[Federal Register Volume 67, Number 43 (Tuesday, March 5, 2002)]
[Notices]
[Pages 10023-10026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5146]



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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25446; 812-12018]


The Vantagepoint Funds and Vantagepoint Investment Advisers, LLC; 
Notice of Application

February 26, 2002.
AGENCY: Security and Exchange Commission (``Commission'').

ACTION: Notice of an application under: (a) Section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') requesting an exemption 
from sections 12(d)(3) and 17(e) of the Act and rule 17e-1 under the 
Act; (b) sections 6(c) and 17(b) of the Act requesting an exemption 
from section 17(a) of the Act; and (c) section 10(f) of the Act 
requesting an exemption from section 10(f) of the Act.

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    Summary of 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. Further, applicants request relief to permit a portion of an 
investment company's portfolio to purchase securities issued by a 
broker-dealer that is an affiliated person of an investment adviser to 
another portion, subject otherwise to the limits in rule 12d3-1 under 
the Act.
    Applicants: The Vantagepoint Funds (the ``Fund'') and Vantagepoint 
Investment Advisers, LLC (``VIA'').
    Filing Dates.The application was filed on March 7, 2000 and amended 
on February 26, 2002.
    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 March 21, 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 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, 777 North Capitol Street, NE., Washington, DC 
20002.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 942-0574 or Michael W. Mundt, Senior Special Counsel, 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 Fifth Street, NW, Washington, 
DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. The Fund is an open-end management investment company registered 
under the Act and currently consists of nineteen investment portfolios 
(``Portfolios''). VIA is an investment adviser registered under the 
Investment Advisers Act of 1940 (``Advisers Act'') and is a wholly-
owned subsidiary of ICMA Retirement Corporation. VIA serves as 
investment adviser to the Portfolios, including Portfolios (``Multi-
Managed Portfolios'') that are advised by VIA and investment 
subadvisers (``Subadvisers''). Each Subadviser is registered under the 
Advisers Act or is exempt from registration. Each Subadviser is 
responsible for making independent investment and brokerage allocation 
decisions for a discrete portion of a Multi-Managed Portfolio based on 
its own research and credit evaluations. Each Subadviser is compensated 
directly by the Fund based on a percentage of the average daily net 
assets of the discrete portion of the Multi-Managed Portfolio allocated 
to the Subadviser. VIA also may directly advise a discrete portion of a 
Multi-Managed Portfolio.
    2. Applicants request relief to permit: (a) A broker-dealer that 
serves as a Subadviser or is an affiliated person of a Subadviser (the 
broker-dealer, an ``Affiliated Broker-Dealer;'' the Subadviser, an 
``Affiliated Subadviser'') to engage in principal transactions with a 
portion of a Multi-Managed Portfolio that is advised by another 
Subadviser that is not an affiliated person of the Affiliated Broker-
Dealer or Affiliated Subadviser (the portion, an ``Unaffiliated 
Portion''; the other Subadviser, an ``Unaffiliated Subadviser''); (b) 
an Affiliated Broker-Dealer to provide brokerage services to an 
Unaffiliated Portion, and the Unaffiliated Portion to use such 
brokerage services, without complying with rule 17e-1(b) or (d) 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 a person of which an Affiliated 
Subadviser is an affiliated person (``Affiliated Underwriter''); (d) a 
portion 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 under the Act, except that 
paragraph (b)(7) of the rule would not require the aggregation of 
purchases by the Affiliated Portion with purchases by Unaffiliated 
Portions; and (e) an Unaffiliated Portion to purchase securities issued 
by an Affiliated Subadviser, or an affiliated person of an Affiliated 
Subadviser, that is involved in securities-related activities 
(``Securities Affiliate''), subject otherwise to the limits in rule 
12d3-1 under the Act.\1\
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    \1\ The terms ``Unaffiliated Subadviser'' and ``Subadviser'' 
include VIA and the term ``Unaffiliated Portion'' includes the 
discrete portion of a Multi-Managed Portfolio directly advised by 
VIA, provided that VIA manages its portion of the Multi-Managed 
Portfolio independently of the portions managed by other Subadvisers 
to the Multi-Managed Portfolio, and VIA does not control or 
influence any other Subadviser's investment decisions for its 
portion of the Multi-Managed Portfolio. VIA does not currently 
manage directly any portion of a Multi-Managed Portfolio
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    3. Applicants request that the exemptive relief apply to any open-
end management investment company registered under the Act or current 
or future portfolio of such company for which VIA or any entity 
controlling, controlled by, or under common control (within the meaning 
of section 2(a)(9) of the Act) with VIA currently or in the future acts 
as an investment adviser. The Fund is the only registered investment 
company that currently intends to rely on the order. VIA 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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Applicants' Legal Analysis

