[Federal Register Volume 65, Number 142 (Monday, July 24, 2000)]
[Notices]
[Pages 45632-45634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18594]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24558, 812-11892]


PIMCO Funds: Multi-Manager Series and PIMCO Advisors L.P.; Notice 
of Application

July 17, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
15(a) of the Act and rule 18f-2 under the Act, as well as from certain 
disclosure requirements.

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Summary of Application: Applicants, PIMCO Funds: Multi Manager Series 
(``Trust'') and PIMCO Advisors L.P. (``Adviser''), request an order 
that would permit them to enter into and materially amend subadvisory 
agreements without shareholder approval and grant relief from certain 
disclosure requirements.

Filing Dates: The application was filed on December 20, 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 August 11, 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, 800 Newport Center Drive, Suite 600, Newport 
Beach, California 92660.

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

Applicant's Representations

    1. The Trust, a Massachusetts business trust, is registered under 
the Act as an open-end management investment company. The Trust is 
currently comprised of twenty six series (each a ``PIMCO Fund'' and 
collectively the ``PIMCO Funds'').\1\Each Fund has its own investment 
objectives, policies and restrictions. The Adviser, registered under 
the Investment Advisers Act of 1940 (``Advisers Act''), serves as 
investment adviser to the Funds pursuant to an investment advisory 
agreement with the Trust (``Advisory Agreement''), which was approved 
by the board of trustees of the Trust (``Board''), including a majority 
of the trustees who are not ``interested persons'', as defind in 
section 2(a)(19) of the Act (``Independent Trustees''), and the 
shareholders of each Fund.
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    \1\ Applicants also request relief with respect to future series 
of the Trust, and any other registered open-end management 
investment companies or series thereof (a) that are advised by the 
Adviser and (b) which operate in substantially the same manner as 
the PIMCO Funds (together with the PIMCO Funds, the ``Funds''). Any 
Fund, that relies on the requested order will do so only in 
accordance with the terms and conditions contained in the 
application. The Trust is the only existing investment company that 
currently intends to rely on the order.
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    2. Under the terms of the Advisory Agreement, the Adviser manages 
the investment of assets of each Fund and may, subject to oversight by 
the Board, hire one or more subadvisers (``Subadvisers'') to provide 
portfolio management services to each of the Funds pursuant to separate 
investment advisory agreements (``Subadvisory Agreements''). Each 
Subadviser is, or will be, an investment adviser that is either 
registered under the Advisers Act or exempt from registration under the 
Advisers Act. Subadvisers are recommended to the Board by the Adviser 
and selected and approved by the Board, including a majority of the 
Independent Trustees. Each Subadviser's fees are, and will be, paid by 
the Adviser out of the management fees received by the Adviser from the 
respective Fund.
    3. The Adviser monitors the Funds and the Subadvisers and makes 
recommendations to the Board regarding allocation, and reallocation, of 
assets between Subadvisers and is responsible for recommending the 
hiring, termination and replacement of Subadvisers. The Adviser 
recommends Subadvisers based on a number of factors used to evaluate 
their skills in

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managing assets pursuant to particular investment objectives.
    4. Applicants request relief to permit the Adviser, subject to 
Board oversight but without obtaining shareholder approval, to (a) 
terminate a Subadviser who is not an affiliated person of the Adviser 
or the Funds, within the meaning of section 2(a)(3) of the Act, except 
by virtue of serving as a subadviser to a Fund (``Non-Affiliated 
Subadviser'') and enter into a subadvisory Agreement with another Non-
affiliated Subadviser; (b) terminate a Subadviser that is a wholly 
owned subsidiary, as defined in section 2(a)(43) of the Act, of the 
Adviser (``Wholly Owned Subadviser'') and enter into a Subadvisory 
Agreement with another Wholly Owned Subadviser; (c) terminate a Wholly 
Owned Subadviser and enter into a Subadvisory Agreement with a Non-
Affiliated Subadviser; or (d) materially amend an existing Subadvisory 
Agreement with a Non-Affiliated Subadviser or a Wholly Owned 
Subadviser. Shareholder approval will continue to be required for any 
other Subadviser changes (not already permitted by Commission rule or 
other Commission or staff action), material amendments to an existing 
Subadvisory Agreement with any Subadviser other than a Non-Affiliated 
Subadviser or a Wholly Owned Subadviser, and material amendments to the 
Advisory Agreement (all such changes referred to as ``Ineligible 
Subadviser Changes'').
    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require each Fund to disclose fees 
paid by the Adviser to the Subadviser. The Trust will disclose for each 
Fund (both as a dollar amount and as a percentage of a Fund's net 
assets): (a) aggregate fees paid to the Adviser and Wholly Owned 
Subadvisers; (b) aggregate fees paid to Non-Affiliated Subadvisers; and 
(c) the fee paid to each Subadviser that is not a Wholly Owned 
Subadviser or a Non-Affiliated Subadviser (``Aggregate Fee 
Disclosure'').

