[Federal Register Volume 61, Number 179 (Friday, September 13, 1996)]
[Notices]
[Pages 48515-48518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23499]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22204; 812-10006]
Brinson Relationship Funds, et al.; Notice of Application
September 9, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``Act'').
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APPLICANTS: Brinson Relationship Funds (``Trust''), any subsequently
created series of the Trust for which Brinson Partners, Inc.
(``Brinson''), any entity resulting from Brinson changing its
jurisdiction or form of organization, or any entity controlling,
controlled by, or under common control with Brinson serves as
investment adviser (collectively, ``Series''), and Brinson.
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from section 12(d)(1) of the Act and under sections
6(c) and 17(b) of the Act for an exemption from section 17(a) of the
Act.
SUMMARY OF APPLICATION: Applicants request an order to permit any
Series to invest in any other Series, and certain Series to invest in
certain other Series in excess of the limits of section 12(d)(1) (A)
and (B). The order would amend and supersede a prior order by also
permitting the latter transactions.
FILING DATE: The application was filed on February 22, 1996, and
amended on April 22, 1996, and August 20, 1996. Applicants have agreed
to file an amendment during the notices period, the substance of which
is included in this notice.
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 October 7, 1996,
and should be accompanied by proof of service on applicants, in the
form of an affidavit, or, for lawyers, a certificate of service.
Hearing request should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: 209 South LaSalle St., Chicago, Illinois 60604-1295.
FOR FURTHER INFORMATION CONTACT:
Mercer E. Bullard, Branch Chief, at (202) 942-0564, or Elizabeth G.
Osterman, Assistant Director, 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Trust, a Delaware business trust, is registered under the
Act as an open-end management investment company. The Trust currently
offers the following six Series, each of which has its own investment
objective and policies: The Brinson Global Securities Fund (``Global
Fund''), the Brinson, Emerging Markets Equity Fund, the Brinson
Emerging Markets Debt Fund, the Brinson Post-Venture Fund, the Brinson
High Yield Fund, High Yield Fund, and the Brinson Short-Term Fund. Only
accredited investors, as defined in Regulation D under the Securities
Act of 1933, may invest in the Trust. The Trust imposes no sales
charges or advisory fees and has no
[[Page 48516]]
distribution plan pursuant to section rule 12b-1 under the Act. One
Series, the Brinson Emerging Markets Equity Fund, charges a redemption
fee, but any investment by any other Series in that Fund will not be
subject to the fee.
2. Brinson, a wholly-owned subsidiary of Swiss Bank Corporation, is
a registered investment adviser under the Investment Advisers Act of
1940. Brinson serves as the investment adviser to each Series. Fund/
Plan Services, Inc. (``Administrator'') provides general
administrative, accounting and pricing and transfer agency services to
each Series, and Bankers Trust Company (``Custodian'') serves as
custodian for each Series.
3. Applications request an order to permit each Series to purchase
shares of another Series (each purchasing Series, an ``Investing
Series''), and to sell its shares to another Series and redeem such
shares upon tender by the other Series (each selling Series, a ``Target
Series''), and for Brinson to effect such transactions, all in
accordance with section 12(d) of the Act.\1\ For purposes of the limits
in section 12(d)(1)(A) of the Act, each Target Series will be treated
as a separate investment company, which means that an Investing Series'
ownership of a Target Series will not be aggregated with its ownership
of any other Target Series in determining compliance with the limits of
that section.
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\1\ Applicants previously obtained an order permitting such
transactions, except that the order did not permit the in-kind
transactions between the Series, which would be permitted pursuant
to the order requested in the application. Brinson Relationship
Funds, Investment Company Act Release Nos. 21662 (Jan. 5, 1996)
(notice) and 21724 (Jan. 31, 1996) (order) (``Prior Order''). The
Prior Order would be superseded by the order requested herein.
