[Federal Register Volume 67, Number 157 (Wednesday, August 14, 2002)]
[Notices]
[Pages 53030-53033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20524]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25694, 812-12692]


Commonfund Institutional Funds, et al.; Notice of Application

August 7, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under: (a) Section 6(c) of the 
Investment Company Act of 1940 (``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 the 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 
that is an affiliated person of an investment adviser to another 
portion, subject to the limits in rule 12d3-1 under the Act.

APPLICANTS: Commonfund Institutional Funds (the ``Company'') and 
Commonfund Asset Management Company, Inc. (``COMANCO'').

FILING DATES: The application was filed on November 21, 2001 and 
amended on August 6, 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 September 3, 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 5th Street, NW., Washington, DC 
20549-0609. Applicants, c/o John W. Auchincloss, Commonfund 
Institutional Funds, 15 Old Danbury Road, Wilton, CT 06897.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
942-0614, or Todd F. Kuehl, Branch Chief, 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 5th Street, NW., Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. The Company is an open-end management investment company 
registered under the Act and currently consists of eight investment 
portfolios (the ``CIF Portfolios''). COMANCO, an indirect, wholly owned 
subsidiary of The Common Fund for Nonprofit Organizations, is an 
investment adviser registered under the Investment Advisers Act of 
1940, as amended (``Advisers Act''). COMANCO serves as investment 
adviser to each of the CIF Portfolios, including CIF Portfolios 
(``Multi-Managed Portfolios'') that are advised by COMANCO and 
investment sub-advisers (``Sub-Advisers''). Each Sub-Adviser is 
registered under the Advisers Act or is exempt from registration. Each 
Sub-Adviser is responsible for making independent investment and 
brokerage allocation decisions for a discrete portion of a Multi-
Managed Portfolio (``Portion'') based on its own research and credit 
evaluations. Each Sub-Adviser is paid a fee by COMANCO out of the 
management fee received by COMANCO from the Multi-Managed Portfolios, 
which fee is based on a percentage of the value of assets allocated to 
the Sub-Adviser. COMANCO may also directly advise a Portion of a Multi-
Managed Portfolio.
    2. Applicants request relief to permit: (a) A broker-dealer that 
serves as a Sub-Adviser or is an affiliated person of a Sub-Adviser 
(the broker-dealer, an ``Affiliated Broker-Dealer''; the Sub-Adviser, 
an ``Affiliated Sub-Adviser'') to engage in principal transactions with 
a Portion of a Multi-Managed Portfolio that is advised by another Sub-
Adviser that is not an affiliated person of the Affiliated Broker-
Dealer or Affiliated Subadviser (the Portion, an ``Unaffiliated 
Portion''; the other Sub-Adviser, an ``Unaffiliated Sub-Adviser''); (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 Sub-Adviser or a person of which an Affiliated 
Sub-Adviser is an affiliated person (``Affiliated Underwriter''); (d) a 
Portion advised by an Affiliated Sub-Adviser (``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 Sub-Adviser, or an affiliated person 
of an Affiliated Sub-Adviser engaged 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 COMANCO and the term ``Unaffiliated Portion'' includes the 
Portion of a Multi-Managed Portfolio directly advised by COMANCO 
provided that it manages its Portion of the Multi-Managed Portfolio 
independently of the Portions managed by other Sub-Advisers to the 
Multi-Managed Portfolio, and COMANCO does not control or influence 
any other Sub-Adviser's investment decisions for its portion of the 
Multi-Managed Portfolio. COMANCO does not currently directly manage 
a Portion of any Multi-Managed Portfolio.

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[[Page 53031]]

    3. Applicants request that the exemptive relief apply to the 
Company or any existing or future open-end management investment 
company registered under the Act, or series thereof, for which COMANCO 
or any entity controlling, controlled by, or under common control with 
(within the meaning of section 2(a)(9) of the Act) COMANCO currently or 
in the future acts as investment adviser. The Company is the only 
registered investment company that currently intends to rely on the 
order. COMANCO 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.

