

[Federal Register: November 9, 2005 (Volume 70, Number 216)]
[Notices]               
[Page 68116-68118]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no05-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27141; 812-13216]

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

November 3, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 15(a) of 
the Act and rule 18f-2 under the Act, as well as certain disclosure 
requirements.

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    Summary of Application: Applicants request an order that would 
permit them to enter into and materially amend subadvisory agreements 
without shareholder approval and would grant relief from certain 
disclosure requirements.
    Applicants: Frank Russell Investment Management Company 
(``FRIMCo'') and Steward Funds, Inc. (the ``Company'').
    Filing Dates: The application was filed on July 20, 2005, and 
amended on November 2, 2005.
    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 November 28, 2005, 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, U.S. Securities and Exchange Commission, 100 F 
St., NE., Washington, DC 20549-9303; Applicants, Gregory J. Lyons, 
Esq., Frank Russell Company, 909 A Street, Tacoma, Washington 98402.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
551-6813, or Nadya B. Roytblat, Assistant Director, at (202) 551-6821 
(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 Desk, 100 F St., NE., Washington, DC 
20549-0102 (telephone (202) 551-5850).

Applicants' Representations

    1. The Company is organized as a Maryland corporation and is 
registered under the Act as an open-end management investment company. 
The Company has two operating series, neither of which will be operated 
pursuant to the application. An amendment to the Company's registration 
statement on Form N-1A to register shares of a third series, the 
Steward Multi-Manager Equity Fund (the ``Existing Fund''), has been 
filed with the Commission. When the registration statement is declared 
effective, the Existing Fund will implement the manager-of-managers 
structure as described in the application. Applicants also request 
relief for any future series of the Company that is advised by FRIMCo 
that uses the manager-of-managers arrangement described in the 
application (each such series, together with the Existing Fund, a 
``Fund'').\1\
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    \1\ All existing entities that currently intend to rely on the 
order are named as applicants. Any entity that relies on the order 
in the future will do so only in accordance with the terms and 
conditions of the application. If the name of any Fund contains the 
name of a Money Manager (as defined below), the name of FRIMCo 
(e.g., ``Frank Russell''), or the name of an entity controlling, 
controlled by, or under common control with FRIMCo that serves as 
the primary adviser to the Fund, will precede the name of the Money 
Manager.
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    2. FRIMCo is registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act'') and will serve 
as investment adviser to the Existing Fund pursuant to an investment 
advisory agreement (``Advisory Agreement'') with the Existing Fund. The 
Advisory Agreement has been approved by the Existing Fund's board of 
directors (``Board''), including a majority of the directors who are 
not ``interested persons,'' as defined in section 2(a)(19) of the Act, 
of the Existing Fund or FRIMCo (the ``Independent Directors''), as well 
as by the sole initial shareholder of the Existing Fund.
    3. Under the terms of the Advisory Agreement, FRIMCo will provide

[[Page 68117]]

investment advisory services to the Existing Fund, supervise the 
investment program for the Existing Fund, and has the authority, 
subject to Board approval, to enter into investment subadvisory 
agreements (``Portfolio Management Agreements'') with one or more 
subadvisers (``Money Managers''). Each Money Manager is registered 
under the Advisers Act. FRIMCo will monitor and evaluate the Money 
Managers and recommend to the Board their hiring, retention or 
termination. Money Managers recommended to the Board by FRIMCo are 
selected and approved by the Board, including a majority of the 
Independent Directors. Each Money Manager has discretionary authority 
to invest the assets or a portion of the assets of the Existing Fund. 
FRIMCo compensates each Money Manager out of the fees paid to FRIMCo 
under the Advisory Agreement.
    4. Applicants request an order that would (a) permit FRIMCo to hire 
Money Managers and materially amend Portfolio Management Agreements 
without obtaining shareholder approval and (b) grant relief from 
certain disclosure requirements concerning fees paid to the Money 
Managers. The requested relief will not extend to any Money Manager 
that is an affiliated person, as defined in section 2(a)(3) of the Act, 
of a Fund or FRIMCo, other than by reason of serving as a Money Manager 
to one or more of the Funds (``Affiliated Money Manager'').
    5. An exemption is requested to permit a Fund to disclose (as both 
a dollar amount and as a percentage of the Fund's net assets): (a) The 
aggregate fees paid to FRIMCo and any Affiliated Money Managers; and 
(b) the aggregate fees paid to Money Managers other than Affiliated 
Money Managers (``Aggregate Fee Disclosure''). For any Fund that 
employs an Affiliated Money Manager, the Fund will provide separate 
disclosure of any fees paid to the Affiliated Money Manager.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to act as an investment adviser to a registered 
investment company except under a written contract that has been 
approved by the vote of a majority of the company's outstanding voting 
securities. Rule 18f-2 under the Act provides that each series or class 
of stock in a series company affected by a matter must approve such 
matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 14(a)(3) of Form N-1A requires disclosure of 
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the 
Securities Exchange Act of 1934 (``1934 Act''). Items 22(c)(1)(ii), 
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A, taken together, 
require a proxy statement for a shareholder meeting at which the 
advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fees,'' a description of the ``terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and proposed fees and the difference between the 
two fees.
    4. Form N-SAR is the semi-annual report filed with the Commission 
by registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
their investment advisers, including the Money Managers.
    5. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b), and (c) of Regulation S-X require 
that investment companies include in their financial statements 
information about investment advisory fees.
    6. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction or any class or classes of 
persons, securities, or transactions from any provisions of the Act, or 
from any rule thereunder, if such 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. Applicants state that their requested relief meets this standard 
for the reasons discussed below.
    7. Applicants assert that the shareholders are relying on FRIMCo's 
experience to select one or more Money Managers best suited to achieve 
a Fund's investment objectives. Applicants assert that, from the 
perspective of an investor in the Fund, the role of the Money Managers 
is comparable to that of the individual portfolio managers employed by 
traditional investment company advisory firms. Applicants state that 
requiring shareholder approval of each Portfolio Management Agreement 
would impose costs and unnecessary delays on the Funds, and may 
preclude FRIMCo from acting promptly in a manner considered advisable 
by the Board. Applicants note that the Advisory Agreement and any 
Portfolio Management Agreement with an Affiliated Money Manager will 
remain subject to section 15(a) of the Act and rule 18f-2 under the 
Act.
    8. Applicants assert that some Money Managers use a ``posted'' rate 
schedule to set their fees. Applicants state that while Money Managers 
are willing to negotiate fees that are lower than those posted on the 
schedule, they are reluctant to do so where the fees are disclosed to 
other prospective and existing customers. Applicants submit that the 
requested relief would allow FRIMCo to negotiate more effectively with 
each individual Money Manager.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Fund may rely on the order requested in the 
application, the operation of the Fund in the manner described in the 
application will be approved by a majority of the Fund's outstanding 
voting securities, as defined in the 1940 Act, or, in the case of a 
Fund whose public shareholders purchase shares on the basis of a 
prospectus containing the disclosure contemplated by condition 2 below, 
by the sole initial shareholder before offering the Fund's shares to 
the public.
    2. The prospectus for each Fund will disclose the existence, 
substance, and effect of any order granted pursuant to the application. 
Each Fund will hold itself out to the public as employing the 
management structure described in the application. The prospectus will 
prominently disclose that FRIMCo has ultimate responsibility (subject 
to oversight by the Board) to oversee the Money Managers and recommend 
their hiring, termination, and replacement.
    3. Within 90 days of the hiring of a new Money Manager, the 
affected Fund shareholders will be furnished all information about the 
new Money Manager that would be included in a proxy statement, except 
as modified to permit Aggregate Fee Disclosure. This information will 
include Aggregate Fee Disclosure and any change in such disclosure 
caused by the addition of the new Money Manager. To meet this 
obligation, the Fund will provide shareholders within 90 days of the 
hiring of a new Money Manager with an information statement meeting the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the 1934 Act, except as

