[Federal Register Volume 63, Number 161 (Thursday, August 20, 1998)]
[Notices]
[Pages 44663-44665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22434]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23391; 812-10842]


Diversified Investors Portfolios, et al.; Notice of Application

August 17, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the 
act from the provisions of section 15(a) of the Act and rule 18f-2 
under the Act.

SUMMARY OF APPLICATION: Applicants seek an order to permit them to 
enter into and materially amend contracts with subadvisers without 
shareholder approval.

APPLICANTS: Diversified Investors Portfolios (``DIP'') and Diversified 
Investment Advisors, Inc. (the ``Manager'').

FILING DATE: The application was filed on October 28, 1997, and amended 
on April 20, 1998. Applicants have agreed to file an amendment during 
the notice period, the substance of which is reflected in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving the applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on September 8, 1998, 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 writers' request, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, 4 Manhattanville 
Road, Purchase, New York 10577, Attention: Robert F. Colby.

FOR FURTHER INFORMATION CONTACT:
Lawrence W. Pisto, Senior Counsel, at (202) 942-0527, or Nadya B. 
Roytblat, 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 at the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549 (tel. (202) 942-8090).

Applicants' Representations

    1. DIP is organized as a New York trust and is registered under the 
Act as an open-end management investment company. DIP currently 
consists of thirteen portfolios (the ``Core Portfolios''). Beneficial 
interests in the Core Portfolios are issued solely in private placement 
transactions that do not involve any ``public offering'' within the 
meaning of Section 4(2) of the Securities Act of 1933 (the ``Securities 
Act''). Investments in the Core Portfolios may only be made by 
investment companies, insurance company separate accounts (including 
accounts registered under the Act and accounts not so registered), 
common or commingled trust funds or similar organizations or entities 
that are ``accredited investors'' within the meaning of Regulation D 
under the Securities Act. Each Core Portfolio serves as a master fund 
in a master/feeder structure. Each registered investment company (or 
series thereof) which invests its investable assets in a Core Portfolio 
is referred to as a feeder fund (``Feeder Fund'').
    2. DIP has entered into investment management agreements with the 
Manager with respect to each of the Core Portfolios (each a 
``Management Agreement''). The Manager is registered under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). Under the terms 
of the Management Agreements, the Manager supervises the overall 
administration of the Core Portfolios, providing or overseeing the 
provision of all business, administrative, investment advisory and, if 
applicable, portfolio management services. For its services, the 
Manager receives a management fee at an annual rate based on a 
percentage of the applicable Core Portfolio's average net assets.
    3. The Manager seeks to enhance performance of the Core Portfolios 
and reduce risk by selecting one or more ``specialist'' subadvisers 
(``Subadvisers''). The Manager selects Subadvisers based on a rigorous 
process which includes researching each Subadviser's asset class, track 
record, organizational structure, management team, consistency of 
performance, assets under management, and other factors. The Manager 
continuously monitors a Subadviser's performance on both a quantitative 
and qualitative basis.
    4. The specific investment decisions for each Core Portfolio are 
made by one or more Subadvisers, each of which has discretionary 
authority to invest all or a portion of the assets of the particular 
Core Portfolio, subject to general supervision by the Manager and DIP's 
Broad of Trustees (``Board''). Each Subadviser is or will be registered 
under the Advisers Act.\1\ Each of the Subadvisers receives a 
subadvisory fee from the Manager at an annual rate based on a 
percentage of the applicable Core Portfolio's average net assets. Of 
the thirteen Core Portfolios, eleven currently have one Subadviser, one 
has two Subadvisers, and one has four Subadvisers.
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    \1\ Each Subadviser will be registered under the Advisers Act 
unless it is a ``bank'' as defined in the advisers Act or is 
otherwise excluded from the definition of ``investment adviser'' 
under section 202(a)(11) of the Advisers Act.
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    5. Applicants request an order that would permit the Manager, 
subject to the oversight by the Board, to enter into and materially 
amend agreements with Subadvisers (``Subadvisory Agreements'') without 
shareholder approval. Applicants believe that this relief would enable 
the Core Portfolios to operate more efficiently and consistently with 
the Manager-Subadviser structure.