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4. Applicants expect that an Investing Series may transfer
portfolio securities to a Target Series, or a Target Series may
transfer portfolio securities to an Investing Series, in exchange for
shares of the Target Series. Applicants contemplate three situations in
which such in-kind transactions may occur: (1) When an Investing Series
makes an initial investment in the Target Series; (2) in order to avoid
unnecessary expense when a Target Series wishes to purchase a security
that an Investing Series wishes to sell; and (3) in order for the
Target Series to reduce trading costs in the event of unusually large
purchases or redemptions. Such in-kind transactions would occur in the
first two situations only when the Investing Series holds portfolio
securities that would be appropriate investments for a Target Series.
These in-kind transactions will comply with the provisions of
paragraphs (a) through (f) of rule 17a-7, except that the consideration
for the portfolio securities will be shares of the Target Series,
rather than cash. In-kind distributions of portfolio securities by a
Target Series in redemption of its shares would be made pro rata.
5. Each Investing Series may invest the assets it allocates to
particular asset classes in a Target Series that primarily invests in
such classes, while also retaining its ability to invest directly in
the securities within such asset classes, as authorized by the
investing Series' investment objectives and policies. If Brinson
believes that it can more economically invest in an asset class
directly, rather than through a Target Series, then such direct
investment will be made. Each Target Series would reserve the right to
discontinue selling shares to any Investing Series if the board of
trustees of the Trust determines that sales of the Target Series'
shares would adversely affect such Series' portfolio management and
operations. Brinson will monitor the magnitude and performance of each
Investing Series' investments in the Target Series.
6. Applicants also request to amend the Prior Order to permit any
Investing Series that is an Asset Allocation Series (as defined below)
to invest in any Target Series that is a Core Series (as defined below)
in excess of the limits of section 12(d)(1)(A) of the Act, and the Core
Series to sell its shares to the Asset Allocation Series in excess of
the limits of section 12(d)(1)(B) of the Act. An Asset Allocation
Series is the Global Fund and any Series which may be created in the
future which employs an active asset allocation strategy of investing
in two or more specific asset classes and which propose to invest in
Target Series that are Core Series in excess of the limits of section
12(d)(1)(A). A Core Series is the Brinson Emerging Markets Equity Fund,
the Brinson Emerging Markets Debt Fund, the Brinson Post-Venture Fund,
the Brinson High Yield Fund, the Brinson Short-Term Fund, and any
Series which may be created in the future which invests at least 65
percent of its assets in one particular asset class and in which an
Asset Allocation Series may invest in excess of limits of section
12(d)(1)(A). No Asset Allocation Series will also be a Core Series.
7. The Global Fund employs active asset allocation strategies
across global equity, fixed income, and money markets and active
security selection within each market. The Global Fund may invest in
certain asset classes by investing in a Series that invests in that
asset class. For example, the Global Fund may invest in equity and debt
securities in emerging markets by investing in two other Series of the
Trust: the Brinson Emerging Markets Equity Fund and the Brinson
Emerging Markets Debt Fund. Such investments by the Global Fund, as
well as investments in other Series of the Trust, may be made in excess
of the limits of section 12(d)(1).
8. Brinson also serve as investment adviser to another investment
company, The Brinson Funds, which offers shares in ten different
Series. Pursuant to a prior order,\2\ Brinson, The Brinson Funds, and
the Trust obtained exemptive relief to permit The Brinson Funds to
invest in the Trust and the Trust to sell its shares to The Brinson
Funds in excess of the limits of sections 12(d)(1) (A) and (B).
Applicants represents that if any Series of The Brinson Funds invests
in a Series in excess of the limits of section 12(d)(1)(A), such Series
will not invest in any other investment company or portfolio thereof
(including another Series) in excess of the limits of section
12(d)(1)(A).
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\2\ Investment Company Act Release Nos. 21922 (Apr. 29, 1996)
(notice) and 21984 (May 28, 1996) (order).
