[Federal Register Volume 66, Number 7 (Wednesday, January 10, 2001)]
[Notices]
[Pages 2031-2034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-650]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24820; 812-11758]


Frank Russell Investment Company, et al; Notice of Application

January 3, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``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 of which one of the investment advisers is an 
affiliated person. 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 of which the investment adviser 
to that portion is affiliated 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: Frank Russell Investment Company (``FRIC''), Russell 
Insurance Funds (``RIF''), and Frank Russell Investment Management 
Company (``Adviser'').

FILING DATES: the application was filed on August 24, 1999, and amended 
on December 1, 1999, and December 14, 2000.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be

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issued unless the SEC orders a hearing. Interested persons may request 
a hearing by writing to the SEC's Secretary and serving applicants with 
a copy of the request, personally or by mail. Hearing requests should 
be received by the SEC by 5:30 p.m. on January 29, 2001, 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 SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-
0609. Applicants, 909 A Street, Tacoma, WA 98402.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0634, or Michael W. Mundt, 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 
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 
20549-0102 (telephone (202) 942-8090).

Applicant's Representations

    1. FRIC is a Massachusetts business trust registered under the Act 
as an open-end management investment company with twenty-nine series. 
RIF is a Massachusetts business trust registered under the Act as an 
open-end management investment company with five series (each series of 
FRIC and RIF, a ``Fund''). Shares of RIF's Funds are offered for sale 
only to insurance companies and to their separate accounts to fund 
variable insurance products.
    2. The Adviser is registered under the Investment Advisers Act of 
1940 (``Advisers Act'') and is a subsidiary of Frank Russell 
Corporation. The Adviser serves as investment adviser to each fund. The 
majority of the Funds are divided into two or more portions (each a 
``Segment''), and the assets of each Segment are invested pursuant to a 
particular investment style. The Adviser selects and monitors for each 
Segment a sub-adviser (``Money Manager'') that is registered under the 
Advisers act or is exempt from registration.\1\ None of the Money 
Managers (except by virtue of serving as Money Manager to a Segment) 
has any affiliation with the Funds, the Adviser, or any person that 
serves as promoter or principal underwriter to the Funds. Each Money 
Manager has complete discretion, within a Fund's objectives, policies 
and restrictions, over the management of its Segment and makes all 
decisions regarding the purchase and sale of securities for its 
Segment. The Adviser pays each Money Manager a fee out of the advisory 
fee received by the Adviser from the Fund.
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    \1\ The Adviser, even when directly exercising investment 
control over a Fund or Segment, is not a Money Manager for purposes 
of the requested relief.
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    (3). Applicants request relief to permit: (i) A broker-dealer 
registered under the Securities Exchange Act of 1934 that serves as a 
Money Manager or is an affiliated person of a Money Manager (the 
broker-dealer, an ``Affiliated Broker-Dealer''; the Money Manager, an 
``Affiliated Money Manager'') to engage in principal transactions with 
a Segment that is advised by a Money Manager that is not an affiliated 
person of the Affiliated Broker-Dealer or Affiliated Money Manager (the 
Segment, an ``Unaffiliated Segment'' the Money Manager, an 
``Unaffiliated Money Manager''), (ii) an Affiliated Broker-Dealer to 
provide brokerage services to an Unaffiliated Segment, and the 
unaffiliated Segment to utilize such brokerage services, without 
complying with rule 17e-1(b) and (c) under the Act, (iii) an 
Unaffiliated Segment to purchase securities during the existence of an 
underwriting syndicate, a principal underwriter of which is an 
Affiliated Money Manager or a person of which an Affiliated Money 
Manager is an affiliated person (``Affiliated Underwriter''), (iv) a 
Segment advised by an affiliated Money Manager (``Affiliated Segment'') 
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 under the 
Act, except that paragraph (b)(7) of the rule would not require the 
aggregation of purchases by the Affiliated Segment with purchases by 
Unaffiliated Segments.
    4. Applicants request that the exemptive relief apply to FRIC, RIF, 
or any existing or future registered open-end management investment 
company advised by the Adviser or a person controlling, controlled by, 
or under common control (within the meaning of section 2(a)(9) of the 
Act) with, the Adviser (including any successors in interest).\2\ Any 
investment company that currently intends to rely on the order is named 
as an applicant. The Adviser will take steps designed to ensure that 
any other existing or future entity that relies on the order will 
comply with the terms and conditions of the application.
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    \2\ The term ``successors in interest'' is limited to entities 
that result from a reorganization into another jurisdiction or 
change in the type of business organization.
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Applicants' Legal Analysis

