[Federal Register Volume 64, Number 71 (Wednesday, April 14, 1999)]
[Notices]
[Pages 18454-18457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9245]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23773; 812-11030-02]


AMR Investment Services Trust, et al.; Notice of Application

April 7, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under sections 6(c) and 
17(b) of the Investment Company Act of 1940 (``Act'') for an exemption 
from section 17(a) of the Act, under section 6(c) for an exemption from 
section 17(e) of the Act and rule 17e-1 under the Act, and under 
section 10(f) of the Act for an exemption from section 10(f).

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SUMMARY OF THE APPLICATION: Applicants request an order to permit 
certain registered open-end management investment companies advised by 
several investment advisers to engage in principal and brokerage 
transactions with a broker-dealer affiliated with one of the investment 
advisers and to purchase securities in offerings underwritten by a 
principal underwriter affiliated with one of the investment advisers. 
The transactions would be between a broker-dealer or principal 
underwriter and a portion of the investment company's portfolio not 
advised by the adviser affiliated with the broker-dealer or principal 
underwriter. Applicants also request relief to permit a portion of the 
portfolio to purchase securities in offering underwritten by a 
principal underwriter affiliated with the investment adviser to that 
portion if the purchase is in accordance with all of the conditions to 
rule 10f-3 under the Act, except for the provision that would require 
aggregation of certain purchases.

APPLICANTS: AMR Investment Services Trust (``AMR Trust''), AMR 
Investment Services, Inc. (``Adviser''), Brandywine Asset Management, 
Inc. (``Brandywine''), Lazard Freres & Co. LLC (``LF''), Legg Mason 
Wood Walker, Inc. (``LMWW''), and Howard, Weil, Labouisse, Friedrichs, 
Inc. (``HWLF'').

FILING DATES: The application was filed on February 26, 1998, and 
amended on March 26, 1999. 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 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 May 3, 1999, and should be accompanied by proof of service on 
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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609. Applicants: AMR Trust and Adviser, 4333 Amon Carter 
Boulevard, MD 5645, Fort Worth, TX 76155; Brandywine, 201 North Walnut 
Street, Wilmington, DE 19801; LF, 30 Rockefeller Plaza, 59th Floor, New 
York 10112; LMWW, 100 Light Street, Baltimore, MD 21202; and HWLF, 1100 
Light Street, Baltimore, MD 21202; and HWLF, 1100 Poydras Street, Ste. 
3500, New Orleans, LA 70163.

FOR FURTHER INFORMATION CONTACT: Michael W. Mundt, Staff Attorney, at 
(202) 942-0578, or George J. Zornada, Branch Chief, at (202) 942-0564 
(Office of Investment Company Regulation, Division of Investment 
Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

[[Page 18455]]

