[Federal Register Volume 67, Number 33 (Tuesday, February 19, 2002)]
[Notices]
[Pages 7433-7436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3864]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25416; 812-12476]


Frank Russell Investment Company, et al.; Notice of Application

February 12, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 12(d)(1)(J) of 
the Investment Company Act of 1940 (``Act'') for an exemption from 
sections 12(d)(1)(A) and (B) of the Act, under section 6(c) and 17(b) 
of the Act for an exemption from sections 17(a)(1) and (2) of the Act, 
and under section 17(d) of the Act and rule 17d-1 under the Act to 
permit certain joint transactions.

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    Summary of Application: The requested order would permit (a) 
certain registered open-end investment companies to use uninvested cash 
and cash collateral to purchase, in kind or for cash, shares of one or 
more affiliated money market funds, and the money market funds to sell 
shares to, and redeem shares from, the investment companies, and (b) 
the investment companies and the money market funds

[[Page 7434]]

to continue to engage in transactions involving portfolio securities in 
reliance on rule 17a-7 under the Act. The requested order would 
supersede a prior order.\1\
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    \1\ Frank Russell Investment Company, et al., Investment Company 
Act Release Nos. 22819 (Sept. 12, 1997) (notice) and 22845 (Oct. 8, 
1997) (order) (``Prior Order'').
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    Applicants: Frank Russell Investment Company (``FRIC''); Russell 
Insurance Funds (``RIF''); the currently existing series of FRIC and 
RIF, and all future registered open-end management investment companies 
and any series thereof that are part of the same ``group of investment 
companies,'' as defined in section 12(d)(1)(G)(ii) of the Act, as FRIC 
and RIF and for which Frank Russell Investment Management Company 
(``Russell'') or a person controlling, controlled by, or under common 
control with Russell (a ``Russell Adviser'') serves as investment 
adviser (FRIC, RIF, all currently existing series of FRIC and RIF, and 
all such future registered open-end management investment companies and 
series thereof together, the ``Funds''); Russell; and Russell Fund 
Distributors, Inc. (``Distributor'').
    Filing Dates: The application was filed on March 9, 2001 and 
amended on September 19, 2001 and January 31, 2002.
    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 March 11, 2002, 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 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, Frank Russell Company, 909 A Street, Tacoma, WA 
98402.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, at 
(202) 942-0553, 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 5th Street, NW., Washington, 
DC 20549-0102, at (202) 942-8090.

Applicants' Representations

    1. FRIC and RIF are Massachusetts business trusts registered under 
the Act as open-end management investment companies. RIF consists of 
five separate series. RIF shares are offered exclusively to insurance 
companies and to their separate accounts to fund variable insurance 
products. FRIC consists of 31 separate series, three of which are money 
market Funds that comply with rule 2a-7 under the Act (each a ``Money 
Market Fund'' and together with any future FRIC or RIF series that is a 
money market Fund complying with rule 2a-7 under the Act, the ``Money 
Market Funds'').\2\ Russell, an investment adviser registered under the 
Investment Advisers Act of 1940, is the investment adviser to each 
series of FRIC and RIF pursuant to an investment advisory agreement 
(``Advisory Agreement'').\3\ Distributor, a wholly-owned subsidiary of 
Russell, serves as distributor for each series of FRIC and RIF.
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    \2\ All existing Funds that currently intend to rely on the 
requested order are named as applicants. Applicants also request 
that the order extend to Russell's successor(s) in interest, which 
are entities that result from a reorganization of the entity into 
another jurisdiction or a change in the type of business 
organization of the entity.
    \3\ Under the Advisory Agreement, in addition to the advisory 
fee, Russell may collect an annual fee (the ``Collateral Investment 
Fee'') for supervising the investment of the Cash Collateral, as 
defined below, of the Funds that are series of FRIC, based on such 
assets not being treated as net assets of a Fund for purposes of 
determining the net asset value per share of such Fund.
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    2. Funds that are not Money Market Funds (the ``Investing Funds'') 
have, or may be expected to have, uninvested cash. Such cash may result 
from a variety of sources, including dividends or interest received on 
portfolio securities, unsettled securities transactions, reserves held 
for investment strategy purposes, scheduled maturity of investments, 
liquidation of investment securities to meet anticipated redemptions, 
dividend payments or new monies received from investors (``Uninvested 
Cash''). Certain of the Funds also may participate in a securities 
lending program under which they loan their portfolio securities to 
certain member banks of the Federal Reserve System and certain primary 
dealers in U.S. government securities (such program, a ``Securities 
Lending Program''). The loans are secured by collateral, equal at all 
times to at least the market value of the securities loaned (such 
collateral, when in the form of cash, ``Cash Collateral'' and together, 
with Uninvested Cash, ``Cash Balances''). Applicants request an order 
to permit the Investing Funds to use their Cash Balances to purchase 
shares of one or more of the Money Market Funds, the Money Market Funds 
to sell their shares to and redeem their shares from the Investing 
Funds, and Russell to effect these transactions.
    3. Applicants state that certain Funds currently engage in purchase 
and sale transactions with other Funds in reliance on rule 17a-7 under 
the Act (``Interfund Transactions''). Applicants seek relief to permit 
these Interfund Transactions to continue in the event that the 
Investing Funds, pursuant to the requested order, use Cash Balances to 
purchase shares of the Money Market Funds and become affiliated 
persons, or affiliated persons of affiliated persons, of other Funds by 
virtue of owning more than 5% of a Money Market Fund. Applicants also 
seek relief to permit in-kind Interfund Transactions in which an 
Investing Fund, solely in instances where the Investing Fund holds 
portfolio securities that would be appropriate investments for a Money 
Market Fund, invests in a Money Market Fund by transferring such 
portfolio securities to the Money Market Fund, in exchange for shares 
of such Money Market Fund.