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Applicants' Legal Analysis
1. Section 17(a) of the Act makes it unlawful for an affiliated
person of a registered investment company to sell securities to, or
purchase securities from, the company. Applicants believe that the
Investing and Target Series may be affiliated persons under section
2(a)(3) of the Act because they share a common investment adviser, and
that the Asset Allocation and Core Series may be affiliated persons for
the additional reason that an Asset Allocation Series may own more than
five percent of a Core Series.
2. Applicants believe that section 17(a) was intended to prohibit
affiliated persons in a position of influence or control over an
investment company to further their own interests by selling property
to an investment company at an inflated value, by purchasing property
from an investment company at less than its fair value, or by selling
or purchasing property on terms that involve overreaching by the
affiliated person. Applicants assert that investments by Investing
Series in Target Series will not result in any of the abuses that
section 17(a) was designed to prevent. Applicants also believe that it
is appropriate to permit the in-kind transactions described above
because they do not differ materially from the kind of transactions
that rule
[[Page 48517]]
17a-7 was intended to exempt from the prohibitions of section 17(a).
3. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that:
(1) The terms of the proposed transaction are reasonable and fair and
do not involve overreaching; (2) the proposed transaction is consistent
with the policies of the registered investment company involved; and
(3) the proposed transaction is consistent with the general provisions
of the Act.
4. Applicants believe that, for the following reasons, the section
17(b) standard has been satisfied. Applicants contend that the
Investing Series' purchase and redemption of a Target Series' shares
will be effected at net asset value, which is the same consideration
paid and received by other shareholders. Applicants also state that no
sales loads, redemption fees, or distribution fees under rule 12b-1
will be charged in connection with transactions between Investing and
Target Series, and Brinson will receive no advisory fee from the
Series. Finally, applicants assert that Investing Series' investments
in Target Series will be made in accordance with each Investing Series'
investment restrictions and its policies set forth in its registration
statement. Applicants also believe that the in-kind transactions are
reasonable and fair and do not involve overreaching.
5. Applicants believe that substantial benefits may flow to
investors if Investing Series may invest in Target Series. Applicants
contend that Investing Series will be able largely to eliminate
brokerage costs and custody fees when they invest in Target Series
rather than investing directly in individual securities. Applicants
also assert that the Investing Series will realize efficiencies when
investing small portions in certain asset classes. Direct investments
in such asset classes would require the Series' managers to follow a
large number of issuers to make a relatively small investment.
Applicants believe it will be more efficient to exploit the expertise
of portfolio managers of Target Series who specialize in such asset
classes. Finally, Applicants believe that investing in Target Series
will provide greater diversification because it will expose the
Investing Series to a greater range of issuers than if the Series
invested directly.
6. Section 12(d)(1)(A) of the Act provides that no registered
investment company may acquire securities of another investment company
if such securities represent more than 3% of the acquired company's
outstanding voting stock, more than 5% of the acquiring company's total
assets, or if such securities, together with the securities of any
other acquired investment companies, represent more than 10% of the
acquiring company's total assets. Section 12(d)(1)(B) provides that no
registered open-end investment company may sell its securities to
another investment company if the sale will cause the acquiring company
to own more than 3% of the acquired company's voting stock, or if the
sale will cause more than 10% of the acquired company's voting stock to
be owned by investment companies.
7. Applicants assert that the restrictions in section 12(d)(1) were
intended to prevent the negative effects associated with unregulated
pyramiding of investment companies, including (1) unnecessary
duplication of costs (e.g. sales loads, advisory fees, and
administrative costs); (2) undue influence by the fund holding company
over its underlying funds; (3) the threat of large scale redemptions of
the securities of the underlying investment companies. For the
following reasons, applicants believe that the proposed arrangements
will not give rise to these dangers.
8. Applicants contend that the proposed structure will not result
in significant duplication of the costs of distribution, portfolio
management, fund administration or operations. Instead, applicants
believe that efficiencies that the Asset Allocation Series should
achieve in portfolio management and fund operations will result in net
cost savings. Applicants assert that there will be no layering of sales
or distribution charges, or advisory fees, because no investment by an
Asset Allocation Series will be subject to such charges or fees.