Applicants' Representations

    1. AMR Trust is a New York common law trust registered under the 
Act as an open-end management investment company with nine series. 
Interests in AMR Trust are offered to the American AAdvantage Funds and 
the American AAdvantage Mileage Funds (collectively, the ``American 
Trusts'') and other institutions in private offerings exempt from 
registration under section 4(2) of the Securities Act of 1933. Each 
series of the American Trusts, with the exception of American 
AAdvantage S&P 500 Index Fund and the American AAdvantage S&P 500 Index 
Mileage Fund, invests all of its investable assets in a series of AMR 
Trust that has the same investment objectives.
    2. The Adviser is registered under the Investment Advisers Act of 
1940 (``Advisers Act'') and is a wholly-owned subsidiary of AMR 
Corporation. The Adviser provides administrative services to the 
American Trusts and investment advisory and administrative services to 
AMR Trust. The assets of certain portfolios of AMR Trust are allocated 
by the Adviser among two to five subadvisers (``Subadvisers''). Each 
Subadviser has discretion to purchase and sell securities for a 
discrete portion of a portfolio's assets in accordance with the 
portfolio's objectives, policies and restrictions, and the specific 
strategies provided by the Adviser \1\ Each Subadviser is paid a fee by 
the Adviser out of the management fee received by the Adviser from AMR 
Trust. The Adviser also may directly advise a discrete portion of a 
portfolio.
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    \1\ The specific strategies are limited to general guidelines 
that do not restrict a Subadviser's discretion to purchase or sell 
particular securities for its segment of a Portfolio's assets.
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    3. Brandywine, a wholly owned subsidiary of Legg Mason, Inc., is an 
investment adviser registered under the Advisers Act that serves as 
Subadviser to three portfolios of AMR Trust LMWW and HWLF are broker-
dealers registered under the Securities Exchange Act of 1934 
(``Exchange Act'') that are also wholly owned subsidiaries of Legg 
Mason, Inc. LMWW and HWLF are under common control with Brandywine. LF 
is an investment adviser registered under the Advisers Act and a 
broker-dealer registered under the Exchange Act. Lazard Asset 
Management (``LAM'') is an operating division of LF that serves as a 
Subadviser.
    4. The requested relief would permit: (a) LF, LMWW, HWLF, or any 
broker-dealer registered under the Exchange Act that itself serves as 
Subadviser (either directly or through a separate operating division) 
or is an affiliated person (an ``Affiliated Broker-Dealer'') of LAM, 
Brandywine, or another investment adviser serving as Subadviser (an 
``Affiliated Subadviser'') to one or more series (each a ``Portfolio'') 
of a Multi-managed Fund (as defined below) to engage in principal 
transactions with a portion of the Portfolio that is advised by another 
Subadviser that is not an affiliated person of the Affiliated Broker-
Dealer or the Affiliated Subadviser (an ``Unaffiliated Subadviser'') 
(each such portion, an ``Unaffiliated Portion''); (b) an Affiliated 
Broker-Dealer to provide brokerage services to an Unaffiliated Portion, 
and the Unaffiliated Portion to utilize such brokerage services, 
without complying with rule 17e-1 (b) and (c) under the Act; (c) an 
Unaffiliated Portion to purchase securities during the existence of an 
underwriting syndicate, a principal underwriter of which is an 
Affiliated Subadviser or an affiliated person of an Affiliated 
Subadviser (an ``Affiliated Underwriter''); and (d) a portion of the 
Portfolio advised by an Affiliated Subadviser (``Affiliated Portion'') 
to purchase securities during the existence of an underwriting 
syndicate, a principal underwriter of which is an Affiliated 
Underwriter, in accordance with the conditions of rule 10f-3 except 
that paragraph (b)(7) of the rule would not require the aggregation of 
purchases by the Affiliated Portion with purchases by an Unaffiliated 
Portion.\2\
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    \2\ The terms ``Unaffiliated Subadviser,'' ``Subadviser'' and 
``Unaffiliated Portion'' include the Adviser and the discrete 
portion of a Portfolio directly advised by the Adviser, 
respectively, provided that the Adviser manages its portion of the 
Portfolio independently of the portions managed by the other 
Subadvisers to the Portfolio, and the Adviser does not control or 
influence any other Subadviser's investment decisions as to specific 
securities for the other Subadviser's portion of the Portfolio.
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    5. Applicants request that the exemptive relief apply to AMR Trust 
or any existing or future registered open-end management investment 
company (a) advised by the Adviser or any entity controlling, 
controlled by, or under common control (within the meaning of section 
2(a)(9) of the Act) with the Adviser and (b) at least one other 
investment adviser registered under the Advisers Act or exempt from 
such registration (AMR Trust and such investment companies, each a 
``Multi-managed Fund''). The relief also would apply as described in 
the application to any existing or future entity that serves as an 
Affiliated Subadviser, Affiliated Broker-Dealer, or Affiliated 
Underwriter. Any entity that currently intends to rely on the order is 
named as an applicant. Any other existing or future entity that relies 
on the order will comply with the terms and conditions of the 
application.

