

[Federal Register: April 21, 2006 (Volume 71, Number 77)]
[Notices]               
[Page 20738-20741]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ap06-109]                         

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27288; 812-12931]

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

April 17, 2006.
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 and under sections 6(c) and 
17(b) of the Act for an exemption from section 17(a) of the Act.

-----------------------------------------------------------------------

Summary of Application: The order would permit certain registered open-
end management investment companies to acquire shares of other 
registered open-end management investment companies outside the same 
group of investment companies.

Applicants: Frank Russell Investment Company (the ``Trust''), Frank 
Russell Investment Management Company (``FRIMCo'') and Russell Fund 
Distributors (the ``Distributor'').

Filing Date: The application was filed on February 21, 2003, and 
amended on April 3, 2006.

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 May 12, 2006, 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 
Street, NE., Washington, DC 20549-1090; Applicants, 909 A Street, 
Tacoma, WA 98402.

FOR FURTHER INFORMATION CONTACT: John Yoder, Senior Counsel, at (202) 
551-6878, or Nadya 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 
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington DC 20549-0102, (telephone (202) 551-5850).

Applicants' Representations

    1. The Trust is an open-end management investment company 
registered under the Act that is comprised of 34 separate series (each, 
a ``Fund'', and together, the ``Funds''). FRIMCo, a Washington 
corporation, is registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act'') and serves as 
investment adviser to the Funds.
    2. Applicants request relief to permit registered open-end 
management investment companies that are not part of the same ``group 
of investment companies,'' as that term is defined in section 
12(d)(1)(G)(ii) of the Act, as the Trust (each, a ``Fund of Funds''), 
to

[[Page 20739]]

acquire shares of the Funds in excess of the limits in section 
12(d)(1)(A) of the Act and the Funds, any principal underwriter for a 
Fund, and any broker or dealer, to sell shares of the Funds to the 
Funds of Funds in excess of the limits in section 12(d)(1)(B) of the 
Act. Each Fund of Funds will be advised by an investment adviser that 
meets the definition in section 2(a)(20)(A) of the Act (``Fund of Funds 
Adviser''). Certain Funds of Funds also may be advised by investment 
adviser(s) that meet the definition in section 2(a)(20)(B) of the Act 
(each, a ``Fund of Funds Subadvisor''). Applicants request that the 
relief apply to: (a) Each registered open-end management investment 
company or series thereof that currently or subsequently is part of the 
same ``group of investment companies,'' within the meaning of section 
12(d)(1)(G)(ii) of the Act, as the Trust and that is advised by FRIMCo 
(also included in the term ``Funds''), their principal underwriters and 
any brokers and dealers; and (b) each Fund of Funds that enters into a 
participation agreement (``Participation Agreement'') with a Fund to 
purchase shares of the Fund.\1\ Applicants state that the Funds will 
offer efficient access to FRIMCo's ``multi-style, multi-manager'' 
approach to Funds of Funds pursuing a range of asset allocation and 
diversification objectives.
---------------------------------------------------------------------------

    \1\ All investment companies that currently intend to rely on 
the requested order are named as applicants. Any other investment 
company that relies on the order in the future will comply with the 
terms and conditions of the application.
---------------------------------------------------------------------------

