[Federal Register Volume 61, Number 4 (Friday, January 5, 1996)]
[Notices]
[Pages 425-428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-172]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21642; 812-8902]
DFA Investment Dimensions Group Inc., et al.; Notice of
Application
December 29, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: DFA Investment Dimensions Group Inc. (``DFAIDG''), The DFA
Investment Trust Company (``DFAITC''), and Dimensional Fund Advisors
Inc. (``DFA'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
from section 12(d)(1) of the Act, under sections 6(c) and 17(b) of the
Act from section 17(a) of the Act, and pursuant to section 17(d) of the
Act and rule 17d-1 thereunder permitting certain joint transactions.
SUMMARY OF APPLICATION: The requested order would permit an open-end
management investment company, DFA International Asset Allocation Fund
(the ``Fund''), to invest substantially all its assets in the shares of
four series of another open-end management investment company, DFAITC
(the ``Underlying Series'').
FILING DATES: The application was filed on March 18, 1994 and amended
on August 31, 1995 and December 13, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on January 23,
1996, 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 SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
[[Page 426]]
Applicants, 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.
FOR FURTHER INFORMATION CONTACT: James M. Curtis, Senior Counsel, at
(202) 942-0563, or C. David Messman, Branch Chief, at (202) 942-0564
(Office of Investment Company Regulation, Division of Investment
Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. DFAIDG, a Maryland corporation, is a registered open-end
management investment company currently comprised of twenty-four
series, seven of which currently serve as ``feeder funds'' for certain
series of DFAITC, a Delaware business trust and a registered open-end
management investment company, in a master fund-feeder fund
relationship. All such series are no load funds. The shares of DFAIDG
are sold to institutional investors, including qualified pension and
profit-sharing plans, endowment funds and foundations, and clients of
registered investment advisers.
2. DFA is engaged in the business of providing investment
management and administrative services to institutional investors,
including DFAIDG and DFAITC, and is registered as an investment adviser
under the Investment Advisers Act of 1940.
3. Because DFA serves as investment adviser to both DFAITC and
DFAIDG, and DFAITC and DFAIDG hold themselves out to investors as
related companies for purposes of investment and investor services,
DFAITC and DFAIDG are part of the same ``group of investment
companies,'' as defined in rule 11a-3 under the Act.
4. Applicants request that the relief sought herein also apply to
any future registered investment company that is advised by DFA, or any
entity controlling, controlled by, or under common control with DFA,
that operates in accordance with the conditions to the requested order,
and that is a member of the same ``group of investment companies,'' as
defined in rule 11a-3.
5. DFAIDG proposes to organize the Fund as a new series. The Fund
will invest substantially all of its assets in the shares of four
series of DFAITC, The Japanese Small Company Series, The United Kingdom
Small Company Series, The Continental Small Company Series, and The
Pacific Rim Small Company Series.
6. The Fund will be designed for investors who wish to achieve
their investment objective of long-term capital appreciation by
investing in one mutual fund that provides for investment in four
series of DFAITC which invest in stocks of small Japanese, United
Kingdom, European, and Pacific Rim companies, respectively, and
professional asset allocation of investments among such series provided
by DFA.
7. The investment objective of each Underlying Series is to achieve
long-term capital appreciation.\1\ Each Underlying Series will invest
principally in readily marketable foreign equity securities of small
companies that are organized or located in limited and specified
geographic areas. Thus, the Japanese Small Company Series will invest
principally in stocks of small companies that are located in Japan. The
United Kingdom Small Company Series will invest principally in stocks
of small companies that are organized in the United Kingdom. The
Continental Small Company Series will invest principally in stocks of
small companies that are organized under the laws of certain European
countries, including, France, Germany, Italy, Switzerland, the
Netherlands, Sweden, Belgium, Norway, Spain, Austria, Finland and
Denmark. The Pacific Rim Small Company Series will invest principally
in stocks of small companies located in Australia, New Zealand,
Singapore, Korea, Hong Kong and Malaysia.
\1\ The Underlying Series were organized on October 15, 1993,
but they presently are not operational. DFAIDG presently offers
shares of Japanese, Pacific Rim, United Kingdom, and Continental
Small Company series (the ``International Portfolios''). The board
of directors of DFAIDG and the board of trustees of DFAITC (who are
the same persons) intend to convert these series into a master fund-
feeder fund structure by investing the assets of each International
Portfolio in shares of the correspondingly-named Underlying Series,
subject to approval by the holders of a majority of each
International Portfolio's outstanding voting securities. The
investment objectives and fundamental and other investment policies
of the International Portfolios and the correspondingly-named
Underlying Series are essentially identical.
