approval would permit the Manager to 
perform to the fullest extent the principal function the Portfolios are 
paying it to perform--selecting Sub-Advisers, monitoring their 
performance, and changing Sub-Advisers when appropriate. To require 
that shareholders approve each new Sub-Adviser would result not only in 
unnecessary administrative expense to the Portfolios, but could result 
in harmful delays in executing changes in Sub-Advisers that the Manager 
and the Trustees may determine are necessary.
    4. Form N-1A is the registration statement used by open-end 
management investment companies to register their securities under the 
Act and under the Securities Act of 1933 (the ``Securities Act''). 
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 22(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 Sub-Advisers.
    7. Form N-SAR is the semi-annual report filed with the SEC by 
registered investment companies. Item 48 of Form N-SAR provides that 
the Trust must disclose the rate schedule for advisory fees paid to 
their advisers, including the Sub-Advisers.
    8. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of the registration 
statements and shareholders reports filed with the SEC under the Act 
and under the Securities Act. Items 6-07(2)(a), (b), and (c) of 
Regulation S-X require that the Trust's financial statements contain 
information concerning fees paid to the Sub-Advisers.
    9. Applicants state that all shareholders of the Trust will be 
fully advised of the fees charged by the Manager for its management 
services because these fees will be disclosed in the Trust's 
prospectus. The fees paid to the Manager reflect the total costs and 
expenses (including Sub-Advisers' compensation) to the Manager for 
managing the Trust's businesses. In addition, all Trust shareholders 
will be advised of the aggregate fees paid by the Manager to all Sub-
Advisers of a Portfolio through the Aggregate Fee Disclosure. 
Applicants assert that the management fee paid to the Manager will be 
negotiated by the Portfolio with the expectation that the Manager will 
seek to pay the lowest appropriate advisory fee to the Sub-Advisers. 
Applicants argue that disclosing individual Sub-Adviser fees may 
inhibit or eliminate the Manager's ability to negotiate fees below the 
``posted'' fee rates. Applicants maintain that any advantage that the 
Manager would gain in negotiating fee arrangements with Sub-Advisers 
would inure ultimately to the benefit of the shareholders of the 
Portfolios because it would be possible for the Manager to pass the 
benefits of a lower sub-advisory fee on to the 

[[Page 44912]]
Portfolios, although the Manager is not legally or contractually 
obligated to do so.\2\ They also submit that the nondisclosure of 
individual Sub-Adviser's fees is in the best interest of the Portfolios 
and their shareholders, because such disclosure would increase costs to 
shareholders without an offsetting benefit.

    \2\The Board, including the Independent Trustees, would be 
required to take the amounts paid by the Manager to the Sub-Advisers 
into account when assessing the profitability of the advisory 
arrangements to the Manager during the course of their annual review 
of the Trust's 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 Trust 
will be fully advised of the fees charged by the Manager for its 
management services (which include compensating the Sub-Advisers), each 
shareholder will have the information to determine whether, in its 
judgment, the total package of 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 shareholders with sufficient and clear 
information to determine whether they are receiving good value from the 
Manager and the Sub-Advisers and whether to redeem their shares if 
dissatisfied with the level of performance for the price paid.
    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 their 
request satisfies these standards.

Applicants' Conditions

    Applicants agree that the following conditions may be imposed in 
any order of the Commission granting the requested relief:
    1. The Manager will provide general management and, alone or 
together with Smith Barney Mutual Funds Management and Boston Advisors, 
administrative services to the Trust, including overall supervisory 
responsibility for the general management and investment of the Trust's 
securities portfolio, and, subject to review and approval by the Board, 
will: (a) set the Portfolios' overall investment strategies; (b) select 
Sub-Advisers; (c) monitor and evaluate the performance of Sub-Advisers; 
(d) allocate and, when appropriate, reallocate a Portfolio's assets 
among its Sub-Advisers in those cases where a Portfolio has more than 
one Sub-Adviser; and (e) implement procedures reasonably designed to 
ensure that the Sub-Advisers comply with the Trust's investment 
objectives, policies, and restrictions.
    2. Before a Portfolio may rely on the order requested hereby, the 
operation of the Portfolio in the manner described in the application 
will be approved by a majority of its outstanding voting securities, as 
defined in the Act, or, in the case of a new Portfolio whose public 
shareholders purchased shares on the basis of a prospectus containing 
the disclosure contemplated by condition 4 below, by the sole 
stockholder before offering of shares of such Portfolio to the public.
    3. The Trust will furnish to shareholders all information about a 
new Sub-Adviser or Advisory 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 Sub-Advisers. Such information will 
include Aggregate Fee Disclosure and any change in such disclosure 
caused by the addition of a new Sub-Adviser or any proposed material 
change in a Portfolio's Advisory Agreement. The Trust will meet this 
condition by providing shareholders with an informal information 
statement complying with the provisions of Regulation 14C and Schedule 
14C under the Exchange Act. With respect to a newly retained Sub-
Adviser, or a change in an Advisory Agreement, this information 
statement will be provided to shareholders of the Portfolio a maximum 
of 90 days after the addition of the new Sub-Adviser or the 
implementation of any change in an Advisory Agreement. The information 
statement will also meet the requirements of Schedule 14A, except as 
modified by the order with respect to the disclosure of fees paid to 
the Sub-Advisers.
    4. The Trust will disclose in its prospectus the existence, 
substance, and effect of the order granted pursuant to the application.
    5. No Trustee or officer of the Trust or director or officer of the 
Manager will own directly or indirectly (other than through a pooled 
investment vehicle that is not controlled by such director, trustee, or 
officer) any interest in any Sub-Adviser except for: (a) ownership of 
interests in the Manager or any entity that controls, is controlled by, 
or is under common control with the Manager; 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 Sub-Adviser or an entity 
that controls, is controlled by, or is under common control with a Sub-
Adviser.
    6. Shares of the Trust will be offered exclusively to participants 
in TRAK and other asset allocation services offered by professional 
asset managers who, for compensation, engage in the business of 
advising others as to the value of securities or as to the advisability 
of investing in, purchasing or selling securities.
    7. The Trust will disclose in its registration statement the 
Aggregate Fee Disclosure.
    8. The Manager will not enter into an Advisory Agreement with any 
Affiliated Sub-Adviser without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Portfolio.
    9. At all times, a majority of the members of the Board will be 
persons each of whom is not an ``interested person'' of the Trust as 
defined in section 2(a)(19) of the Act (``Independent Trustees''), and 
the nomination of new or additional Independent Trustees will be placed 
within the discretion of the then existing Independent Trustees.
    10. Independent counsel knowledgeable about the Act and the duties 
of Independent Trustees will be engaged to represent the Independent 
Trustees. The selection of such counsel will be placed within the 
discretion of the then existing Independent Trustees.
    11. The Manager will provide the Board, no less frequently than 
quarterly, information about the Manager's profitability on a per-
Portfolio basis. Such information will reflect the impact on 
profitability of the hiring or termination of any Sub-Adviser during 
the applicable quarter.
    12. Whenever a Sub-Adviser is hired or terminated, the Manager will 
provide the Board information showing the expected impact on the 
Manager's profitability.
    13. When a Sub-Adviser change is proposed for a Portfolio with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
Board's 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 the Manager or the Affiliated Sub-Adviser derives 
an inappropriate advantage.


[[Page 44913]]

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21361 Filed 8-28-95; 8:45 am]
BILLING CODE 8010-01-M