[Federal Register Volume 66, Number 138 (Wednesday, July 18, 2001)]
[Notices]
[Pages 37497-37501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17887]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25061; 812-11616]


CDC IXIS Asset Management Advisers, L.P., et al.; Notice of 
Application

July 12, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under sections 6(c) and 
17(b) of

[[Page 37498]]

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 
sections 12(d)(3) and 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 certain underwritings. The 
transactions would be between the broker-dealer and a portion of the 
investment company's portfolio not advised by the adviser affiliated 
with that broker-dealer. The order also would permit these investment 
companies not to aggregate certain purchases from an underwriting 
syndicate in which an affiliated person of one of the investment 
advisers is a principal underwriter. Further, applicants request relief 
to permit a portion of an investment company's portfolio to purchase 
securities issued by a broker-dealer, which is an affiliated person of 
an investment adviser to another portion, subject to the limits in rule 
12d3-1 under the Act.

APPLICANTS: CDC IXIS Asset Management Advisers, L.P. (formerly known as 
Nvest Funds Management, L.P.) (``NFM'') and CDC Nvest Funds Trust I 
(``Trust'').

FILING DATES: The application was filed on May 25, 1999, and amended on 
March 5, 2001 and June 28, 2001.

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 August 6, 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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, 399 Boylston Street, 6th Floor, Boston, MA 
02116, Attn: John E. Pelletier; copy to: Ryan C. Larrenaga, Esq., Ropes 
& Gray, One International Place, Boston, MA 02110-2624.

FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Branch Chief, or 
Nadya B. Roytblat, Assistant Director, 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).

Applicants' Representations

    1. The Trust is a Massachusetts business trust registered under the 
Act as an open-end management investment company with twelve series, 
four of which are advised by NFM and three or more investment 
subadvisers (the ``Star Funds'').\1\
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    \1\ Specifically, the Star Funds are the CDC Nvest Star Advisers 
Fund, the CDC Nvest Star Worldwide Fund, the CDC Nvest Star Small 
Cap Fund and the CDC Nvest Star Value Fund.
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    2. NFM is registered under the Investment Advisers Act of 1940 
(``Advisers Act'') and provides investment advisory and administrative 
services to the Trust. The assets of the Star Funds are allocated by 
NFM among multiple subadvisers (``Subadvisers''). Each Subadviser has 
discretion to purchase and sell securities for a discrete segment of a 
Star Fund's assets in accordance with that Star Fund's objectives and 
the Subadviser's own investment style and strategies. The subadvisory 
fees paid to each Subadviser are either paid by NFM or, if paid 
directly to the Subadviser by the Trust, reduce the management fee 
received by NFM from the Trust by the amount of the subadvisory fee.
    3. The requested relief would permit: (a) any broker-dealer that 
itself serves as Subadviser (either directly or through a separate 
operating division) or is an affiliated person of a Subadviser (an 
``Affiliated Subadviser'') to a Multi-Segment Fund (as defined below) 
(an ``Affiliated Broker-Dealer'') to engage in principal transactions 
with a portion of the Multi-Segment Fund that is advised by another 
Subadviser that is not an affiliated person of the Affiliated Broker-
Dealer or the Affiliated Subadvisor (each such portion, an 
``Unaffiliated Segment''); (b) 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; (c) an Unaffiliated Segment to purchase 
securities during the existence of an underwriting syndicate, a 
principal underwriter of which is an Affiliated Subadviser or a person 
of which an Affiliated Subadviser is an affiliated person (``Affiliated 
Underwriter''); (d) a portion of the Star Fund advised by an Affiliated 
Subadviser (``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 except that paragraph (b)(7) of the rule would not 
require the aggregation of purchases by the Affiliated Segment with 
purchases by an Unaffiliated Segment; and (e) an Unaffiliated Segment 
to acquire securities issued by an Affiliated Subadviser or an 
affiliated person of an Affiliated Subadviser engaged in securities-
related activities (``Securities Affiliate'') within the limits of rule 
12d3-1. The requested relief would apply only if the Affiliated Broker-
Dealer is not an affiliated person or an affiliated person of an 
affiliated person of NFM, the Subadviser making the investment decision 
with respect to the Unaffiliated Portion (``Unaffiliated Subadviser''), 
a principal underwriter, promoter, or an officer, trustee, or employee 
of the Multi-Managed Portfolio engaging in the transaction.
    4. Applicants request that the exemptive relief apply to the Trust 
or any existing or future registered open-end management investment 
company or series thereof advised by (a) NFM or any entity controlling, 
controlled by, or under common control (within the meaning of section 
2(a)(9) of the Act) with NFM and (b) at least one other investment 
adviser registered under the Advisers Act or exempt from such 
registration (the Star Funds and such investment companies or series 
thereof, each a ``Multi-Segment Fund'' or ``Fund''). The relief also 
would apply to any existing or future entity that serves as an 
Affiliated Subadviser, Affiliated Broker-Dealer, or Affiliated 
Underwriter to a Multi-Segment Fund. Any investment company that 
currently intends to rely on the order is named as an applicant. NFM 
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.