Applicants' Legal Analysis

I. Investment of Cash Balances in Money Market Funds

A. Section 12(d)(1) of the Act
    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or if such securities, together with the securities of other 
acquired investment companies, represent more than 10% of the acquiring 
company's outstanding total assets. Section 12(d)(1)(B) of the Act 
provides that no registered open-end investment company may sell its 
securities to another investment company if the sale will cause the 
acquiring company to own more than 3% of the acquired company's voting 
stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies.
    2. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any person, security, or transaction from any provision of 
section 12(d)(1) if and to the extent that

[[Page 7435]]

such exemption is consistent with the public interest and the 
protection of investors.
    3. Applicants request relief under section 12(d)(1)(J) to permit 
the Investing Funds to use their Cash Balances to acquire shares of the 
Money Market Funds in excess of the percentage limitations in section 
12(d)(1)(A), provided however, that in all cases an Investing Fund's 
aggregate investment of Uninvested Cash in shares of the Money Market 
Funds will not exceed 25% of the Investing Fund's total assets at any 
time. Applicants also request relief to permit the Money Market Funds 
to sell their shares to the Investing Funds in excess of the percentage 
limitations in section 12(d)(1)(B).
    4. Applicants state that the proposed arrangement will not result 
in the abuses that sections 12(d)(1)(A) and (B) were intended to 
prevent. Applicants state that there is no threat of redemption to gain 
undue influence over the Money Market Funds due to the highly liquid 
nature of each Money Market Fund's portfolio. Applicants also note that 
Russell or a Russell Adviser will serve as investment adviser to all of 
the Funds. Applicants state that the proposed arrangement will not 
result in inappropriate layering of either sales charges or investment 
advisory fees. Shares of the Money Market Funds sold to the Investing 
Funds will not be subject to a sales load, redemption fee, asset-based 
distribution fee or service fee. If a Money Market Fund offers more 
than one class of shares in which an Investing Fund may invest, the 
Investing Fund will invest its Cash Balances only in the class with the 
lowest expense ratio at the time of the investment. In connection with 
approving any advisory contract for an Investing Fund, its board of 
trustees (``Board''), including a majority of the trustees who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act 
(``Independent Trustees''), will consider to what extent, if any, the 
advisory fees and any Collateral Investment Fee charged to the 
Investing Fund by Russell or the Russell Adviser to the Investing Fund 
should be reduced to account for reduced services provided to the 
Investing Fund by Russell or the Russell Adviser to the Investing Fund 
as a result of Cash Balances being invested in the Money Market Funds. 
Applicants represent that no Money Market Fund will acquire securities 
of any other investment company in excess of the limitations contained 
in section 12(d)(1)(A) of the Act.
B. Section 17(a) of the Act
    5. Section 17(a) of the Act makes it unlawful for any affiliated 
person of a registered investment company, acting as principal, to sell 
or purchase any security to or from the investment company. Section 
2(a)(3) of the Act defines an affiliated person of an investment 
company to include any person directly or indirectly owning, 
controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person, any person 5% or 
more of whose outstanding securities are directly or indirectly owned, 
controlled, or held with power to vote by the other person, any person 
directly or indirectly controlling, controlled by, or under common 