Applicants' Legal Analysis

A. Principal Transactions Between Unaffiliated Portions and Affiliated 
Broker-Dealers

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and an affiliated 
person of, promoter of, or principal underwriter for such company, or 
any affiliated person of an affiliated person, promoter, or principal 
underwriter. Section 2(a)(3)(E) of the Act defines an affiliated person 
to be any investment adviser of an investment company, and section 
2(a)(3)(C) of the Act defines an affiliated person of another person to 
include any person directly or indirectly controlling, controlled by, 
or under common control with such person. Applicants state that an 
Affiliated Subadviser would be an affiliated person of a Portfolio, and 
an Affiliated Broker-Dealer would be either an Affiliated Subadviser or 
an affiliated person of the Affiliated Subadviser, and thus an 
affiliated person of an affiliated person (``second-tier affiliated'' 
of a Portfolio, including the Unaffiliated Portion. Accordingly, 
applicants state that any transactions to be effected by an 
Unaffiliated Subadviser on behalf of an Unaffiliated Portion of a 
Portfolio with an Affiliated Broker-Dealer are subject to the 
prohibitions of section 17(a).
    2. Applicants seek relief under sections 6(c) and 17(b) to exempt 
principal transactions prohibited by section 17(a) because an 
Affiliated Broker-Dealer is deemed to be an affiliated person or a 
second-tier affiliate of an Unaffiliated Portion solely because an 
Affiliated Subadviser is the Subadviser to another portion of the same 
Portfolio. The requested relief would not be available if the 
Affiliated Broker-Dealer (except by virtue of serving as a Subadviser) 
is an affiliated person or a second-tier affiliate of the Adviser, the 
Unaffiliated Subadviser making the investment decision or any officer, 
director or employee of the Multi-managed Fund.
    3. Section 17(b) of the Act authorizes the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned, and the proposed transaction is consistent with

[[Page 18456]]

the policy of each registered investment company and the general 
purposes of the Act. Section 6(c) of the Act permits the Commission to 
exempt any person or transaction from any provision of the Act if the 
exemption is necessary or 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.
    4. Applicants contend that section 17(a) is intended to prevent 
persons who have the power to control an investment company from using 
that power to the person's own pecuniary advantage. Applicants assert 
that when the person acting on behalf of an investment company has no 
direct or indirect pecuniary interest in a party to a principal 
transaction, the abuses that section 17(a) is designed to prevent are 
not present. Applicants state that if an Unaffiliated Subadviser 
purchases securities on behalf of an unaffiliated portion in a 
principal transaction with an Affiliated Broker-Dealer any benefit that 
might inure to the Affiliated Broker-Dealer would not be shared by the 
Unaffiliated Subadviser. In addtion, applicants state that Subadvisers 
generally are paid on the basis of a percentage of the value of the 
assets allocated to their management. The execution of a transaction to 
the disadvantage of the Unaffiliated Portion would disadvantage the 
Unaffiliated Subadviser to the extent that it diminishes the value of 
the Unaffiliated Portion. Applicants further submit that Adviser's 
power to dismiss Subadvisers or to change the portion of a Portfolio 
allocated to each Subadviser reinforces a Subadviser's incentive to 
maximize the investment performance of this own portion of the 
Portfolio.
    5. Applicants state that each Subadviser's contract assigns it 
responsibility to manage a discrete portion of the Portfolio. Each 
Subadviser is responsible for making independent investment and 
brokerage allocation decisions based on its own research and credit 
evaluations. Applicants represent that the Adviser does not dictate 
brokerage allocation or investment decisions to any Portfolio advised 
by a Subadviser, or have the contractual right to do so, except with 
respect to a portion advised directly by the Adviser. Applicants 
contend that, in managing a discrete portion of a portfolio, each 
Subadviser acts for all practical purposes as though it is managing a 
separate investment company.
    6. Applicants state that the proposed transactions will be 
consistent with the policies of the Portfolio, since each Unaffiliated 
Subadviser is required to manage the Unaffiliated Portion in accordance 
with the investment objectives and related investment policies of the 
Portfolio as described in its registration statement. Applicants also 
assert that permitting the transaction will be consistent with the 
general purposes of the Act and in the public interest because the 
ability to engage in the transactions increases the likelihood of a 
Portfolio achieving best price and execution on its principal 
transactions, while giving rise to none of the abuses that section 
17(a) was designed to prevent.