[[Page 68118]]

modified by the order to permit Aggregate Fee Disclosure.
    4. FRIMCo will not enter into a Portfolio Management Agreement with 
any Affiliated Money Manager without that agreement, including the 
compensation to be paid thereunder, being approved by Fund 
shareholders.
    5. The Board of each Fund will satisfy the fund governance 
standards as defined in rule 0-1(a)(7) under the Act by the compliance 
date for the rule (``Compliance Date''). Prior to the Compliance Date, 
a majority of the Board will be Independent Directors, and the 
nomination of new or additional Independent Directors will be at the 
discretion of the then existing Independent Directors.
    6. When a Money Manager change is proposed for a Fund with an 
Affiliated Money Manager, the Board, including a majority of the 
Independent Directors, will make a separate finding, reflected in the 
applicable Board minutes, that such change is in the best interests of 
the Fund and its shareholders and does not involve a conflict of 
interest from which FRIMCo or the Affiliated Money Manager derives an 
inappropriate advantage.
    7. Independent legal counsel, as defined in rule 0-1(a)(6) under 
the Act, will be engaged to represent the Independent Directors. The 
selection of such counsel will be within the discretion of the then 
existing Independent Directors.
    8. FRIMCo will provide the Board, no less frequently than 
quarterly, with information about the profitability of FRIMCo on a per-
Fund basis. The information will reflect the impact on profitability of 
the hiring or termination of any Money Manager during the applicable 
quarter.
    9. Whenever a Money Manager is hired or terminated, FRIMCo will 
provide the Board with information showing the expected impact on the 
profitability of FRIMCo.
    10. FRIMCo will provide general investment management services to 
each Fund, including overall supervisory responsibility for the general 
management and investment of the Fund's assets, and, subject to review 
and approval of the Board, will: (i) Set each Fund's overall investment 
strategies, (ii) evaluate, select and recommend Money Managers to 
manage all or a part of a Fund's assets, (iii) when appropriate, 
allocate and reallocate a Fund's assets among multiple Money Managers, 
(iv) monitor and evaluate the performance of Money Managers, and (v) 
implement procedures reasonably designed to ensure that the Money 
Managers comply with each Fund's investment objective, policies and 
restrictions.
    11. No director or officer of a Fund, or director or officer of 
FRIMCo, will own directly or indirectly (other than through a pooled 
investment vehicle that is not controlled by such person) any interest 
in a Money Manager, except for (a) ownership of interests in FRIMCo or 
any entity that controls, is controlled by, or is under common control 
with FRIMCo, or (b) ownership of less than 1% of the outstanding 
securities of any class of equity or debt of a publicly traded company 
that is either a Money Manager or an entity that controls, is 
controlled by or is under common control with a Money Manager.
    12. Each Fund will disclose in its registration statement the 
Aggregate Fee Disclosure.
    13. The requested order will expire on the effective date of rule 
15a-5 under the Act, if adopted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-22332 Filed 11-8-05; 8:45 am]

BILLING CODE 8010-01-P