control with the other person, and any investment adviser to an 
investment company. Because the Investing Funds and the Money Market 
Funds have Russell as an investment adviser, and because all of the 
Funds have a Russell Adviser, they may be deemed to be under common 
control and thus affiliated persons of each of the other Funds. In 
addition, if an Investing Fund purchases more than 5% of the voting 
securities of a Money Market Fund, the Investing Fund and Money Market 
Fund may be affiliated persons of each other. As a result of these 
affiliations, section 17(a) would prohibit the sale of shares of Money 
Market Funds to the Investing Funds, and the redemption of such shares 
by Money Market Funds.
    6. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from section 17(a) of the Act if the terms of the proposed 
transaction, including the consideration to be paid or received, are 
reasonable and fair 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 concerned and with the 
general purposes of the Act. Section 6(c) of the Act permits the 
Commission to exempt persons or transactions 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 policy and provisions of the Act.
    7. Applicants submit that their request for relief to permit the 
purchase of shares of the Money Market Funds by the Investing Funds, 
and the redemption of the shares of the Money Market Funds, satisfies 
the standards in sections 6(c) and 17(b). Applicants state that the 
Investing Funds will retain their ability to invest their Cash Balances 
directly in money market instruments as authorized by their respective 
investment objectives and policies. Similarly, a Money Market Fund has 
the right to discontinue selling shares to any of the Investing Funds 
if the Money Market Fund's board of trustees or investment adviser 
determines that such sale would adversely affect its portfolio 
management and operations. In addition, applicants note that shares of 
the Money Market Funds will be purchased and redeemed at their net 
asset value, the same consideration paid and received for these shares 
by any other shareholder.
C. Section 17(d) of the Act and Rule 17d-1 Under the Act
    8. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
an affiliated person of a registered investment company, acting as 
principal, from participating in or effecting any transaction in 
connection with any joint enterprise or joint arrangement in which the 
investment company participates, unless the Commission has approved the 
joint arrangement. Applicants state that the Investing Funds and the 
Money Market Funds, by participating in the proposed transactions, and 
Russell, by effecting the proposed transactions, could be deemed to be 
participating in a joint arrangement within the meaning of section 
17(d) and rule 17d-1.
    9. In considering whether to approve a joint transaction under rule 
17d-1, the Commission considers whether the investment company's 
participation in the joint enterprise is consistent with the 
provisions, policies and purposes of the Act and the extent to which 
participation in the joint enterprise is on a basis different from or 
less advantageous than that of other participants. Applicants state 
that, for the reasons discussed above, the proposed transactions meet 
the standards for an order under rule 17d-1.

II. Interfund Transactions

    10. As noted above, section 17(a) of the Act would prohibit the 
purchase and sale of portfolio securities between the Funds. Rule 17a-7 
under the Act provides an exemption from section 17(a) for a purchase 
and sale transaction between a registered investment company and an 
affiliated person (or an affiliated person of an affiliated person), 
provided certain conditions are met, including that the affiliation 
between the registered investment company and the affiliated person (or 
an affiliated person of the affiliated person) must exist solely by 
reason of the entities

[[Page 7436]]