[[Page 37499]]

Applicants' Legal Analysis

A. Principal Transactions between an Unaffiliated Segment and an 
Affiliated Broker-Dealer

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities or other property 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 Segment. Accordingly, applicants state that any 
transactions to be effected by an Unaffiliated Subadviser on behalf of 
an Unaffiliated Segment of a Multi-Segment 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 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) is an 
affiliated person or a second-tier affiliate of NFM, the Unaffiliated 
Subadviser making the investment decision, any principal underwriter or 
promoter of the Fund, or any officer, director or employee of the 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 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 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 Segment would disadvantage the 
Unaffiliated Subadviser to the extent that it diminishes the value of 
the Unaffiliated Segment. Applicants further submit that NFM's power to 
dismiss Subadvisers or to change the portion of a Multi-Segment 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 Multi-Segment Fund. 
Each Subadviser is responsible for making independent investment and 
brokerage allocation decisions based on its own research and credit 
evaluations. Applicants represent that NFM 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 Multi-Segment 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, since each Unaffiliated 
Subadviser 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 the Act was designed to prevent.

B. Payment of Brokerage Compensation by an Unaffiliated Segment to an 
Affiliated Broker-Dealer

    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. 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 Multi-Segment Fund) 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 Subadviser is the Subadviser to another 
portion of the same Multi-Segment Fund. The relief would not apply if 
the Affiliated Broker-Dealer (except by virtue of

[[Page 37500]]

serving as Subadviser) is an affiliated person or a second-tier 
affiliate of NFM, the Unaffiliated Subadviser to the Unaffiliated 
Segment of the Multi-Segment Fund, any principal underwriter or 
promoter of the Fund, or any officer, director 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 Subadviser are directly aligned with the 
interests of the Unaffiliated Segment 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 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) 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 
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 Multi-Segment Fund, is 
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 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) is an 
affiliated person or a second-tier affiliate of NFM, the Unaffiliated 
Subadviser making the investment decision with respect to the 
Unaffiliated Segment of the Multi-Segment Fund, any principal 
underwriter or promoter of the Fund, or any officer, director, 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 Multi-Segment 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.

D. Purchases of Securities of Securities Affiliates by an Unaffiliated 
Segment.

    1. Section 12(d)(3) of the Act, in relevant part, generally 
prohibits a registered investment company from acquiring any security 
issued by any person who is a broker, dealer, investment adviser, or 
engaged in the business of underwriting (collectively, ``securities-
related activities''). Rule 12d3-1 under the Act exempts certain 
transactions from the prohibitions of section 12(d)(3) if specified 
conditions are met. One of these conditions, paragraph (c) of rule 
12d3-1, generally provides that the exemption provided by the rule is 
not available when the issuer of the securities is the investment 
company's investment adviser, promoter, or principal underwriter, or an 
affiliated person of the investment company's investment adviser, 
promoter, or principal underwriter.
    2. Applicants state that each Subadviser is considered to be an 
affiliated person of an entire Multi-Segment Fund. Accordingly, a 
Securities Affiliate is either an affiliated person (as Subadviser to 
another portion of the Multi-Segment Fund) or a second-tier affiliate 
of an Unaffiliated Segment. Thus, an Unaffiliated Segment may not 
purchase securities of a Securities Affiliate in reliance on rule 12d3-
1 because of paragraph (c). Applicants request relief under section 
6(c) from section 12(d)(3) to permit an Unaffiliated Segment of a 
Multi-Segment Fund to acquire securities of a Securities Affiliate 
within the limits of rule 12d3-1. The requested exemption would apply 
only where a Securities Affiliate is deemed to be an affiliated person 
or a second-tier affiliate of an Unaffiliated Segment within the 
meaning of rule 12d3-1(c) solely because an Affiliated Subadviser is 
the Subadviser to another portion of the same Multi-Segment Fund.
    3. Applicants state that their proposal does not raise the 
conflicts of interest that rule 12d3-1(c) was designed to address 
because of the nature of the affiliation between a Securities Affiliate 
and the Unaffiliated Portion. Applicants submit that each Subadviser 
acts independently of the other Subadvisers in making investment 
decisions for the assets allocated to its portion of the Multi-Segment 
Fund. Further, applicants submit that prohibiting the Unaffiliated 
Portions from purchasing securities issued by Securities Affiliates 
could harm the interests of a Fund's shareholders by preventing the 
Unaffiliated Subadviser from achieving optimal investment results.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Each Multi-Segment Fund relying on the requested order will be 
advised by an Affiliated Subadviser and at least one Unaffiliated 
Subadviser and will be

[[Page 37501]]

operated in the manner described in the application.
    2. No Affiliated Subadviser, Affiliated Broker-Dealer, Affiliated 
Underwriter or Securities Affiliate (except by virtue of serving as 
Subadviser to a discrete portion of a Multi-Segment Fund) will be an 
affiliated person or a second-tier affiliated of NFM, any Unaffiliated 
Subadviser, or any principal underwriter, promoter, officer, director, 
or employee of a Multi-Segment 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 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 will be satisfied except that paragraph (b)(7) 
will not require the aggregation of purchases by the Affiliated Segment 
with purchases by an Unaffiliated Segment.
    6. With respect to purchases by an Unaffiliated Segment of 
securities issued by a Securities Affiliate, the conditions of rule 
12d3-1 will be satisfied except for paragraph (c) to the extent such 
paragraph is applicable solely because such issuer is an Affiliated 
Subadviser or an affiliated person of an Affiliated Subadviser.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17887 Filed 7-17-01; 8:45 am]
BILLING CODE 8010-01-M