[Federal Register Volume 67, Number 123 (Wednesday, June 26, 2002)]
[Notices]
[Pages 43193-43197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25618; 812-12662]


AXP Partners Series, Inc., et al.; Notice of Application

June 19, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application 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 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 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

[[Page 43194]]

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 an 
investment adviser or an affiliated person of an investment adviser to 
another portion, subject to the limits in rule 12d3-1 under the Act.

APPLICANTS: AXP Partners Series, Inc., AXP Partners International 
Series, Inc., AXP Strategy Series, Inc. (each, an ``AXP Fund,'' and 
each underlying series, an ``AXP Portfolio''), AXP Variable Portfolio--
Partners Series, Inc. (the ``Life Fund,'' and the underlying series, 
the ``Life Portfolio'') (the AXP Funds and the Life Funds, the 
``Funds'') (the AXP Portfolios and the Life Portfolio, the 
``Portfolios''), American Express Financial Corporation (``AEFC'') and 
IDS Life Insurance Company (``IDS Life'').
    Filing Dates: The application was filed on October 12, 2001 and 
amended on June 19, 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 July 15, 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. Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, 
MN 55402-3268. AEFC and IDS Life, 200 AXP Financial Center, 
Minneapolis, MN 55474.

FOR FURTHER INFORMATION CONTACT: John L. Sullivan, Senior Counsel, at 
(202) 942-0681, or Nadya B. Roytblat, Assistant Director, at (202) 942-
0564 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Each Fund is a Minnesota corporation registered under the Act as 
an open-end management investment company. The Funds offer several 
Portfolios with different investment objectives and policies. Shares of 
the Life Portfolio are sold to IDS Life and its subsidiaries as a 
funding option for variable annuity contracts and variable life 
insurance policies issued by IDS Life and its subsidiaries.
    2. AEFC is a Delaware corporation registered as an investment 
adviser under the Investment Advisers Act of 1940 and serves as 
investment adviser to the AXP Portfolios. A subsidiary of AEFC, IDS 
Life is a stock life insurance company organized under the laws of 
Minnesota and manages the Life Portfolio. IDS Life has entered into an 
advisory agreement with AEFC pursuant to which AEFC furnishes 
investment advice to the Life Portfolio.\1\ The Adviser allocates the 
assets of each Portfolio among subadvisers (each, a ``Subadviser''). 
Each Subadviser has discretion to purchase and sell securities for its 
portion of a Portfolio in accordance with that Portfolio's objectives, 
policies and restrictions. As compensation for its services, each 
Subadviser is paid a fee by AEFC out of the management fee received by 
AEFC from the Portfolios.
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    \1\ For purposes of the application, the term ``Adviser'' is 
used to mean AEFC, with respect to the AXP Funds and the AXP 
Portfolios, and IDS Life and AEFC jointly, with respect to the Life 
Fund and the Life Portfolio.
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    3. Applicants request relief to permit: (a) Any broker-dealer 
registered under the Securities Exchange Act of 1934 that itself serves 
as a Subadviser to, or is an affiliated person of a Subadviser to a 
Portfolio (the broker-dealer, an ``Affiliated Broker-Dealer'; the 
Subadviser, an ``Affiliated Subadviser'') to engage in principal 
transactions with a portion of the Portfolio (``Portion'') that is 
advised by another Subadviser that is not an affiliated person of the 
Affiliated Broker-Dealer or the Affiliated Subadviser (the Subadviser, 
an ``Unaffiliated Subadviser'; the Portion, an ``Unaffiliated 
Portion'') \2\; (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 17-1(b) and 
(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 of the Portfolio 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 an Unaffiliated Portion; and (e) an 
Unaffiliated Portion to acquire securities issued by an Affiliated 
Subadviser or an affiliated person of an Affiliated Subadviser engaged 
in securities-related activities (``Securities Affiliate''), subject to 
the limits in rule 12d3-1 under the Act.
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    \2\ The terms ``Unaffiliated Subadviser,'' ``Subadviser,'' and 
``unaffiliated Portion'' include the Adviser and the Portion 
directly advised by the Adviser, respectively, provided that the 
Adviser manages its Portion independently of the Portions managed by 
other Subadvisers to the Portfolio, and the Adviser does not control 
or influence any other Subadviser's investment decisions for its 
Portion the Adviser does not currently directly advise nay Portion 
of any Portfolio.
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    4. Applicants request that the requested relief apply to the Funds 
and any existing or future registered management investment company or 
its series advised by (a) AEFC or any entity controlling, controlled 
by, or under common control with AEFC, and (b) at least one 
Unaffiliated Subadviser registered under the Advisers Act or exempt 
from registration (such investment company or its series included in 
the term ``Portfolio''). Applicants also request that the relief apply 
to any existing or future entity that serves as an Affiliated 
Subadviser, Affiliated Broker-Dealer or Affiliated Underwriter with 
respect to a Portfolio relying on the order. Any investment company 
that currently intends to rely on the order is named as an applicant. 
Any existing or future entity that relies on the order in the future 
will comply with the terms and conditions of the application.