B. Payment of Brokerage Compensation by Unaffiliated Portions to 
Affiliated Broker-Dealers.

    1. Section 17(e)(2) of the Act prohibits an affiliate or a second-
tier affiliate of a registered investment company from receiving 
compensation for acting as broker in connection with the sale of 
securities to or by the investment company if the compensation exceeds 
the limits prescribed by the section unless otherwise permitted by rule 
17e-1 under the Act. Rule 17e-1 sets forth the conditions under which 
an affiliated person or a second-tier affiliate of an investment 
company may receive a commission which would not exceed the ``usual and 
customary broker's commission'' for purposes of section 17(e)(2). Rule 
17e-1(b) requires the investment company's board of directors, 
including a majority of the directors who are not interested persons 
under section 2(a)(19) of the Act, to adopt certain procedures and to 
determine at last quarterly that all transactions effected in reliance 
on the rule complied with the procedures. Rule 17e-1(c) specifies the 
records that must be maintained by each investment company with respect 
to any transaction effected pursuant to rule 17e-1.
    2. As discussed above, applicants state that an Affiliated Broker-
Dealer is either an affiliated person (as Subadviser to another portion 
of the Portfolio) or a second-tier affiliate of an Unaffiliated Portion 
and thus subject to section 17(e). Applicants request an exemption 
under section 6(c) from section 17e-1 to the extent necessary to permit 
an Unaffiliated Portion to pay brokerage compensation to an Affiliated 
Broker-Dealer acting as broker in the ordinary course of business in 
connection with the sale of securities to or by such Unaffiliated 
Portion, without complying with the requirements of rule 17e-1(b) and 
(c). The requested exemption would apply only where an Affiliated 
Broker-Dealer is deemed to be an affiliated person or a second-tier 
affiliate of an Unaffiliated Portion solely because an Affiliated 
Subadviser is the Subadviser to another portion of the same Portfolio. 
The relief would not apply if the Affiliated Broker-Dealer (except by 
virtue of serving as Subadviser) is an affiliated person or a second-
tier affiliate of the Adviser, the Unaffiliated Subadviser to the 
Unaffiliated Portion of the Portfolio, or any officer, director or 
employee of the Multi-managed Fund.
    3. Applicants believe that the proposed brokerage transactions 
involve no conflicts of interest of possibility of self-dealing and 
will meet the standards of section 6(c). Applicants assert that the 
interests of an Unaffiliated Subadviser are directly aligned with the 
interests of the Unaffiliated Portion it advises, and an Unaffiliated 
Subadviser will enter into brokerage transactions with Affiliated 
Broker-Dealers only if the fees charged are reasonable and fair as 
required by rule 17e-1(a). Applicants also note that an Unaffiliated 
Subadviser has a fiduciary duty to obtain best price and execution for 
the Unaffiliated Portion.

C. Purchases of Securities From Offerings With Affiliated Underwriters

    1. Section 10(f) of the Act, in relevant part, prohibits a 
registered investment company from knowingly purchasing or otherwise 
acquiring, during the existence of any underwriting or selling 
syndicate, any security (except a security of which the company is the 
issuer) a principal underwriter of which is an officer, director, 
member of an advisory board, investment adviser, or employee of the 
company, or an affiliated person of any of those persons. Section 10(f) 
also provides that the Commission may exempt by order any transaction 
of classes of transactions from any of the provisions of section 10(f), 
if and to the extent that such exemption is consistent with the 
protection of investors. Rule 10f-3 under the Act exempts certain 
transactions from the prohibitions of section 10(f) if specified 
conditions are met. Paragraph (b)(7) of rule 10f-3 limits the 
securities purchased by the investment company, or by two or more 
investment companies having the same investment adviser, to 25% of the 
principal amount of the offering of the class of securities.
    2. Applicants state that each Subadviser, although under contract 
to manage only a distinct portion of a Portfolio, is considered an 
investment adviser to the entire Portfolios. As a result, applicants 
believe that all purchases of securities by an Unaffiliated Portion 
from an