Applicants' Legal Analysis

A. Sections 12(d)(1)(A) and (B) of the Act

    1. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, any principal underwriter, and 
any broker or dealer from selling shares of the investment company 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 generally.
    2. Section 12(d)(1)(J) 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 section 
12(d)(1) if the exemption is consistent with the public interest and 
the protection of investors. Applicants seek an exemption under section 
12(d)(1)(J) to permit a Fund of Funds to acquire shares of the Funds 
and the Funds to sell their shares to the Fund of Funds beyond the 
limits set forth in section 12(d)(1)(A) of that Act and the Funds, any 
principal underwriter for a Fund, and any broker or dealer, to sell 
shares of the Funds to the Funds of Funds in excess of the limits in 
section 12(d)(1)(B) of the Act.
    3. Applicants state that the proposed arrangement will adequately 
address the policy concerns underlying sections 12(d)(1)(A) and (B), 
which include concerns about undue influence by a fund of funds over 
underlying funds, excessive layering of fees, and overly complex fund 
structures. Accordingly, applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    4. Applicants state that the proposed arrangement will not result 
in undue influence by a Fund of Funds or its affiliates over the Funds. 
To limit the influence that a Fund of Funds may have over a Fund, 
applicants propose a condition prohibiting a Fund of Funds' Advisory 
Group (as defined below) and a Fund of Funds' Subadvisory Group (as 
defined below) from controlling a Fund within the meaning of section 
2(a)(9) of the Act. To limit further the potential for undue influence 
over the Funds, applicants propose conditions 2 through 7, stated 
below, to preclude a Fund of Funds and its affiliated entities from 
taking advantage of a Fund with respect to transactions between the 
entities and to ensure the transactions will be on an arm's length 
basis. A Fund of Funds' Advisory Group is any Fund of Funds Adviser, 
any person controlling, controlled by, or under common control with a 
Fund of Funds Adviser, and any investment company or issuer that would 
be an investment company but for section 3(c)(1) or 3(c)(7) of the Act 
that is advised by a Fund of Funds Adviser or any person controlling, 
controlled by, or under common control with a Fund of Funds Adviser. A 
Fund of Funds' Subadvisory Group is any Fund of Funds Subadvisor, any 
person controlling, controlled by, or under common control with a Fund 
of Funds Subadvisor, and any investment company or issuer that would be 
an investment company but for section 3(c)(1) or 3(c)(7) of the Act (or 
portion of such investment company or issuer) advised by the Fund of 
Funds Subadvisor or any person controlling, controlled by, or under 
common control with the Funds of Funds Subadvisor.
    5. As an additional assurance that a Fund of Funds understands the 
implications of an investment by the Fund of Funds under the requested 
order, each Fund of Funds and Fund will execute a Participation 
Agreement (prior to an investment in the shares of the Fund in excess 
of the limits of section 12(d)(1)(A) of the Act) stating that their 
boards of directors or trustees (``Boards'') and their investment 
advisers understand the terms and conditions of the order and agree to 
fulfill their responsibilities under the order. Applicants note that a 
Fund may choose to reject an investment from the Fund of Funds.
    6. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. Applicants state that the Board of 
the Fund of Funds, including a majority of the directors or trustees 
who are not ``interested persons,'' as such term is defined in section 
2(a)(19) of the Act (``Disinterested Directors''), will find that the 
investment advisory fees charged under any investment advisory 
agreements are based on services provided that will be in addition to, 
rather than duplicative of, services provided under the investment 
advisory agreement(s) of any Fund in which the Fund of Funds may 
invest. In addition, among other things, a Fund of Funds Adviser will 
waive fees otherwise payable to it by a Fund of Funds in an amount at 
least equal to any compensation received by the Fund of Funds Adviser, 
or an affiliated person of the Fund of Funds Adviser, from the Funds in 
connection with the investment by the Fund of Funds in the Fund. 
Applicants also state that any sales charges and/or service fees 
charged with respect to shares of a Fund of Funds will not exceed the 
limits applicable to a fund of funds set forth in NASD Conduct Rule 
2830.
    7. Applicants state that the proposed arrangement will not create 
an overly complex fund structure. Applicants note a Fund will be 
prohibited from acquiring securities of any investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A), except to the extent 
permitted by an exemptive order that allows the Fund to purchase shares 
of an affiliated money market fund for short-term cash management 
purposes.

[[Page 20740]]