Applicants' Legal Analysis

A. Principal Transactions Between an Unaffiliated Portion and an 
Affiliated Broker-Dealer

    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 (``second-

[[Page 43195]]

tier affiliate''), 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 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 Portfolio, including the Unaffiliated Portion. 
Accordingly, applicants state that any transactions to be effected by 
an Unaffiliated Subadviser on behalf of an Unaffiliated Portion of a 
Portfolio 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 Portion as a result of the 
fact that an Affiliated Subadviser is the Subadviser to another Portion 
of the same Portfolio. The requested relief would not be available if 
the Affiliated Broker-Dealer (except by virtue of serving as a 
Subadviser to a Portion) is an affiliated person or a second-tier 
affiliate of the Adviser, the Unaffiliated Subadviser making the 
investment decision with respect to the Unaffiliated Portion, or any 
principal underwriter, promoter, officer, director or employee of the 
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, including the 
consideration to be paid or received, 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 financial advantage. Applicants assert 
that when the person acting on behalf of an investment company has no 
direct or indirect financial 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 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 value of the 
assets allocated to their management. The execution of a transaction to 
the disadvantage of the Unaffiliated Portion would disadvantage the 
Unaffiliated Subadviser to the extent that it diminishes the value of 
the Unaffiliated Portion. Applicants further submit that the Adviser's 
power to dismiss a Subadviser or to change the portion of a Portfolio's 
assets allocated to a Subadviser reinforces the Subadviser's incentive 
to maximize the investment performance of its own Portion.
    5. Applicants state that each Subadviser's contract assigns it 
responsibility to manage a Portion. Each Subadviser is responsible for 
making independent investment and brokerage allocation decisions based 
on its own research and credit evaluations. Applicants represent that 
the Adviser does not dictate brokerage allocation or investment 
decisions nor does it have the contractual right to do so, except with 
respect to a Portion advised directly by the Adviser. Applicants 
contend that, in managing a Portion, 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 Portfolio involved, since each 
Unaffiliated Subadviser is required to manage its Portion in accordance 
with the investment objectives and policies described in the 
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 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 an Unaffiliated Portion 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 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 during the preceding quarter complied with [the company's 
rule 17e-1] 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 or a second-tier affiliate of an 
Unaffiliated Portion 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 Portion 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 Portion, 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 Portfolio. The relief would not apply if the 
Affiliated Broker-Dealer (except by virtue of serving as Subadviser to 
a Portion) is an affiliated person or a second-tier affiliate of the 
Adviser, the Unaffiliated Subadviser making the investment decision 
with respect to the Unaffiliated Portion, or any principal underwriter, 
promoter, officer, director or employee of the Portfolio.

[[Page 43196]]

    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 because 
the financial interests of an Unaffiliated Subadviser are directly 
aligned with the interests of the Unaffiliated Portion it advises, an 
Unaffiliated Subadviser will enter into brokerage transactions with 
Affiliated Broker-Dealers only if the fees charged are reasonable and 
fair compared to those charged by other brokers in connection with 
comparable transactions involving similar securities during a 
comparable period of time. Applicants also 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) 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 to a Portfolio, although 
under contract to manage only a Portion, is considered an investment 
adviser to the Portfolio itself, not just the Portion it manages. 
Therefore, applicants believe that all purchases of securities by the 
Subadviser on behalf of the Portfolio from an underwriting syndicate, a 
principal underwriter of which is another Subadviser to the same 
Portfolio or a person of which such other Subadviser is an affiliated 
person, would be subject to section 10(f).
    3. Applicants request relief under section 10(f) from that section 
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 those provisions apply 
solely because an Affiliated Subadviser is an investment adviser to the 
Portfolio. The requested relief would not be available if the 
Affiliated Underwriter (except by virtue of serving as Subadviser to a 
Portion) is an affiliated person or a second-tier affiliate of the 
Adviser, the Unaffiliated Subadviser making the investment decision 
with respect to the Unaffiliated Portion, or any principal underwriter, 
promoter, officer, director or employee of the 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 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 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 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 Portfolios because, 
in part, a decision by the Subadviser to a Portion to purchase 
securities from an underwriting syndicate, a principal underwriter of 
which is a Subadviser to a different Portion of the same Portfolio or a 
person of which such other Subadviser is an affiliated person, involves 
no potential for ``dumping.'' In addition, applicants assert that 
aggregating purchases would serve no purpose because there is no 
collaboration among Subadvisers to the same Portfolio, 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 
Portion

    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. 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 to a portion of a 
Portfolio is considered to be an investment adviser to the entire 
Portfolio. Thus, an Unaffiliated Portion would not be able to purchase 
securities issued by a Securities Affiliate (which would include 
another Subadviser to the same Portfolio or an affiliated person of 
that Subadviser) in reliance on rule 12d3-1 because of paragraph (c). 
Applicants request relief under section 6(c) from section 12(d)(3) to 
allow any Unaffiliated Subadviser for an Unaffiliated Portion to 
acquire securities issued by a Securities Affiliate within the limits 
of rule 12d3-1. The requested relief would only apply where a 
Securities Affiliate is deemed to be an affiliated person or a second-
tier affiliate of an Unaffiliated Portion within the meaning of rule 
12d3-1(c) solely because an Affiliated Subadviser is the Subadviser to 
another portion of the same Portfolio.
    3. Applicants state that the proposed transactions do 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 Portfolio. 
Furthermore, applicants submit that prohibiting an Unaffiliated Portion 
from purchasing securities issued by a Securities Affiliate could harm 
the interests of a Portfolio'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 Portfolio relying on the requested order will be advised by 
an Affiliated Subadviser and at least one Unaffiliated Subadviser and 
will be operated in the manner described in the application.

[[Page 43197]]

    2. No Affiliated Subadviser, Affiliated Broker-Dealer, Affiliated 
Underwriter or Securities Affiliate (except by virtue of serving as 
Subadviser to a Portion) will be an affiliated person or a second-tier 
affiliate of the Adviser, any Unaffiliated Subadviser, or any principal 
underwriter, promoter, officer, director or employee of a Portfolio.
    3. No Affiliated Subadviser will directly or indirectly consult 
with any Unaffiliated Subadviser 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 Portion 
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 Portion 
with purchases by an Unaffiliated Portion.
    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. 02-16062 Filed 6-25-02; 8:45 am]
BILLING CODE 8010-01-P