[[Page 18457]]

underwriting syndicate a principal underwriter of which is an 
Affiliated Underwriter would be subject to section 10(f).
    3. Applicants request relief under section 10(f) from that section 
to permit an Unaffiliated Portion to purchase securities during the 
existence of an underwriting or selling syndicate, a principal 
underwriter of which is an Affiliated Underwriter. Applicants request 
relief from section 10(f) only to the extent those provisions apply 
solely because an Affiliated Subadviser is an investment adviser to the 
Portfolio. The requested relief would not be available if the 
Affiliated Underwriter (except by virtue of serving as Subadviser) is 
an affiliated person or a second-tier affiliate of the Adviser the 
Unaffiliated Subadviser making the investment decision with respect to 
the Unaffiliated Portion of the Portfolio, or any officer, director, or 
employee of the Multimanaged Fund. Applicants also seek relief from 
section 10(f) to permit an Affiliated Portion to purchase securities 
during the existence of an underwriting syndicate, a principal 
underwriter of which is an Affiliated Underwriter, provided that the 
purchase will be in accordance with the conditions of rule 10f-3, 
except that paragraph (b)(7) of the rule will not require the 
aggregation of purchases by the Affiliated Portion with purchases by an 
Unaffiliated Portion.
    4. Applicants state that section 10(f) was adopted in response to 
concerns about the ``dumping'' of otherwise unmarketable securities on 
investment companies, either by forcing the investment company to 
purchase unmarketable securities from its underwriting affiliate, or by 
forcing or encouraging the investment company to purchase the 
securities from another member of the syndicate. Applicants submit that 
these abuses are not present in the context of the Portfolios because a 
decision by an Unaffiliated Subadviser to purchase securities from an 
underwriting syndicate, a principal underwriter of which is an 
Affiliated Underwriter, involves no potential for ``dumping.'' In 
addition, applicants assert that aggregating purchases would serve no 
purpose because there is no collaboration among Subadvisers, and any 
common purchases by an Affiliated Subadviser and an Unaffiliated 
Subadviser would be coincidence.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Each Portfolio relying on the requested order will be advised by 
an Affiliated Subadviser and at least one Unaffiliated Subadviser and 
will be operated in the manner described in the application.
    2. No Affiliated Subadviser, Affiliated Broker-Dealer, or 
Affiliated Underwriter (except by virtue of serving as Subadviser to a 
discrete portion of a Portfolio) will be an affiliated person or a 
second-tier affiliate of the Adviser, any Unaffiliated Subadviser, or 
any officer, director, or employee of a Multi-managed Fund.
    3. No Affiliated Subadviser will directly or indirectly consult 
with any Unaffiliated Subadvisers concerning allocation of principal or 
brokerage transactions.
    4. No Affiliated Subadviser will participate in any arrangement 
whereby the amount of its subadvisory fees will be affected by the 
investment performance of an Unaffiliated Subadviser.
    5. With respect to purchases of securities by an Affiliated Portion 
during the existence of any underwriting or selling syndicate, a 
principal underwriter of which is an Affiliated Underwriter, the 
conditions of rule 10f-3 will be satisfied except that paragraph (b)(7) 
will not require the aggregation of purchases by the Affiliated Portion 
with purchases by an Unaffiliated Portion.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9245 Filed 4-13-99; 8:45 am]
BILLING CODE 8010-01-M