Applicants' Legal Analysis

    1. Section 15(a) of the Act makes it unlawful for any person to act 
as an investment adviser to a registered investment company except 
pursuant to a written contract that has been approved by a majority of 
the investment company's outstanding voting securities. Rule 18f-2 
provides that each series or class of stock in a series company must 
approve the matter if the Act requires shareholder approval.\2\
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    \2\ In the case of the Core Portfolios, which are ``master'' 
funds in a master/feeder structure, shareholder approval 
requirements under section 15(a) and rule 18f-2 also are governed by 
the voting provisions set forth in section 1 12(d)(1)(E) of the Act.
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    2. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security, or transaction from any provision of the Act to the 
extent that 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.

[[Page 44664]]

    3. Applicants request an order under section 6(c) that would exempt 
them from section 15(a) and rule 18f-2 to permit the Manager, subject 
to approval by the Board, to enter into and materially amend 
Subadvisory Agreements without shareholder approval. Applicants request 
that the relief extend to the existing Core Portfolios as well as 
future series of DIP and any other registered open-end management 
investment company advised by the Manager or a person controlling, 
controlled by, or under common control with the Manager that operates 
in substantially the same manner as DIP with respect to the Manager-
Subadviser structure and complies with the terms and conditions of the 
application (``Future Fund'').
    4. Applicants state that, from the perspective of the investor in a 
Core Portfolio or Feeder Fund, the role of the Subadviser is comparable 
to that of the individual portfolio managers employed by other 
investment advisory firms. The Subadvisers are concerned only with 
selection of portfolio investments in accordance with a Core 
Portfolio's investment objective and policies and have no broader 
supervisory, management or administrative responsibilities with respect 
to the Core Portfolio. Applicants state that the Core Portfolios thus 
offer the Manager/Subadviser structure to allow investors the 
opportunity to invest their assets in a selection of investment 
disciplines managed by their respective Subadvisers. The Manager, based 
on its own analyses and experience, determines which Subadvisers are 
likely to make specific portfolio securities selections which, in the 
aggregate, will achieve the desired and defined objectives of a 
particular investment discipline under existing market conditions. 
Investors also obtain the Manager's constant supervision of these 
Subadvisers, so that new Subadvisers can be introduced in response to 
changing market conditions or a Subadviser's performance, in each case 
in an attempt to improve the overall performance of the Core 
Portfolios.
    5. Applicants believe that investors in a Feeder Fund or Core 
Portfolio are, in effect, electing to have the Manager select one or 
more Subadvisers best suited to achieve that Core Portfolio's 
investment objective. Part of such investor's investment decision is a 
decision to have those selections made by a professional management 
organization, such as the Manager, with substantial experience in 
making such evaluations and selections (or in recommending the 
termination of Subadvisers, as deemed appropriate by the Manager). 
Applicants thus believe that the requested relief will allow the Core 
Portfolio to operate more efficiently and in accordance with investor 
expectations. Applicants also note that the Management Agreement will 
remain subject to the shareholder voting requirements of section 15(a).

