[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Notices]
[Pages 65710-65713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30861]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21597; 812-9476]
The Diversified Investors Funds Group, et al.; Notice of
Application
December 13, 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: The Diversified Investors Funds Group (``Diversified
Fund''); Diversified Investors Portfolios (``Diversified Portfolios'');
Diversified Investment Advisors, Inc. (``Diversified''), on behalf of
itself and each open-end management investment company or series
thereof organized in the future (the ``Future Funds'') which is a
member of the same ``group of investment companies'' as defined in rule
11a-3 under the Act; and Diversified Investors Securities Corp. (the
``Distributor'').
RELEVANT ACT SECTIONS: Order of exemption requested pursuant to section
6(c) of the Act from section 12(d)(1) of the Act, pursuant to sections
6(c) and 17(b) of the Act from section 17(a) of the Act, and pursuant
to rule 17d-1 under the Act permitting certain joint transactions in
accordance with section 17(d) of the Act and rule 17d-1 thereunder.
SUMMARY OF APPLICATION: The requested order would permit applicants to
create a ``fund of funds'' that initially will have three portfolios.
Each portfolio would allocate substantially all of its assets among the
series of Diversified Fund or of the Future Funds (each such series and
Future Fund is referred to individually as an ``Underlying Spoke,'' and
all such series and Future Funds, collectively, as the ``Underlying
Spokes'') without regard to the percentage limitations of section
12(d)(1). The Underlying Spokes, in turn, will invest in a
corresponding series of Diversified Portfolios or of a Future Fund
(each such series and Future Fund is referred to individually as an
``Underlying Hub,'' and all such series and Future Funds, collectively,
as the ``Underlying Hubs''). The requested order also would permit
certain affiliated joint transactions in accordance with section 17(d)
of the Act and rule 17d-1.
FILING DATES: The application was filed on February 6, 1995, and
amended and restated on June 2, 1995, July 12, 1995, and December 12,
1995.
HEARING OR NOTIFICATION OF HEARINGS: 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 8, 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, N.W., Washington, D.C.
20549. Applicants, 4 Manhattanville Road, Purchase, New York 10577.
FOR FURTHER INFORMATION CONTACT:
Mary Kay Frech, Senior Attorney, at (202) 942-0579, or C. David
Messman, 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. Diversified Fund is organized as a Massachusetts business trust.
Diversified Portfolios is organized as a trust under the laws of the
State of New York. Each of Diversified Fund and Diversified Portfolios
is registered as an open-end management investment company under the
Act. Diversified Fund currently consists of eight separate series and
Diversified Portfolios currently consists of nine separate series.
2. Diversified is a registered investment adviser under the
Investment Advisers Act of 1940. Diversified is an indirect, wholly-
owned subsidiary of AEGON USA, Inc., a financial services holding
company whose primary emphasis is life and health insurance and annuity
and investment products. AEGON USA, Inc. is an indirect, wholly-owned
subsidiary of AEGON nv, a Netherlands corporation which is a publicly
traded international insurance group. Diversified currently is the
investment manager for Diversified Portfolios and acts as administrator
and transfer agent for Diversified Fund. Each Underlying Spoke
organized in the future will be administered by Diversified, and each
Underlying Hub organizer in the future will be advised by Diversified.
Diversified Investors Securities Corp.
[[Page 65711]]
(the ``Distributor''), a Delaware corporation, acts as distributor for
Diversified Fund.
3. Applicants propose to organize The Diversified Investors
Strategic Allocation Funds (``Strategic Fund''), which will operate as
a ``fund of funds.'' Strategic Fund will be organized as a
Massachusetts business trust, and, subject to the receipt of the
requested order, will be registered under the Act as a non-diversified,
open-end, management investment company. Strategic Fund initially will
have three series or portfolios, identified as the Aggressive
Portfolio, the Moderate Portfolio, and the Conservative Portfolio
(collectively referred to as the ``Portfolios,'' or individually as a
``Portfolio''). Each Portfolio will invest all of its investable assets
in shares of the Underlying Spokes and will allocate and reallocate its
assets among the Underlying Spokes. Investments also may be made in
money market investments for cash management and temporary defensive
purposes.
4. The Underlying Spokes are, or will be, ``feeder'' (or ``spoke'')
funds in a ``master-feeder'' (or ``Hub and Spoke'') \1\
structure in which there are other feeders investing in the master
funds. Each of the existing Underlying Spokes invests, and each future
Underlying Spoke will invest, all of its investable assets in an
Underlying Hub having the same investment objective and policies as the
Underlying Spoke. Each current Underlying Hub has one or more sub-
advisers who are responsible for its day-to-day investment selections.