having a common investment adviser, common directors and/or common 
officers and the transaction must be for no consideration other than 
cash. Applicants state that the Funds may not be able to rely on rule 
17a-7 when purchasing or selling portfolio securities to other Funds, 
and that the Investing Funds may not be able to rely on rule 17a-7 to 
effect in-kind purchases of shares of the Money Market Funds, because 
some of the Investing Funds may own more than 5% of the outstanding 
voting securities of a Money Market Fund and, therefore, an affiliation 
would not exist solely by reason of the transacting Funds having a 
common investment adviser, common directors and/or common officers. In 
addition, in-kind purchases of shares of a Money Market Fund by an 
Investing Fund would not meet the cash payment requirement of rule 17a-
7(a).
    11. Applicants request relief under sections 6(c) and 17(b) of the 
Act to permit the Interfund Transactions. Applicants submit that the 
requested relief satisfies the standards for relief in sections 6(c) 
and 17(b). Applicants state that, with respect to the Investing Funds' 
in-kind purchases of shares of the Money Market Funds, the 
consideration paid by the Investing Funds for shares of the Money 
Market Funds will be based on the net asset value of the Money Market 
Funds. With respect to the purchase and sale of portfolio securities 
between the Funds, applicants state that the price paid for the 
securities will be the current market price of the securities. Further, 
applicants state that the Interfund Transactions will comply with rule 
17a-7 under the Act in all respects other than (i) the requirement that 
the parties to the transactions be affiliated persons (or affiliated 
persons of affiliated persons) of each other solely by reason of having 
a common investment adviser or investment advisers that are affiliated 
persons of each other, common officers and/or common directors, solely 
because the Investing Funds and the Money Market Funds might become 
affiliated persons within the meaning of sections 2(a)(3)(A) and (B) of 
the Act and (ii) the requirement that the transactions be for no 
consideration other than cash, solely because certain of the Interfund 
Transactions may be effected in shares of a Money Market Fund.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Shares of the Money Market Funds sold to and redeemed by the 
Investing Funds will not be subject to a sales load, redemption fee, 
distribution fee under a plan adopted in accordance with rule 12b-1 
under the Act, or service fee (as defined in rule 2830(b)(9) of the 
Conduct Rules of the National Association of Securities Dealers).
    2. No Money Market Fund will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    3. Each of the Investing Funds will invest Uninvested Cash in, and 
hold shares of, the Money Market Funds only to the extent that such 
Investing Fund's aggregate investment of Uninvested Cash in all of the 
Money Market Funds does not exceed 25% of the Investing Fund's total 
assets. For purposes of this limitation, each Investing Fund or series 
thereof will be treated as a separate investment company.
    4. Each Investing Fund and each Money Market Fund relying on the 
order will be advised by Russell or a Russell Adviser.
    5. Investment by an Investing Fund in shares of a Money Market Fund 
will be in accordance with each Investing Fund's respective investment 
restrictions and will be consistent with each Investing Fund's policies 
as set forth in its prospectus and statement of additional information.
    6. At or before the next meeting of a Board is held for the purpose 
of voting on an Advisory Agreement under section 15 of the Act, Russell 
or the Russell Adviser to the Investing Fund will provide the Board 
with specific information regarding the approximate cost to Russell or 
the Russell Adviser to the Investing Fund of, or portion of the 
advisory fee and any Collateral Investment Fee under the existing 
Advisory Agreement attributable to, managing the Cash Balances of the 
Investing Fund that can be expected to be invested in the Money Market 
Funds. In connection with approving any Advisory Agreement for an 
Investing Fund, the Board, including a majority of the Independent 
Trustees, shall consider to what extent, if any, the advisory fees and 
any Collateral Investment Fee charged to the Investing Fund by Russell 
or the Russell Adviser to the Investing Fund should be reduced to 
account for any change in the services provided to the Investing Fund 
by Russell or the Russell Adviser to the Investing Fund as a result of 
Cash Balances being invested in the Money Market Funds. The minute 
books of the Investing Fund will record fully the Board's consideration 
in approving the Advisory Agreement, including the considerations 
referred to above.
    7. Before a Fund may participate in the Securities Lending Program, 
a majority of the Board (including a majority of the Independent 
Trustees) will approve the Fund's participation in the Securities 
Lending Program. No less frequently than annually, the Board also will 
evaluate, with respect to each Investing Fund, any securities lending 
arrangement and its results and determine that any investment of Cash 
Collateral in the Money Market Funds is in the best interests of the 
shareholders of the Investing Fund.
    8. To engage in Interfund Transactions, the Investing Funds and 
Money Market Funds will comply with rule 17a-7 under the Act in all 
respects other than (i) the requirement that the parties to the 
transactions be affiliated persons (or affiliated persons of affiliated 
persons) of each other solely by reason of having a common investment 
adviser or investment advisers that are affiliated persons of each 
other, common officers and/or common directors, solely because the 
Investing Funds and the Money Market Funds might become affiliated 
persons within the meaning of sections 2(a)(3)(A) and (B) of the Act 
and (ii) the requirement that the transactions be for no consideration 
other than cash, solely because certain Interfund Transactions may be 
effected in shares of a Money Market Fund.
    For the Commission, by the Division of Investment Management, under 
delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3864 Filed 2-15-02; 8:45 am]
BILLING CODE 8010-01-P