[Federal Register Volume 65, Number 16 (Tuesday, January 25, 2000)]
[Notices]
[Pages 3983-3986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1734]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24255, 812-11774]


Liberty All-Star Equity Fund, et al.; Notice of Application

January 19, 2000.
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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APPLICANTS:  Liberty All-Star Equity Fund (``Equity Fund''), Liberty 
All-Star Growth Fund, Inc. (``Growth Fund''), Liberty Funds Trust IX 
(``Liberty Trust'') on behalf of its sole series, Liberty All-Star 
Growth & Income Fund (``Growth &

[[Page 3984]]

Income Fund''), Liberty Variable Investment Trust (``LVIT'') on behalf 
of one of its services, Liberty All-Star Equity Fund, Variable Series 
(``Equity Fund, VS,'' collectively with Equity Fund, Growth Fund and 
Growth & Income Fund, the ``Funds''), Liberty Asset Management Company 
(``LAMCO''), J.P. Morgan Investment Management Inc. (``J.P. Morgan''), 
J.P. Morgan Securities Inc. (``Morgan Securities''), and William Blair 
& Company, L.L.C. (``William Blair'').

SUMMARY OF APPLICATION:  Applicants request an order to permit certain 
registered 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 offerings underwritten by a principal 
underwriter affiliated with the investment adviser to that portion if 
the purchase is in accordance with all of the conditions of rule 10f-3 
under the Act, except for the provision that would require aggregation 
of certain purchases.

FILING DATES:  The application was filed on September 16, 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 requested 
relief 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 February 14, 2000 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 may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES:  Secretary, Commission, 450 5th Street, NW, Washington, D.C. 
20549-0609. Applicants: Equity Fund, Growth Fund, Liberty Trust and 
LAMCO, 600 Atlantic Avenue, Boston, MA 02210-2214; LVIT, One Financial 
Center, Boston, MA 02111; J.P. Morgan, 522 Fifth Avenue, New York, NY 
10036; Morgan Securities, 60 Wall Street, New York, NY 10260; and 
William Blair, 222 W. Adams Street, Chicago, IL 60606.

FOR FURTHER INFORMATION CONTACT:  Anu Dubey, Senior Counsel, at (202) 
942-0687, or Michael W. Mundt, 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 
Commission's Public Reference Branch, 450 5th Street, NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Equity Fund, a Massachusetts business trust, and Growth Fund, a 
Maryland corporation, are registered under the Act as closed-end 
management investment companies. Liberty Trust and LVIT are 
Massachusetts business trusts registered under the Act as open-end 
management investment companies.
    2. LAMCO is registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act'') and is responsible 
for the general management and investment of each Fund's assets. LAMCO 
also provides administrative services to each Fund, some of which are 
delegated to LAMCO's affiliate, Colonial Management Associates, Inc. 
The assets of each Fund are allocated by LAMCO among three to five 
subadvisers (``Subadvisers''). Each Subadviser has discretion to 
purchase and sell securities for a discrete portion of a Fund 
portfolio's assets in accordance with the Fund's objectives, policies, 
and restrictions. Each Subadviser is paid a fee by LAMCO out of the 
management fee received by LAMCO from the Funds. None of the 
Subadvisers (except by virtue of serving as Subadviser to a discrete 
portion of a Fund) has any affiliation with the Funds or LAMCO or with 
any person that serves as promoter or principal underwriter to the 
Funds.
    3. J.P. Morgan, a subsidiary of J.P. Morgan & Co. Incorporated 
(``JPM Incorporated''), a bank holding company, is an investment 
adviser registered under the Advisers Act that serves as Subadviser to 
Growth Fund, Equity Fund, and Equity Fund, VS. Morgan Securities is a 
broker-dealer registered under the Securities Exchange Act of 1934 
(``Exchange Act'') and, as a wholly-owned subsidiary of JPM 
Incorporated, is under common control with J.P. Morgan. William Blair 
is an investment adviser registered under the Advisers Act and a 
broker-dealer registered under the Exchange Act that serves as 
Subadviser to Growth Fund through its investment management services 
department. William Blair conducts brokerage activities through its 
institutional sales and trading department, an operating division 
separate from its investment management services department.
    4. The requested relief would permit: (a) William Blair, Morgan 
Securities, 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 J.P. Morgan, William Blair, or another investment adviser 
serving as Subadviser (an ``Affiliated Subadviser'') to one or more 
Multi-Managed Funds (as defined below) to engage in principal 
transactions with a portion of the Fund 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 
Fund 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.
    5. Applicants request that the exemptive relief apply to the Funds 
or any existing or future registered management and investment company 
(a) advised by LAMCO or any entity controlling, controlled by, or under 
common control (within the meaning of section 2(a)(9) of the Act) with 
LAMCO and (b) at least one other investment adviser registered under 
the Advisers Act or exempt from such registration (the Funds and such 
investment companies, each a ``Multi-Managed

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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 and 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 Fund, 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 affiliate'') of a Fund, 
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 Fund 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 
Fund. The requested relief would not be available if the Affiliated 
Broker-Dealer (except by virtue of serving as a Subadviser to a 
discrete portion of a Fund) is an affiliated person or a second-tier 
affiliate of LAMCO, 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 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 addition, applicants state that 
Subadvisers 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 LAMCO's power 
to dismiss Subadvisers or to change the portion of a Fund allocated to 
each Subadviser reinforces a Subadviser's incentive to maximize the 
investment performance of its own portion of the Fund.
    5. Applicants state that each Subadviser's contract assigns it 
responsibility to manage a discrete portion of the Fund. Each 
Subadviser is responsible for making independent investment and 
brokerage allocation decisions based on its own research and credit 
evaluations. Applicants represent that LAMCO does not dictate brokerage 
allocation or investment decisions to any Fund advised by a Subadviser, 
or have the contractual right to do so. Applicants contend that, in 
managing a discrete portion of a Fund, 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 Fund involved, since each 
Unaffiliated Subadviser is required to manage the Unaffiliated Portion 
in accordance with the investment objectives and related investment 
policies of the Fund as described in its registration statement. 
Applicants also assert that permitting the transactions 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 Fund 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 least 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 Fund) 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 17(e) and rule 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)

[[Page 3986]]

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 Fund. The 
relief would not apply if the Affiliated Broker-Dealer (except by 
virtue of serving as Subadviser to a discrete portion of a Fund) is an 
affiliated person or a second-tier affiliate of LAMCO, the Unaffiliated 
Subadviser to the Unaffiliated Portion of the Fund, or any officer, 
director or employee of the Multi-Managed Fund.
    3. Applicants believe that the proposed brokerage transactions 
involve no conflicts of interest or 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 such 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 or 
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 Fund, is considered an 
investment adviser to the entire Fund. As a result, applicants believe 
that all purchases of securities by an Unaffiliated Portion from an 
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 
Fund. The requested relief would not be available if the Affiliated 
Underwriter (except by virtue of serving as Subadviser to a discrete 
portion of a Fund) is an affiliated person or a second-tier affiliate 
of LAMCO, the Unaffiliated Subadviser making the investment decision 
with respect to the Unaffiliated Portion of the Fund, or any officer, 
director, or employee of the Multi-Managed 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 Funds 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 Fund 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 this application.
    2. No Affiliated Subadviser, Affiliated Broker-Dealer or Affiliated 
Underwriter (except by virtue of serving as Subadviser to a discrete 
portion of a Fund) will be an affiliated person or a second-tier 
affiliate of LAMCO, 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 
of a Fund 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 of the Fund 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. 00-1734 Filed 1-24-00; 8:45 am]
BILLING CODE 8010-01-M