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8. Each Underlying Series, except the United Kingdom Small Company
Series, will charge a reimbursement fee to investors, including the
Fund, equal to the reimbursement fee charged by its correspondingly-
named International Portfolio. The reimbursement fee paid to a
Portfolio is used to defray costs associated with investing the
proceeds of the sale of its shares, thereby eliminating a dilutive
effect such costs otherwise would have on the net asset value of shares
held by existing shareholders. The amount of the reimbursement fee, in
each case, represents an estimate of the costs reasonably anticipated
to be associated with the purchase of securities by each International
Portfolio.
9. The Fund will invest virtually all its assets in the four
Underlying Series. A small portion of the Fund's assets might be
invested in short-term, high-quality, fixed-income obligations pending
investment in shares of the Underlying Series and/or pending payment of
redemptions of its own shares for cash, and to defray operating
expenses.
10. Allocation of the assets of the Fund will be determined by DFA.
Target allocations will remain in effect until the next semi-annual re-
calculation. To maintain target weights during the period, adjustments
may be made by applying future purchases by the Fund in proportion
necessary to rebalance the Fund's investment portfolio. Adjustments may
also be made by redemptions. Therefore, adjustments reflecting
reallocation of the assets of the Fund among the four Underlying Series
will occur at relatively infrequent and predictable intervals, and
management of the Underlying Series will not be unduly affected by
redemption of their shares by the Fund.
11. The board of trustees of DFAITC is comprised of the same
persons who serve as the board of directors of DFAIDG. A majority of
these persons are not interested persons of DFAIDG, DFAITC, or DFA.
Each board has adopted a written policy governing potential conflicts
of interest, as required by the North American Securities
Administrators Association, Inc., in respect of ``master fund-feeder
fund'' structures.
12. The Fund will bear all of its own expenses and, indirectly, its
proportionate share of the expenses of each Underlying Series. The
Fund's direct expenses will include audit, legal, share registration,
costs of shareholders' meetings, insurance premiums, fees of non-
interested directors, administrative, accounting, transfer and dividend
disbursing agency, custodian fees and the like. Also, as a separate
series of DFAIDG, the Fund will pay its proportionate share of any
other expenses of DFAIDG which are not specifically allocable to any
series or class of shares of DFAIDG. Certain expenses, such as
directors' fees and expenses, insurance premiums and certain fees will
be borne on a shared basis with the other series of DFAIDG.
13. DFA intends to provide the Fund will asset allocation advice,
without charge, pursuant to a written agreement between DFA and DFAIDG.
DFA is currently willing to provide this service at no charge because
the simple
[[Page 427]]
investment portfolio of the Fund provides basically for only four
investment securities.
14. The Fund's structure contains no layering of sales charges or
advisory fees. DFAIDG and DFAITC do not, and the Fund will not, charge
a front-end load or a contingent-deferred sales charge. Moreover,
neither the Fund nor the Underlying Series currently intend to impose
any ``asset based sales charges'' or ``service fees,'' as those terms
are defined in Article III, section 26, of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. Furthermore,
DFA will not charge the Fund an advisory fee.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) provides that no registered investment
company may acquire securities of another investment company if such
securities represent more than 3% of the acquired company's outstanding
voting stock, more than 5% of the acquiring company's total assets, or
if such securities, together with the securities of any other acquired
investment companies, represent more than 10% of the acquiring
company's total assets. Section 12(d)(1)(B) provides that no registered
open-end investment company may sell its securities 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.
2. Section 6(c) provides that the SEC may exempt persons or
transactions if, and to the extent that, 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 request an order under section 6(c)
exempting them from the limitations of section 12(d)(1) (A) and (B) to
the extent necessary to permit the Fund to purchase an unlimited amount
of the outstanding voting securities of each Underlying Series, the
securities of each Underlying Series to have an aggregate value equal
to as much as 100% of the value of the total assets of the Fund, the
Fund to invest essentially all of its assets in the securities of the
Underlying Series, and each of the Underlying Series to sell an
unlimited amount of its total outstanding voting securities to the
Fund.
3. Section 12(d)(1) is intended to prevent the unregulated
pyramiding of investment companies and the negative effects which are
perceived to arise from such pyramiding. These abuses include the
acquiring fund imposing undue influence over the management of the
acquired funds through the threat of large-scale redemptions, the
layering of sales charges and advisory fees, conflicts of interest
between the fund holding company and the underlying funds, and the
creation of a structure which may be confusing to investors.
4. Applicants state that the potential for control of the
Underlying Series by the threat of redemptions by the Fund which would
cause a loss of advisory fees is groundless because the Fund would be
part of the same fund complex as the Underlying Series and may acquire
only shares of the Underlying Series. Since DFA would be the advisor to
all of the Underlying Series as well as the Fund, a redemption by the
Fund from one Underlying Series would simply result in investing the
proceeds in another Underlying Series.
5. Applicants believe that the Fund, and indirectly its
stockholders, should bear the expense of operation of the Fund, and
that such cost should not be borne by the Underlying Series because the
asset allocation service provided by the Fund is a valuable service.