Applicants argue that the Administrator will not receive higher fees,
as the administration and accounting fees paid to it by the Asset
Allocation Series will be reduced by an amount equal to fees paid for
such services by the Core Series to the extent that they are
attributable to the Asset Allocation Series' investment in the Core
Series. Applicants also believe that each Asset Allocation Series'
custodial fees will be lower than if it invested directly in the
securities held by the Core Series.
9. Applicants believe that there is no risk that the management of
an Asset Allocation Series will exercise inappropriate control or undue
influence over the management of the Core Series because Brinson is the
adviser for all Series, and because there will be a small number of
investors in the Core Series, which are marketed solely to accredited
investors.
10. Applicants contend that the proposed transactions will reduce
the potential for disruptive large scale redemptions because Brinson
will serve as investment adviser to the Series and the Series will be
part of the same ``group of investment companies,'' as defined in rule
11a-3 under the Act.
11. Section 6(c) of the Act provides that the SEC may exempt
persons or transactions from any provision of the Act if such exemption
is necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the Act.
Applicants believe that the transactions described above meet the
standards set forth in section 6(c).
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Target Series' shares purchased by an Investing Series will
not be subject to a sales load, redemption fee, advisory fee, or
distribution fee under a plan adopted in accordance with rule 12b-1
under the Act.
2. Investment in shares of a Target Series will be in accordance
with each Investing Series' respective investment restrictions and will
be consistent with its policies as recited in its registration
statement.
3. The applicants will cause Brinson, the Administrator, the
Custodian, and their respective affiliates, in their capacities as
service providers to the Target Series, to remit to the respective
Investing Series, or to waive, an amount equal to all fees received by
them or their affiliates under their respective agreements with the
Trust, on behalf of the Target Series, to the extent such fees are
based upon the Investing Series' assets invested in the shares of a
Target Series. Any of these fees remitted or waived will not be subject
to recoupment by Brinson, the Administrator, the Custodian, or their
respective affiliates at a later date.
4. If Brinson waives any portion of a Target Series' fees or bears
any portion of the expenses of a Target Series (an ``Expense Waiver''),
the adjusted fees for a Target Series (gross fees minus Expense Waiver)
will be calculated without reference to the amounts waived or remitted
pursuant to condition 3 above. If the amount waived pursuant to
condition 3 exceeds adjusted fees, Brinson also will reimburse the
Investing Series in an amount equal to such excess.
[[Page 48518]]
5. Each Asset Allocation Series and each Core Series will be part
of the same ``group of investment companies,'' as defined in rule 11a-3
under the Act.
6. No Core Series will acquire securities of any investment company
or series thereof in excess of the limits contained in section
12(d)(1)(A) of the Act.
7. A majority of the trustees of the Trust will not be ``interested
persons,'' as defined in section 2(a)(19) of the Act.
8. Applicants agree to provide the following information, in
electronic format, to the Chief Financial Analyst of the SEC's Division
of Investment Management: monthly average total assets of each Asset
Allocation Series and Core Series; monthly purchases and redemptions
(other than by exchange) for each Asset Allocation Series and each of
its Core Series; monthly exchanges into and out of each Asset
Allocation Series and each Core Series; month-end allocations of the
Asset Allocation Series' assets among its Core Series; annual expense
ratios for each Asset Allocation Series and for each of its Core
Series; and a description of any vote taken by the shareholders of any
Cores Series, including a statement of the percentage of votes cast for
and against the proposal by the Asset Allocation Series and by the
other shareholders of the Core Series. The information will be provided
as soon as reasonably practicable following each fiscal year-end of the
Trust (unless the Chief Financial Analyst shall notify applicants in
writing that such information need no longer be submitted).
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23499 Filed 9-12-96; 8:45 am]
BILLING CODE 8010-01-M