Applicants' Conditions

    1. Before a Core Portfolio may rely on the order requested in the 
application, the operation of the Core Portfolio in the manner 
described in the application will be approved by a majority of the 
outstanding voting securities of the Core Portfolio, within the meaning 
of the Act, pursuant to voting instructions provided by shareholders of 
those Feeder Funds investing in such Core Portfolio (or by the unit 
holders in the case of Feeder Funds that are insurance company separate 
accounts) that are registered under the Act or other voting 
arrangements that comply with section 12(d)(1)(E)(iii)(aa) of the Act, 
if applicable. Before a Future Fund may rely on the order requested in 
the application, the operation of the Future Fund in the manner 
described in the application will be approved by a majority of the 
outstanding voting securities of the Future Fund, within the meaning of 
the Act, pursuant to voting instructions provided by the shareholders 
of the Future Fund (or by unit holders in the case of a Future Fund 
that is an insurance company separate account registered under the 
Act), in accordance with section 12(d)(1)(E)(iii)(aa) of the Act, or in 
the case of a Future Fund whose shareholders or unit holders, as the 
case may be, purchase shares in a public offering on the basis of a 
prospectus containing the disclosure contemplated by Condition 2 below, 
by the initial shareholder(s) before the shares of the Future Fund are 
offered to the public.
    2. A Feeder Fund's prospectus, DIP's or Future Fund's offering 
documents and, if applicable, DIP's or Future Fund's prospectus, will 
disclose the existence, substance and effect of any order granted 
pursuant to this application. In addition, the Feeder Funds, the Core 
Portfolios and Future Funds will hold themselves out as employing the 
Manager/Subadviser approach described in the application. A Feeder 
Fund's prospectus, DIP's or Future Fund's offering documents and, if 
applicable, DIP's or Future Fund's prospectus, will prominently 
disclose that the Manager has ultimate responsibility to oversee the 
Subadvisers and recommend their hiring, termination, and replacement.
    3. The Manager will provide management and administrative services 
to the core Portfolios and, subject to the review and approval by the 
Board, will, as necessary: set each Core Portfolio's overall investment 
strategies; select Subadvisers; allocate and reallocate, as 
appropriate, each Core Portfolio's assets among Subadvisers; monitor 
and evaluate Subadviser performance; and oversee Subadviser compliance 
with the investment objective, policies and restrictions of the 
applicable Core Portfolio.
    4. At all times, a majority of the Board will be persons who are 
not ``interested persons'' of DIP, within the meaning of section 
2(a)(19) of the Act (the ``Independent Trustees''), and the nomination 
of new or additional Independent Trustees will be placed within the 
discretion of the then existing Independent Trustees.
    5. Neither the Manager nor a Core Portfolio will enter into a 
Subadvisory Agreement with any subadviser that is an affiliated person 
of DIP or the Manager, within the meaning of section 2(a)(3) of the Act 
(each an ``Affiliated Subadviser''), other than by reason of serving as 
Subadviser to one or more Core Portfolios, without such Subadvisory 
Agreement, including the compensation to be paid thereunder, being 
approved by the shareholders of the applicable Core Portfolio pursuant 
to voting instructions provided by shareholders of those Feeder Funds 
investing in such Core Portfolios (or by unit holders in the case of 
Feeder Funds that are insurance company separate accounts) that are 
registered under the Act or other voting arrangements that comply with 
12(d)(1)(E)(iii)(aa) of the Act, if applicable.
    6. When a Subadviser change is proposed for a Core Portfolio with 
an Affiliated Subadviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
minutes of the meetings of the Board that such change is in the best 
interests of the applicable Core Portfolio and its investors 
(including, in the case of a Core Portfolio offered to insurance 
company separate accounts, the unit holders of any separate account for 
which that Core Portfolio serves as a funding medium) and does not 
involve a conflict of interest from which the Manager or the Affiliated 
Subadviser derives an inappropriate advantage.
    7. No director, trustee or officer of DIP or the Manager will own 
directly or indirectly (other than through a pooled investment vehicle 
that is not controlled by the director, trustee or officer) any 
interest in a Subadviser except for ownership of (i) interests in the 
Manager

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or any entity that controls, is controlled by, or is under common 
control with the Manager; or (ii) less than 1% of the outstanding 
securities of any class of equity or debt of a publicly-traded company 
that is either a Subadviser or an entity that controls, is controlled 
by, or is under common control with a Subadviser.
    8. Within 75 days of the hiring of any new Subadviser, the Manager 
will furnish the shareholders of the applicable Core Portfolio and 
Feeder Funds (including in the case of a Feeder Fund that is an 
insurance company separate account, the unit holders of that separate 
account) all the information that would have been included in a proxy 
statement. Such information will include any changes in such 
information caused by the addition of a new Subadviser. To meet this 
obligation, the Manager will provide the shareholders of the applicable 
Core Portfolios and Feeder Funds (including in the case of a Feeder 
Fund that is an insurance company separate account, the unit holders of 
that separate account) with an information statement meeting the 
requirements of Regulation 14C and Schedule 14C under the Securities 
Exchange Act of 1934 (the ``Exchange Act''), as well as the 
requirements of Item 22 of Schedule 14A under the Exchange Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-22434 Filed 8-19-98; 8:45 am]
BILLING CODE 8010-01-M