In addition to the Underlying Spokes, each of the existing Underlying
Hubs has a number of additional ``spokes,'' including a bank sponsored
collective trust, insurance company separate accounts established in
respect of variable annuity contracts which are registered as unit
investment trusts, and non-registered insurance company separate
accounts. In the future, each Underlying Hub may sell interests to
other eligible entities to the extent permitted by applicable law.
\1\ Hub and Spoke is a registered service mark of
Signature Financial Group, Inc.
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5. Allocations of a Portfolio's assets among shares of the
Underlying Spokes will be made consistent with its investment
objective. For example, it is anticipated that the Aggressive Portfolio
would, under normal circumstances, invest substantially all of its
assets in Underlying Spokes/Hubs that invest in equity securities. The
Underlying Spokes/Hubs in which each Portfolio may invest will be
described in the Portfolio's prospectus. In addition, the prospectus
will disclose the general ranges for investment by the Portfolio in
each type of Underlying Spoke (i.e., equity, fixed-income, and money
market), and in each specific Underlying Spoke. Shareholders will
receive disclosure of any changes in the identity of the Underlying
Spokes in which the Portfolio may invest (e.g., if a new Underlying
Spoke is included) or any changes in the investment ranges. Allocations
of a Portfolio's assets among Underlying Spokes initially will be made,
and subsequently adjusted, consistent with quantitative and other
market and economic analyses administered by Diversified in its role as
investment manager to Strategic Fund.
6. It currently is contemplated that Strategic Fund will be sold
without a front-end or deferred sales charge, and will not have a rule
12b-1 distribution plan. The only direct expense payable by Strategic
Fund will be an asset allocation and administrative fee, which
initially will be at a rate of .20% per annum of average daily net
assets for each Portfolio.\2\ In return for the fee, Diversified will
furnish Strategic Fund with all operating and administrative services
and will pay all of the operating expenses (e.g., the fees and expenses
of Strategic Fund's independent trustees and the minimal fees and
expenses associated with the preparation and audit of its financial
statements, but not portfolio brokerage expenses) for Strategic Fund.
\2\ Because Strategic Fund under normal circumstances will
invest exclusively in shares of the Underlying Spokes, it is not
anticipated that it will bear any portfolio brokerage expenses
except those associated with the short-term investment of cash, if
any.
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7. Each existing Underlying Spoke and Underlying Hub is, and,
subject to the right to institute such fees and charges to the extent
permitted in condition 5 below, each future Underlying Spoke and
Underlying Hub will be, sold without a front-end or deferred sales
charge. The shareholders of Strategic Fund, however will pay indirectly
their proportional share of the expenses of each Underlying Spoke in
which Strategic Fund invests. These expenses include (a) an
administration fee payable to Diversified, which covers, among other
things, the expenses of transfer agency services, (b) rule 12b-1 fees,
which are payable by the existing Underlying Spokes at a maximum rate
of .25% per annum of net assets, and (c) other customary expenses of
registered investment companies, primarily consisting of compensation
to independent trustees, insurance premiums, fees and expenses of
independent auditors and legal counsel, and accounting expenses. The
expenses also include the Underlying Spokes proportional share of the
expenses of the Underlying Hubs in which they invest, which include
advisory fees and other customary expenses of registered investment
companies.
8. Applicants may, although they do not contemplate doing so in the
near future, enter into a special servicing agreement (the ``Servicing
Agreement''), pursuant to which the Distributor will provide all
distribution and distribution-related services relating to Strategic
Fund. The Servicing Agreement would provide that a portion of each
Underlying Spoke's rule 12b-1 fees attributable to shares held by
Strategic Fund may be used to reimburse the Distributor for expenses
incurred in rendering distribution and distribution-related services to
the Portfolios. Each Underlying Spoke thus would be permitted to pay
rule 12b-1 fees in respect of distribution of shares of a Portfolio,
but only to the extent that the Portfolio has invested in the
Underlying Spoke.
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 section 12(d)(1) to permit Strategic Fund to invest
in the Underlying Spokes in excess of the percentage limitations of
section 12(d)(1).
[[Page 65712]]
3. Applicants propose to organize Strategic Fund to provide
investors with a simple means of investing in a diversified mutual fund
investment program tailored by investment professionals to different
investment goals and risk tolerances. Applicants believe that Strategic
Fund will provide an alternative to other programs that investors turn
to for diversification and asset allocation advice, such as wrap fee
programs using mutual funds and inter-complex funds of funds.