B. Section 17(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include any person 5% or 
more of whose outstanding voting securities are directly or indirectly 
owned, controlled, or held with power to vote by the other person.
    2. Applicants state that a Fund of Funds and a Fund might become 
affiliated persons if the Fund of Funds acquires 5% or more of the 
Fund's outstanding voting securities. In light of this possible 
affiliation, section 17(a) could prevent a Fund from selling shares to 
and redeeming shares from the Fund of Funds.
    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 (a) the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (b) the proposed transaction is consistent with the policies 
of each registered investment company involved; and (c) the proposed 
transaction is consistent with the general purposes of the Act. Section 
6(c) of the Act permits the Commission to exempt any class of persons 
or transactions from any provisions of the Act 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.
    4. Applicants submit that the proposed transactions satisfy the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the transactions are fair and 
reasonable and do not involve overreaching. Applicants note that the 
consideration paid for the sale and redemption of shares of the Funds 
will be based on the net asset values of the Funds. Applicants state 
that the proposed transactions will be consistent with the policies of 
each Fund of Funds as set forth in each Fund of Funds' registration 
statement, the policies of each Fund, and with the general purposes of 
the Act.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The members of a Fund of Funds' Advisory Group will not control 
(individually or in the aggregate) a Fund within the meaning of section 
2(a)(9) of the Act. The members of a Fund of Funds' Subadvisory Group 
will not control (individually or in the aggregate) a Fund within the 
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in 
the outstanding voting securities of a Fund, the Fund of Funds' 
Advisory Group or the Fund of Funds' Subadvisory Group, each in the 
aggregate, becomes a holder of more than 25 percent of the outstanding 
voting securities of a Fund, it will vote its shares of the Fund in the 
same proportion as the vote of all other holders of the Fund's shares. 
This condition does not apply to the Fund of Funds' Subadvisory Group 
with respect to a Fund for which the Fund of Funds Subadvisor or a 
person controlling, controlled by, or under common control with the 
Fund of Funds Subadvisor acts as the investment adviser within the 
meaning of section 2(a)(20)(A) of the Act.
    2. No Fund of Funds or Fund of Funds Advisor, Fund of Funds 
Subadvisor, promoter, or principal underwriter for a Fund of Funds, or 
any person controlling, controlled by or under common control with any 
of those entities (``Fund of Funds Affiliate'') will cause any existing 
or potential investment by the Fund of Funds in shares of a Fund to 
influence the terms of any services or transactions between the Fund of 
Funds or a Fund of Funds Affiliate and the Fund or the investment 
adviser(s), promoter or principal underwriter of a Fund, or any person 
controlling, controlled by, or under common control with any of those 
entities (``Fund Affiliate'').
    3. The Board of a Fund of Funds, including a majority of the 
Disinterested Directors, will adopt procedures reasonably designed to 
assure that the Fund of Funds Adviser and any Fund of Funds Subadvisor 
are conducting the investment program of the Fund of Funds without 
taking into account any consideration received by the Fund of Funds or 
a Fund of Funds Affiliate from a Fund or a Fund Affiliate in connection 
with any services or transactions.
    4. Once an investment by a Fund of Funds in the securities of a 
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board 
of the Fund, including a majority of the trustees who are not 
``interested persons,'' as such term is defined in section 2(a)(19) of 
the Act (``Disinterested Trustees''), will determine that any 
consideration paid by the Fund to the Fund of Funds or a Fund of Funds 
Affiliate in connection with any services or transactions: (a) Is fair 
and reasonable in relation to the nature and quality of the services 
and benefits received by the Fund; (b) is within the range of 
consideration that the Fund would be required to pay to another 
unaffiliated entity in connection with the same services or 
transactions; and (c) does not involve overreaching on the part of any 
person concerned. This condition does not apply with respect to any 
services or transactions between a Fund and its investment adviser(s) 
or any person controlling, controlled by, or under common control with 
such investment adviser(s).
    5. No Fund of Funds or Fund of Funds Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause a Fund to purchase a security during the existence of an 
underwriting or selling syndicate in which a principal underwriter is 
an officer, director, member of an advisory board, Fund of Funds 
Adviser, Fund of Funds Subadvisor, or employee of the Fund of Funds, or 
a person of which any such officer, director, member of an advisory 
board, Fund of Funds Adviser, Fund of Funds Subadvisor or employee is 
an affiliated person (``Underwriting Affiliate'' except that any person 
whose relationship to a Fund is covered by section 10(f) of the Act is 
not an Underwriting Affiliate). An offering of securities during the 
existence of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate is an ``Affiliated 
Underwriting.''
    6. The Board of a Fund, including a majority of the Disinterested 
Trustees, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting once 
an investment by a Fund of Funds in the securities of the Fund exceeds 
the limit of section 12(d)(1)(A)(i) of the Act, including any purchases 
made directly from an Underwriting Affiliate. The Board will review 
these purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Fund of Funds in shares of the Fund. The Board shall consider, 
among other things, (i) whether the purchases were consistent with the 
investment objectives and policies of the Fund; (ii) how the 
performance of securities purchased in an Affiliated Underwriting 
compares to the performance of comparable securities purchased during a 
comparable period of time in underwritings other than Affiliated 
Underwritings or to a benchmark such as a comparable market index; and 
(iii) whether the amount of securities purchased by the Fund in 
Affiliated Underwritings and the amount