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 Sub-Adviser would be 
an affiliated person of a Multi-Managed Portfolio, and an Affiliated 
Broker-Dealer would be either an Affiliated Sub-Adviser or an 
affiliated person of the Affiliated Sub-Adviser to the same Multi-
Managed Portfolio, 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 Sub-
Adviser 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).
    2. Applicants seek relief under sections 6(c) and 17(b) of the Act, 
to exempt principal transactions prohibited by section 17(a) 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 Sub-Adviser is the Sub-Adviser 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 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 the general 
purposes of the Act. Section 6(c) of the Act permits the Commission to 
exempt any person or transaction from any provisions 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) was designed to prevent are 
not present. Applicants state that if an Unaffiliated Sub-Adviser 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 Sub-Adviser. Applicants state that Sub-Advisers are 
paid on the basis of a percentage of the value of the assets under 
their management. The execution of a transaction to the disadvantage of 
an Unaffiliated Portion would also disadvantage the Unaffiliated Sub-
Adviser to the extent that it diminishes the value of the Unaffiliated 
Portion. Applicants further state that COMANCO's power to dismiss Sub-
Advisers or to change the Portion of a Multi-Managed Portfolio 
allocated to each Sub-Adviser reinforces a Sub-Adviser's incentive to 
maximize the investment performance of its own Portion of the Multi-
Managed Portfolio.
    5. Applicants state that each Sub-Adviser's contract assigns it 
responsibility to manage a discrete Portion of the Multi-Managed 
Portfolio. Each Sub-Adviser is responsible for making independent 
investment and brokerage allocation decisions based on its own research 
and credit evaluations. Applicants state that COMANCO 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 COMANCO. 
Applicants submit that, in managing a discrete Portion of a Multi-
Managed Portfolio, each Sub-Adviser 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 Portfolios, since 
each Unaffiliated Sub-Adviser is required to manage the Unaffiliated 
Portion in accordance with the investment objectives and related 
investment policies of the Multi-Managed Portfolio as described in its 
prospectus and statement of additional information. 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 such transactions increases the likelihood of the 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 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 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 that would not exceed the ``usual and 
customary broker's commission'' for purposes of section 17(e)(2) of the 
Act. 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(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 Sub-Adviser 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) of the

[[Page 53032]]

Act 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 Sub-Adviser is the Sub-Adviser to another Portion of the 
same Multi-Managed Portfolio.
    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 Sub-Adviser 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 Sub-Adviser 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 underwriter, 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 Sub-Adviser, although under contract 
to manage only a Portion of a Multi-Managed Portfolio, is an investment 
adviser to the entire 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 those provisions apply solely because an Affiliated 
Sub-Adviser 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 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-Managed 
Portfolios because a decision by an Unaffiliated Sub-Adviser to a 
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 Sub-
Advisers, and any common purchases by an Affiliated Sub-Adviser and an 
Unaffiliated Sub-Adviser 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 the 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 Sub-Adviser 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 Sub-Adviser, or an 
affiliated person of an Affiliated Sub-Adviser. The requested relief 
would not extend to securities issued by the Sub-Adviser making the 
purchase, COMANCO, or a Securities Affiliate 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 Sub-Adviser 
acts independently of the other Sub-Advisers in making investment 
decisions for the assets allocated to its portion of the Multi-Managed 
Portfolio. Further, applicants assert that prohibiting the Unaffiliated 
Portions from purchasing securities issued by Securities Affiliates 
could harm the interests of shareholders by preventing the Unaffiliated 
Sub-Adviser 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-Managed Portfolio relying on the requested order will 
be advised by an Affiliated Subadviser and at least one Unaffiliated 
Sub-Adviser, and will be operated in the manner described in the 
application.
    2. No Affiliated Sub-Adviser, Affiliated Broker-Dealer, Affiliated 
Underwriter or Securities Affiliate (except by virtue of serving as 
Sub-Adviser to a Portion of a Multi-Managed Portfolio) will be an 
affiliated person or second-tier affiliate of (a) COMANCO; (b) the 
Unaffiliated Sub-Adviser making

[[Page 53033]]

the investment decision with respect to the Unaffiliated Portion of the 
Multi-Managed Portfolio; (c) any principal underwriter or promoter of a 
Multi-Managed Portfolio, or (d) any officer, director or employee of 
the Multi-Managed Portfolio engaging in the transaction.
    3. No Affiliated Sub-Adviser will directly or indirectly consult 
with any Unaffiliated Sub-Adviser concerning allocation of principal or 
brokerage transactions or concerning the purchase of securities issued 
by Securities Affiliates. Sub-Advisers may consult with COMANCO in 
order to monitor compliance with the limits in rule 12d3-1.
    4. No Affiliated Sub-Adviser will participate in any arrangement 
whereby the amount of its sub-advisory fees will be affected by the 
investment performance of an Unaffiliated Sub-Adviser.
    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) of such rule to the 
extent such paragraph is applicable solely because such issuer is an 
Affiliated Sub-Adviser or an affiliated person of an Affiliated Sub-
Adviser.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20524 Filed 8-13-02; 8:45 am]
BILLING CODE 8010-01-P