[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