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
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 the vote of the company's outstanding voting securities. 
Rule 18f-2 under the Act provides that each series or class of stock in 
a series company affected by a matter must approve such matter if the 
Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 15(a)(3) of Form N-1A requires disclosure of 
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the 
Securities Exchange Act of 1934 (``Exchange Act''). Item 22(a)(3)(iv) 
of Schedule 14A requires a proxy statement for a shareholder meeting at 
which a new fee will be established, or an exiting fee increased, to 
include a table of the current and pro forma fees. Items 22(c)(1)(ii), 
22(c)(1)(iii), 22(c)(8), and 22(c)(9) of Schedule 14A, taken together, 
require a proxy statement for a shareholder meeting at which the 
advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fee,'' a description of the ``terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and proposed fees and the difference between the 
two fees.
    4. Form N-SAR is semi-annual report filed with the Commission by 
registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
their investment advisers, including the Sub-Advisers.
    5. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholders reports filed with the 
Commission. Sections 6-07(2)(a), (b) and (c) of Regulation S-X require 
that investment companies include in their financial statements 
information about investment advisory fees.
    6. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction or any class or classes of 
persons, securities or transactions from any provision of the Act, or 
from any rule thereunder, 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 their requested relief meets this standard 
for the reasons discussed below.
    7. Applicants assert that shareholders are relying on the Adviser 
to select and monitor the activities of Non-Affilated Subadvisers and 
Wholly Owned Subadvisers that are best suited for the respective Funds. 
Applicants assert that, from the perspective of the investor, the role 
of the Non-Affilated Subadvisers and the Wholly Owned Subadvisers is 
comparable to that of individual portfolio managers employed by other 
investment advisory firms. Applicants contend that requiring 
shareholder approval of Subadvisory Agreements may impose unnecessary 
costs and delays on the Funds, and may preclude the Adviser from Acting 
promptly and efficiently according to the judgment of the Board and the 
Adviser.
    8. Applicants also assert that no impermissible conflict of 
interest or opportunity for self-dealing would arise when a Subadviser 
change (other than an Ineligible Subadviser Change) is made. Applicants 
state that the Adviser does not have any economic incentive to replace 
one Wholly Owned Subadviser with another Wholly Owned Subadviser since 
its overall compensation does not increase by virtue of its ownership 
interest in both entities.\2\ Applicants further state that the Adviser 
does not derive any economic benefit when it replaces a Wholly Owned 
Subadviser with a Non-Affilated Subadviser or when it makes material 
changes to a Subadvisory Agreement with a Wholly Owned Subadviser. 
Applicants note that the Ineligible Subadviser Changes will remain 
fully subject to the requirements of section 15(a) of the Act and rule 
18f-2 under the Act.
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    \2\ Applicants assert that they may not be able to rely on the 
safe harbor afforded by rule 2a-6 under the Act for making Wholly 
Owned Subadviser changes without shareholder approval. Applicants 
state that their view is based principally on the Adviser's 
management arrangement with each of its Wholly Owned Subadvisers, 
pursuant to which the managing general partner of each Wholly Owned 
Subadviser generally runs the day-to-day Affairs of the Wholly Owned 
Subadviser and each Wholly Owned Subadviser has its own investment 
personnel. Accordingly, applicants state that it may be asserted 
that changes in Wholly Owned Subadvisers for the Funds could be 
regarded as changes in ``management'' and, thus, an ``assignment'' 
with the meaning of sections 2(a)(4) and 15(a)(4) of the Act, so as 
to preclude reliance on rule 2a-6. Applicants also state that the 
guidance offered by the Commission staff in no-action letters may 
not apply to the adviser's management structure with respect to 
Wholly Owned Subadvisers.
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    9. Applicants assert that some Non-Affiliated Subadvisers use a 
``posted'' rate schedule to set their fees. Applicants state that the 
Adviser may not be able to negotiate below ``posted'' fee rates with 
Non-Affilated Subadvisers if each Non-Affiliated Subadviser's fees are 
required to be disclosed. With respect to Wholly Owned Subadvisers, 
applicants state that the Funds' shareholders would expect an aggregate 
fee to be presented because the adviser and the Wholly Owned Subadviser 
are essentially part of the same economic