4. Section 12(d)(1) is intended to mitigate or eliminate actual or
potential abuses which might arise when one investment company acquires
shares of another investment company. These abuses include the
acquiring fund imposing undue influence over the management of the
acquired funds through the threat of large-scale redemptions, the
acquisition by the acquiring company of voting control of the acquired
company, the layering of sales charges, advisory fees, and
administrative costs, and the creation of a complex pyramidal structure
which may be confusing to investors.
5. Applicants believe that Strategic Fund is structured in a manner
consistent with the intent of section 12(d)(1) and which avoids the
abuses intended to be prevented by that section. Applicants state that
the proposed structure of Strategic Fund is very different from the
structure of the investment companies whose practices led to the
adoption of section 12(d)(1) and its amendment in 1970. Strategic Fund
and the Underlying Spokes and the Underlying Hubs are part of the same
group of investment companies, and each of these funds is or will be a
registered investment company subject to the protections of the Act. In
addition, because Diversified will be the investment adviser to
Strategic Fund and each of the Underlying Hubs, applicants assert that
it will be obligated to treat each fund fairly and impartially in the
exercise of its fiduciary obligations. Diversified also will be subject
to its fiduciary obligation to avoid self-dealing, therefore, it may
not enter into transactions solely for the purpose of benefitting
Diversified at the expense of Strategic Fund or any of the Underlying
Hubs. Finally, applicants argue that Diversified's self-interest will
prompt it to maximize benefits to all shareholders, and not disrupt the
operations of Strategic Fund or any of the Underlying Spokes or
Underlying Hubs.
6. Applicants believe that, although the proposed structure of
Strategic Fund could be deemed to involve three levels of fees rather
than two levels, this does not change the analysis with respect to the
requested relief. Applicants assert that the structure of the
Underlying Spokes and the Underlying Hubs does not create a layering of
fees of the type that section 12(d)(1) was meant to address. They argue
that this structure, which is specifically permitted by section
12(d)(1)(E), merely separates typical mutual fund expenses into two
distinct levels. The expenses of the Underlying Spokes generally are
limited to fund administrative and operating expenses (primarily the
administration fee and the rule 12b-1 fee). The expenses of the
Underlying Hubs generally are limited to investment advisory fees,
custodian fees, portfolio accounting fees, and fees for transfer/
accounting services. Thus, applicants assert that there is no
significant overlap in the various expenses incurred at the hub level
and at the spoke level, and that it is appropriate to collapse these
two levels for purposes of the analysis of the operation of Strategic
Fund.
7. Applicants believe that, while Strategic Fund could invest
directly in the Underlying Hubs (and accordingly impose the same
expenses that are charged at the level of the Underlying Spokes
directly on Strategic Fund), the proposed structure has advantages for
shareholders. Applicants assert that the proposed structure will offer
shareholders a clearly defined choice either to allocate and reallocate
their assets among the Underlying Spokes of their choosing, or to pay
the incremental asset allocation fee so that Strategic Fund will make
the asset allocation decisions. In addition, they argue that investing
in the Underlying Spokes rather than directly in the Underlying Hubs
serves to facilitate the Hub and Spoke accounting function
and avoid the extra costs that would be incurred if a Portfolio
invested directly in several Underlying Hubs.
8. Applicants assert that there will be no layering of fees as a
consequence of the Strategic Fund structure which will result in fees
in excess of those permitted to be imposed by a single fund. Subject to
the right to institute such fees and charges to the extent permitted in
condition 5 below, it currently is contemplated that Strategic Fund
will not impose, and no Underlying Spoke will impose, any front-end or
deferred sales charge. The existing Underlying Spokes currently are
permitted to pay the Distributor rule 12b-1 fees at a maximum rate of
.25% per annum of net assets. Applicants have agreed that any sales
charges or service fees charged with respect to Strategic Fund
(including those paid at the Underlying Spoke level) will not exceed
the limits set forth in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.
9. Applicants believe that Strategic Fund's asset allocation and
administrative fee will be justified by the incremental benefits, not
otherwise available, of the professional asset allocation service that
Diversified will provide for investors choosing to invest in Strategic
Fund rather than in specific Underlying Spokes, as well as compensate
Diversified for the operating and administrative obligations it will
undertake with respect to Strategic Fund. Applicants assert that many
investors who have little interest or experience in selecting
investments feel a need to seek professional advice in order to achieve
successful asset allocation and diversification for initial investments
and changes in their mutual fund mix. Applicants believe that Strategic
Fund will provide investors with a competitive and viable alternative
to other mutual fund based asset allocation programs. Accordingly,
applicants believe that the requested exemption from section 12(d)(1)
is appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies of the Act.