B. Section 17(a)
1. Section 17(a) makes it unlawful for an affiliated person of a
registered investment company to sell securities to, or purchase
securities from, the company. Section 2(a)(3)(C) of the Act provides
that an affiliated person of another person is any person directly or
indirectly controlling, controlled by, or under common control with
such other person. Because the Fund and the Underlying Series will have
a common board of directors and a common adviser, they could be deemed
to be under common control and thereby affiliated persons of each other
under section 2(a)(3) of the Act. The sale by the Underlying Series of
their shares to the Fund could thus be deemed to be principal
transactions between affiliated persons prohibited under section 17(a).
2. Section 17(b) provides that the SEC shall exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the proposed transaction are reasonable and fair and do not involve
overreaching, the proposed transaction is consistent with the policies
of the registered investment company involved, and the proposed
transaction is consistent with the general provisions of the Act.
Section 6(c) permits the SEC to exempt any person, security, or
transaction, or any class or classes of persons, securities, 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. Applicants request an exemption under
sections 6(c) and 17(b) to permit the Underlying Series to sell their
shares to the Fund.\2\
\2\ Because section 17(b) could be interpreted to permit the SEC
to exempt only a single transaction from section 17(a), applicants
are also requesting an exemption from section 17(a) under section
6(c). See In the Matter of Keystone Custodian Funds, Inc., 21 SEC
295 (1945).
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3. Applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b). The Fund provides one
comprehensive and effective investment product with access to both
international diversification and professional asset allocation
services and therefore applicants believe that relief is appropriate in
the public interest. Applicants believe that their proposal is
structured to assure that neither the Fund nor the Underlying Series
will participate on a basis that is different or less advantageous than
any other participant.
C. Section 17(d) and Rule 17d-1
1. Section 17(d) prohibits an affiliated person of a registered
investment company, or an affiliated person of such person, acting as
principal, from effecting any transaction in which such investment
company is a joint, or joint and several, participant with such person
in contravention of SEC rules and regulations. Rule 17d-1 provides that
an affiliated person of a registered investment company or an
affiliated person of such person, acting as principal, shall not
participate in, or effect any transaction in connection with, any joint
enterprise or other joint arrangement in which the registered
investment company is a participant unless the SEC has issued an order
approving the arrangement. As discussed above, DFAIDG and DFAITC could
be deemed affiliated persons of each other under section 2(a)(3) of the
Act. When the Fund purchases the shares of the Underlying Series and
the Underlying Series sell their shares to the Fund, they could be
deemed to be ``joint or joint and several participants'' in respect of
such transactions in violation of rule 17d-1.
2. Applicants request that the SEC issue an order under section
17(d) and rule 17d-1 approving the proposed arrangements and
transactions described herein. Applicants believe that such
arrangements and transactions
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are structured to assure that neither the Fund nor DFAITC will
participate therein on a basis that is different from or less
advantageous than any other participant.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Fund and each Underlying Series will be part of the same
``group of investment companies,'' as defined in rule 11a-3 under the
Act.
2. No Underlying Series shall acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act.
3. A majority of the directors of the Fund will not be ``interested
persons'' of the Fund, as defined in section 2(a)(19) of the Act.
4. Before approving any advisory contract under section 15, the
board of directors of the Fund, including a majority of the directors
who are not ``interested persons'' of the Fund, as defined in section
2(a)(19), shall find that advisory fees charged under such contract are
based on services provided that are in addition to, rather than
duplicative of, services provided pursuant to any Underlying
Portfolio's advisory contract. Such finding, and the basis upon which
the finding was made, will be recorded fully in the minute books of the
Fund.
5. Any sales charges or service fees charged with respect to the
securities of the Fund, when aggregated with any sales charges or
service fees paid by the Fund with respect to shares of the acquired
Underlying Portfolios, shall not exceed the limits set forth in Article
III, section 26, of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.
6. Applicants agree to provide the following information, in
electronic format, to the Chief Financial Analyst of the SEC's Division
of Investment Management: Monthly average total assets for each Fund
portfolio and each of its Underlying Series; monthly purchases and
redemptions (other than by exchange) for each Fund portfolio and each
of its Underlying Series; monthly exchanges into and out of each Fund
portfolio and each of its Underlying Series; month-end allocations of
each Fund portfolio's assets among its Underlying Series; annual
expense ratios for each Fund portfolio and each of its Underlying
Series; and a description of any vote taken by the shareholders of any
Underlying Series, including a statement of the percentage of votes
cast for and against the proposal by the Fund and by the other
shareholders of the Underlying Series. Such information will be
provided as soon as reasonably practicable following each fiscal year-
end of the Fund (unless the Chief Financial Analyst shall notify
applicants in writing that such information need no longer be
submitted).
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
FR Doc. 96-172 Filed 1-4-96; 8:45 am]
BILLING CODE 8010-01-M