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enterprise. Applicants thus submit that aggregate Fee Disclosure is in 
the best interest of the Funds and their shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Fund may rely on the order requested herein, the 
operation of the Fund in the manner described in the application will 
be approved by a majority of the Fund's outstanding voting securities, 
as defined in the Act, or, in the case of a new Fund, whose public 
shareholders purchase shares on the basis of a prospectus containing 
the disclosure contemplated by condition 2 below, by the sole initial 
shareholder before offering the Fund's shares to the public.
    2. The prospectus for each Fund will disclose the existence, 
substance, and effect of any order granted pursuant to the application. 
Each Fund will hold itself out to the public as employing the 
management structure described in the application. The prospectus will 
prominently disclose that the Adviser has ultimate responsibility 
(subject to oversight by the Board) to oversee the Subadvisers and 
recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of a Wholly Owned Subadviser or 
Non-Affiliated Subadviser, the Adviser will furnish shareholders all 
information about the Subadviser that would be included in a proxy 
statement, except as modified to permit Aggregate Fee Disclosure. This 
information will include aggregate Fee Disclosure and any change in 
such disclosure caused by the addition of a new Subadviser. To meet 
this obligation, the Adviser will provide shareholders, within 90 days 
of the hiring of a Subadviser, with an information statement meeting 
the requirements of Regulation 14C, Schedule 14C and Item 22 of 
Schedule 14A under the Exchange Act, except as modified by the order to 
permit Aggregate Fee Disclosure.
    4. Any Ineligible Subadviser Change will be required to be approved 
by the shareholders of the applicable Fund.
    5. At all times, a majority of the Board will be Independent 
Trustees, and the nomination of new or additional Independent Trustees 
will be at the discretion of the then existing Independent Trustees.
    6. When a Subadviser change is proposed for a Fund with a 
Subadviser that is an affiliated person of the Adviser, the Board, 
including a majority of the Independent Trustees, will make a separate 
finding, reflected in the applicable Board minutes, that the change is 
in the best interests of the Fund and its shareholders and does not 
involve a conflict of interest from which the Adviser or the affiliated 
Subadviser derives an inappropriate advantage.
    7. Independent counsel knowledgeable about the Act and the duties 
of Independent Trustees will be engaged to represent the Independent 
Trustees. The selection of such counsel will be within the discretion 
of the Independent Trustees.
    8. The Adviser will provide the Board, no less frequently than 
quarterly, with information about the Adviser's profitability on a per-
Fund basis. The information will reflect the impact on profitability of 
the hiring or termination of any Subadviser during the applicable 
quarter.
    9. Whenever a Subadviser is hired or terminated, the Adviser will 
provide the Board with information showing the expected impact on the 
Adviser's profitability.
    10. The Adviser will provide general management services to each 
Fund, including overall supervisory responsibility for the general 
management and investment of the Fund's assets, and, subject to review 
and approval by the Board, will (a) set each Fund's overall investment 
strategies, (b) evaluate, select and recommend Subadvisers to manage 
all or a part of a Fund's assets, (c) allocate and, when appropriate, 
reallocate a Fund's assets among multiple Subadvisers, (d) monitor and 
evaluate the performance of Subadvisers, and (e) implement procedures 
reasonably designed to ensure that the Subadvisers comply with each 
Fund's investment objective, policies and restrictions.
    11. No trustee or officer of the Funds nor director or officer of 
the Adviser will own directly or indirectly (other than through a 
pooled investment vehicle that is not controlled by such person) any 
interest in a Subadviser, except for (a) ownership of interests in the 
Adviser or any entity, except a Wholly Owned Subadviser, that controls, 
is controlled by, or is under common control with the Adviser, or (b) 
ownership of less than 1% of the outstanding securities of any class of 
equity or debt of any publicly traded company that is either a 
Subadviser or controls, is controlled by or is under common control 
with a Subadviser.
    12. Each Fund will include in its registration statement the 
Aggregate Fee Disclosure.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-18594 Filed 7-21-00; 8:45 am]
BILLING CODE 8010-01-M