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 17(b) provides that the SEC shall
exempt a proposed transaction from section 17(a) if evidence
establishes that: (a) the terms of the proposed transaction are
reasonable and fair and do not involve overreaching; (b) the proposed
transaction is consistent with the policies of the registered
investment company involved; and (c) the proposed transaction is
consistent with the general provisions of the Act.
2. Applicants request exemptive relief from the prohibitions of
section 17(a) to allow the transactions described in the application.
Applicants believe that the relief is consistent with the standards of
section 17(b). Applicants assert that the terms of the proposed
transaction are reasonable and fair because the shareholders in
Strategic Fund will benefit from the valuable incremental services
provided as a result of the proposed structure and from savings that
accrue based upon their individual situations, such as by not having to
pay fees to a financial adviser or sales commissions to a broker-
dealer. Strategic Fund shareholders also will receive practical
benefits from the
[[Page 65713]]
consolidation of records and reports, and the general ease of investing
in one fund instead of several. In addition, in return for the indirect
expenses of investing in the Underlying Spokes and the Underlying Hubs,
the Portfolios and their shareholders will benefit to the same extent
as other shareholders in the Underlying Spokes from the administrative
services provided to the Underlying Spokes and the portfolio management
services provided to the Underlying Hubs.
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.
2. Applicants believe that all shareholders of the Underlying
Spokes, including Strategic Fund, will benefit equally from the
distribution and distribution-related services received from the
Distributor, which services will be financed, in part, from rule 12b-1
fees. Under the Servicing Agreement, the distribution-related expenses
relating to Strategic Fund would be paid from the rule 12b-1 fees of
the Underlying Spokes only up to the amount of such fees attributable
to the shares of the Portfolios, and no Underlying Spoke would be
required to pay any additional distribution-related expenses
attributable to the Portfolios. In addition to the benefit to each
Portfolio from the sale of its shares, applicants assert that each
Underlying Spoke would receive a benefit from the sale of shares of the
Portfolios to the extent that a Portfolio invests in such Underlying
Spoke. Applicants submit that, based on these considerations: (a)
Strategic Fund may create benefits for the Underlying Spokes; (b) the
benefits would be shared by the Underlying Spokes in proportion to
their assets; (c) the Underlying Spokes and Strategic Fund would
participate in the arrangement on the same or substantially the same
basis; (d) none of the Underlying Spokes, the Underlying Hubs,
Strategic Fund, Diversified, or the Distributor would be advantaged or
disadvantaged over one another; and (e) the entire arrangement would be
consistent with the provisions, policies, and purposes of the Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Strategic Fund and each Underlying Spoke and Underlying Hub will
be part of the same ``group of investment companies,'' as defined in
rule 11a-3 under the Act.
2. No Underlying Hub 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 trustees of Strategic Fund will not be
``interested persons,'' as defined in section 2(a)(19) of the Act (the
``Independent Trustees'').
4. Before approving any advisory contract under section 15 of the
Act, the trustees of Strategic Fund, including a majority of the
Independent Trustees, 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 Hub's
advisory contract. Such finding, and the basis upon which the finding
was made, will be recorded fully in the minute books of Strategic Fund.
5. Any sales charges or service fees charged with respect to
securities of Strategic Fund, when aggregated with any sales charges or
service fees paid by Strategic Fund with respect to securities of the
Underlying Spokes, 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 Division:
monthly average total assets for each Portfolio and each of its
Underlying Spokes and Underlying Hubs; monthly purchases and
redemptions (other than by exchange) for each Portfolio and each of its
Underlying Spokes and underlying Hubs; monthly exchanges into and out
of each Portfolio and each of its Underlying Spokes; month-end
allocations of each Portfolio's assets among its Underlying Spokes;
annual expense ratios for each Portfolio and each of its Underlying
Spokes and Underlying Hubs; and a description of any vote taken by the
shareholders of any Underlying Spoke, including a statement of the
percentage of votes cast for and against the proposal by Strategic Fund
and by the other shareholders of the Underlying Spoke. Such information
will be provided as soon as reasonably practicable following each
fiscal year-end of Strategic Fund (unless the Chief Financial Analyst
shall notify Strategic Fund or Diversified in writing that such
information need no longer be submitted).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-30861 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-M