[[Page 20741]]

purchased directly from an Underwriting Affiliate have changed 
significantly from prior years. The Board shall take any appropriate 
actions based on its review, including, if appropriate, the institution 
of procedures designed to assure that purchases of securities in 
Affiliated Underwritings are in the best interest of shareholders.
    7. The Fund shall maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and 
shall maintain and preserve for a period of not less than six years 
from the end of the fiscal year in which any purchase from an 
Affiliated Underwriting occurred, the first two years in an easily 
accessible place, a written record of each purchase of securities in 
Affiliated Underwritings once an investment by a Fund of Funds in the 
securities of a Fund exceeds the limit in section 12(d)(1)(A)(i) of the 
Act, setting forth from whom the securities were acquired, the identity 
of the underwriting syndicate's members, the terms of the purchase, and 
the information or materials upon which the Board's determinations were 
made.
    8. Before investing in shares of a Fund in excess of the limits in 
section 12(d)(1)(A), each Fund of Funds and Fund will execute a 
Participation Agreement stating, without limitation, that their Boards 
and their investment advisers understand the terms and conditions of 
the order and agree to fulfill their responsibilities under the order. 
At the time of its investment in shares of a Fund in excess of the 
limit in section 12(d)(1)(A)(i), a Fund of Funds will notify the Fund 
of the investment. At such time, the Fund of Funds will also transmit 
to the Fund a list of the names of each Fund of Funds Affiliate and 
Underwriting Affiliate. The Fund of Funds will notify the Fund of any 
changes to the list of the names as soon as reasonably practicable 
after a change occurs. The Fund and the Fund of Funds will maintain and 
preserve a copy of the order, the agreement, and the list with any 
updated information for the duration of the investment and for a period 
of not less than six years thereafter, the first two years in an easily 
accessible place.
    9. Prior to approving any advisory contract under section 15 of the 
Act, the Board of each Fund of Funds, including a majority of the 
Disinterested Directors, will find that the advisory fees charged under 
such advisory contract are based on services provided that will be in 
addition to, rather than duplicative of, the services provided under 
the advisory contract(s) of any Fund in which the Fund of Funds may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Fund of Funds.
    10. A Fund of Funds Adviser will waive fees otherwise payable to it 
by the Fund of Funds in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by a Fund under 
rule 12b-1 under the Act) received from a Fund by the Fund of Funds 
Adviser, or an affiliated person of the Fund of Funds Adviser, other 
than any advisory fees paid to the Fund of Funds Adviser or its 
affiliated person by the Fund, in connection with the investment by the 
Fund of Funds in the Fund. Any Fund of Funds Subadvisor will waive fees 
otherwise payable to the Fund of Funds Subadvisor, directly or 
indirectly, by the Fund of Funds in an amount at least equal to any 
compensation received from a Fund by the Fund of Funds Subadvisor, or 
an affiliated person of the Fund of Funds Subadvisor, other than any 
advisory fees paid to the Fund of Funds Subadvisor or its affiliated 
person by the Fund, in connection with the investment by the Fund of 
Funds in the Fund made at the direction of the Fund of Funds 
Subadvisor. In the event that the Fund of Funds Subadvisor waives fees, 
the benefit of the waiver will be passed through to the Fund of Funds.
    11. Any sales charges and/or service fees charged with respect to 
shares of a Fund of Funds will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    12. No Fund will acquire securities of any investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A) of the Act, except to the 
extent permitted by an exemptive order that allows the Fund to purchase 
shares of an affiliated money market fund for short-term cash 
management purposes.
    13. The Boards of any Fund of Funds and of any Fund will satisfy 
the fund governance standards as defined in rule 0-1(a)(7) under the 
Act by the later of (i) the compliance date for the rule or (ii) the 
date on which the Fund of Funds and the Fund execute a Participation 
Agreement.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-5974 Filed 4-20-06; 8:45 am]

BILLING CODE 8010-01-P