A. Principal Transactions Between Unaffiliated Portions 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 Subadviser would be an 
affiliated person of a Multi-Managed Portfolio, and an Affiliated 
Broker-Dealer would be either an Affiliated Subadviser or an affiliated 
person of the Affiliated Subadviser, and thus a second-tier affiliate 
of a Multi-Managed Portfolio, including the Unaffiliated Portions. 
Accordingly, applicants state that any transactions to be effected by 
an Unaffiliated Subadviser on behalf of an Unaffiliated Portion of a 
Multi-Managed Portfolio with an Affiliated Broker-Dealer are subject to 
the prohibitions of section 17(a)(1) and (2).
    2. Applicants seek relief under section 6(c) and 17(b) to exempt 
principal transactions prohibited by section 17(a)(1) and (2) 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 
Multi-Managed Portfolio.
    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 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 were 
to purchase 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 average daily 
net assets of the portion of the Multi-Managed Portfolio allocated to 
their management. The execution of a transaction to the disadvantage of 
an unaffiliated Portion would also disadvantage the Unaffiliated 
Subadviser to the extent that it diminishes the value of the 
Unaffiliated Portion. Applicants further state that VIA's power to 
dismiss Subadvisers or to change the portion of a Multi-Managed 
Portfolio allocated to each Subadviser reinforces a Subadviser's 
incentive to maximize the investment performance of its own portion of 
the Multi-Managed Portfolio.
    5. Applicants state that each Subadviser's contract assigns it 
responsibility to manage a discrete portion of the Multi-Managed 
Portfolio. Each Subadviser is responsible for making independent 
investment and brokerage allocation decisions based on its own research 
and credit evaluations. Applicants that VIA does not dictate brokerage 
allocation or investment decisions for any Multi-Managed Portfolio, or 
have the contractual right to do so, except for any portion of a Multi-
Managed Portfolio advised directly by VIA. Applicants submit that, in 
managing a discrete portion of a Multi-Managed Portfolio, 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 Multi-Managed Portfolio, since each 
Unaffiliated Subadviser is required to manage the Unaffiliated Portion 
in accordance with the investment objectives and policies of the Multi-
Managed Portfolio as described in its registration statement. 
Applicants 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 
Multi-Managed Portfolio 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 Unaffiliated Portions 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 a 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 interest 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(d) 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 a Multi-Managed Portfolio) or a second-tier affiliate of an 
Unaffiliated Portion and thus subject to section 17(e). Applicants 
request relief under section 6(c) from section 17(e). Applicants 
request relief under section 6(c) from section 17(e) of the Act and 
rule 17e-1 under the Act to the extent necessary to permit the 
Unaffiliated Portion to pay brokerage compensation to an Affiliated 
Broker Dealer acting as broker in the ordinary course of business 
without complying with the requirements of rule 17e-1(b) and (d). 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 Multi-Managed Portfolio.

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    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) of the Act. 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 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) when a principal underwriter of the security, or an affiliated 
person of the principal writer, is an officer, director, member of an 
advisory board, investment adviser, or employee of the investment 
company. 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 discrete portion of a Multi-Managed Portfolio, is an 
investment adviser to the Multi-Managed Portfolio. Therefore, 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) 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 that those provisions apply solely because an 
Affiliated Subadviser is an investment adviser to the Multi-Managed 
Portfolio. 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 is 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 the 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-Managed 
Portfolios because a decision by an Unaffiliated Subadviser to a 
discrete portion of a Multi-Managed Portfolio to purchase securities 
during the existence of an underwriting syndicate, a principal 
underwriter of which is an Affiliated Underwriter, involves no 
potential for ``dumping.'' In addition, applicants state 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 Issued by Securities Affiliates

    1. Section 12(d)(3) of the Act 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. Rule 12d3-1 under Act exempts certain transactions from 
the prohibitions of section 12(d)(3) if certain conditions are met. One 
of these conditions, set forth in paragraph (c) of rule 12d3-1, 
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 adviser, promoter, or principal underwriter.
    2. Applicants state that because each Subadviser to a Multi-Managed 
Portfolio is considered to be an investment adviser to the entire 
Multi-Managed Portfolio, an Unaffiliated Portion may not purchase 
securities of a Securities Affiliate in reliance on rule 12d3-1. 
Applicants request an exemption under section 6(c) from section 
12(d)(3) to permit an Unaffiliated Portion to acquire securities issued 
by a Securities Affiliate subject to the limits in rule 12d3-1, except 
for paragraph (c) to the extent that the paragraph applies solely 
because the Securities Affiliate is an Affiliated Subadviser, or an 
affiliated person of an affiliated Subadviser. The requested relief 
would not extend to securities by the Subadviser making the purchase, 
VIA, or an affiliated person of any of these entities.
    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-Managed 
Portfolio. Further, applicants submit that prohibiting the Unaffiliated 
Portions from purchasing securities issued by Securities Affiliates 
could harm the interests of shareholders by preventing the Unaffiliated 
Subadviser form achieving optimal investment results.

Applicant's Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Each Multi-Managed Portfolio will be advised by an Affiliated 
Subadviser and at least one Unaffiliated Subadviser, and will be 
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-Managed Portfolio) will be 
an affiliated person or a second-tier affiliate of (a) VIA, (b) any 
Unaffiliated Subadviser, (c) any principal underwriter or promoter of 
the Multi-Managed Portfolio, or (d) any officer, director or employee 
of the Multi-Managed Portfolio.
    3. No Affiliated Subadviser will directly or indirectly consult 
with any Unaffiliated Subadviser concerning allocation of principal or 
brokerage transactions or concerning the purchase of the securities 
issued by Securities Affiliates. Subadvisers may consult with VIA in 
order to monitor regulatory compliance, including compliance with the 
limits of rule 12d3-1.
    4. No Affiliated Subadviser will participate in any arrangement 
whereby

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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 
during the existence of an 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 
with purchases by Unaffiliated Portions.
    6. With respect to purchases by an Unaffiliated Portion 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. 02-5146 Filed 3-4-02; 8:45 am]
BILLING CODE 8010-01-M