A. Principal Transactions Between Unaffiliated Segments 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 (``second-tier affiliate''). 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 Money Manager would be 
an affiliated person of a Fund, and an Affiliated Broker-Dealer would 
be either an Affiliated Money Manager or an affiliated person of the 
Affiliated Manager, and thus a second-tier affiliate of a Fund, 
including the Unaffiliated Segment. Accordingly, applicants state that 
any transactions to be effected by an Unaffiliated Money Manager on 
behalf of an Unaffiliated Segment 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 Segment solely because an 
Affiliated Money Manager is the Money Manager to another Segment of the 
same Fund. The requested relief would not be available if the 
Affiliated Broker-Dealer (except by virtue of serving as a Money 
Manager) is an affiliated person or a second-tier affiliate of the 
Adviser, the Unaffiliated Money Manager making the investment decision 
with respect to the Unaffiliated Segment of the Fund, or any officer, 
trustee or employee of the Fund.
    3. Section 17(b) of the Act authorizes the SEC 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

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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 SEC 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 Money Manager 
purchases securities on behalf of an Unaffiliated Segment 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 Money Manager. In addition, applicants state that 
Money Managers 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 segment would 
disadvantage the Unaffiliated Money Manager to the extent that it 
diminishes the value of the Unaffiliated Segment. Applicants further 
submit that the Adviser's power to dismiss Money Managers or to change 
the portion of a Fund allocated to each Money Manager reinforces a 
Money Manager's incentive to maximize the investment performance of its 
Segment.
    5. Applicants state that each Money Manager's contract assigns it 
responsibility to manage a Segment. Each Money Manager is responsible 
for making independent investment and brokerage allocation decisions on 
its own research and credit evaluations. Applicants represent that the 
Adviser does not dictate brokerage allocation or investment decisions 
to any Fund advised by a Money Manager, or have the contractual right 
to do so, except with respect to a Segment advised directly by the 
Adviser. Applicants contend that, in managing a Segment, each Money 
Manager 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, since each Unaffiliated Money 
Manager is required to manage the Unaffiliated Segment 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 Segments to 
Affiliated Broker-Dealers

    1. Section 17(e)(2) of the Act prohibits an affiliated person 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 Money Manager to another 
Segment) or a second-tier affiliate of an Unaffiliated Segment 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 Segment 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 Segment, 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 Segment solely because an 
Affiliated Money Manager is the Money Manager to another Segment of the 
same Fund. The relief would not apply if the Affiliated Broker-Dealer 
(except by virtue of serving as Money Manager to a Segment) is an 
affiliated person or a second-tier affiliate of the Adviser, the 
Unaffiliated Money Manager to the Unaffiliated Segment of the Fund, or 
any officer, trustee or employee of the 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 Money Manager are directly aligned with 
the interests of the Unaffiliated Segment it advises, and an 
Unaffiliated Money Manager 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 Money Manager has a fiduciary duty to obtain best price 
and execution for the Unaffiliated Segment.

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) when a principal underwriter of the security, or an affiliated 
person of the principal underwriter, is an officer, director, member of 
an advisory board, investment adviser or employee of the company. 
Section 10(f) also provides that the SEC 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 Money Manager, although under 
contract to manage only a Segment of a Fund, is

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considered an investment adviser to the entire Fund. As a result, 
applicants believe that all purchases of securities by an Unaffiliated 
Segment 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 Segment 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 Money Manager is an investment adviser to 
the Fund. The requested relief would not be available if the Affiliated 
Underwriter (except by virtue of serving as Money Manager) is an 
affiliated person or a second-tier affiliate of the Adviser, the 
Unaffiliated Money Manager making the investment decision with respect 
to the Unaffiliated Segment of the Fund, or any officer, trustee or 
employee of the Fund. Applicants also seek relief from section 10(f) to 
permit an Affiliated Segment 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 Segment with purchases by an Unaffiliated Segment.
    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 Money Manager 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 Money Managers, and any 
common purchases by an Affiliated Money Manager and an Unaffiliated 
Money Manger 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 Money Manager and at least one Unaffiliated Money Manager 
and will be operated in the manner described in the application.
    2. No Affiliated Money Manager, Affiliated Broker-Dealer, or 
Affiliated Underwriter (except by virtue of serving as Money Manager to 
a Segment of a Fund) will be an affiliated person or a second-tier 
affiliate of the Adviser, any Unaffiliated Money Manager, or any 
officer, trustee, or employee of a Fund.
    3. No Affiliated Money Manager will directly or indirectly consult 
with any Unaffiliated Money Managers concerning allocation of principal 
or brokerage transactions.
    4. No Affiliated Money Manager will participate in any arrangement 
whereby the amount of its sub-advisory fees will be affected by the 
investment performance of an Unaffiliated Money Manager.
    5. With respect to purchases of securities by an Affiliated Segment 
during the existence of any underwriting or selling syndicate, a 
principal underwriter of which is an Affiliated Underwriter, the 
conditions of rule 10f-3 under the Act will be satisfied except that 
paragraph (b)(7) will not require the aggregation of purchases by the 
Affiliated Segment with purchases by Unaffiliated Segments.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-650 Filed 1-9-01; 8:45 am]
BILLING CODE 8010-01-M