[Federal Register Volume 60, Number 29 (Monday, February 13, 1995)]
[Notices]
[Pages 8262-8265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3459]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20883; 812-9304]
Frank Russell Investment Company, et al.; Notice of Application
February 6, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Frank Russell Investment Company, including all current and
future series thereof, (the ``Investment Company''); Frank Russell
Investment Management Company (``FRIMCo''), Russell Fund Distributors,
Inc. (``RFD''), and all future registered open-end management
investment companies distributed by RFD or for which FRIMCo serves in
the future as investment adviser, or for which any person controlling,
controlled by, or under common control with FRIMCo (within the meaning
of section 2(a)(9) of the Act) may in the future serve as investment
adviser.
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for conditional exemptions from sections 18(f), 18(g), and 18(i) of the
Act.
SUMMARY OF APPLICATION: Applicants seek an order that would permit them
to issue an unlimited number of classes of shares representing
interests in the same portfolio of securities.
FILING DATE: The application was filed on October 25, 1994, and was
amended on January 9, 1995, and on February 1, 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 March 3, 1995,
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 SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street N.W., Washington, D.C.
20549. Applicants, 909 A Street, Tacoma, Washington 98402.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Wagman, Staff Attorney, (202) 942-0654, or Barry D. Miller,
Senior Special Counsel, (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
SEC's Public Reference Branch.
Applicants' Representations
1. The Investment Company is a Massachusetts business trust
registered under the Act as an open-end management investment company.
The Investment Company is a series company and consists of twenty-two
separate series, each of which has separate investment objectives and
policies (the existing and future series of the Investment Company are
collectively referred to as the ``Funds''). FRIMCo is the investment
adviser (the [[Page 8263]] ``Adviser'') and RFD is the distributor of
the Investment Company. The Funds consist of both money market funds
and funds with fluctuating net asset values, the shares of which are
sold and redeemed daily at net asset value without a sales or
redemption change.
2. Applicants proposed to create a multi-class distribution
system.\1\ The Investment Company would be permitted to offer an
unlimited number of additional classes of shares (``New Shares'') in
connection with (a) a plan adopted pursuant to rule 12b-1 under the Act
(the ``Services Plan''); and/or (b) a non-rule 12b-1 administrative
plan (the ``Shareholder Administrative Plan''); or (c) neither the
Services Plan nor the Shareholder Administrative Plan (collectively,
the ``Plans''). The services provided pursuant to the Plans will
augment or replace (and not be duplicative of) the services to be
provided to the Funds by FRIMCo and RFD. Applicants propose to
``unbundle'' the services to be provided to the Funds to permit
organizations, such as broker-dealers or banks, to select those
services they wish to provide to their customers under Services Plan
agreements and/or Shareholder Administrative Plan agreements
(collectively, ``Plan Agreement'').\2\
\1\Existing shares of the Funds are expected to comprise one or
more different classes.
\2\ Twelve of the Funds (the ``Internal Fee Funds'') follow the
conventional practice of paying FRIMCo a management fee from Fund
assets. Ten of the Funds (the ``External Fee Funds'') require
investors to pay a management fee directly to FRIMCo pursuant to
contracts between each investor and FRIMCo. Each shareholder of an
External Fee Fund pays the same pro rata amount for advisory
services as each other shareholder of the Fund. In the future,
FRIMCo may elect to ``internalize'' the portion of the management
fee attributable to advisory services, administrative services, or
both, so that fees for those services are deducted from Fund assets
in the same manner as done for the Internal Fee Funds. In no event,
if the requested relief is granted, would a Fund issue both a class
of shares with an internal fee arrangement and one with an external
fee arrangement.
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3. A Fund would pay the distributor and/or an organization for its
services and assistance in accordance with the terms of its particular
Plan Agreement(s) (the ``Plan Payments''). Plan Payments will not
exceed the limits imposed under Article III, Section 26 of the Rules of
Fair Practice of the National Association of Securities Dealers
(``NASD'').
4. The New Shares of a Fund would be identical in all respects,
except that: (a) Each class of New Shares would have a different class
designation; (b) each class of New Shares offered in connection with a
Plan would bear the expense of the Plan Payments applicable to such
class; (c) each class of New Shares could, as more fully described
below, also bear certain other expenses (``Class Expenses'') that are
directly attributable only to the class; (d) only the holders of the
New Shares of the class or classes involved would be entitled to vote
on matters pertaining to a Plan and any related agreements relating to
such class or classes; and (e) classes of New Shares may have different
exchange privileges.
5. Expenses of the Investment Company that cannot be attributed
directly to any one Fund will be allocated to each Fund based on the
relative net assets of such Fund (``Investment Company Expenses'').
Expenses that may be attributable to a Fund but not to a particular
class will be allocated to a class (``Fund Expenses'').
6. FRIMCo may choose to reimburse or waive Class Expenses of
certain classes on a voluntary, temporary basis. The amount of Class
Expenses waived or reimbursed by FIRMCo may vary from class to class.
Class Expenses are, by their nature, specific to a given class and
therefore are expected to vary from one class to another. Applicants
thus believe that it is acceptable and consistent with shareholder
expectations to reimburse or waive Class Expenses at different levels
for different classes of the same Fund.
7. In addition, FRIMCo may waive or reimburse Investment Company
Expenses and/or Fund Expenses (with or without a waiver or
reimbursement of Class Expenses) but only if the same proportionate
amount of Investment Company Expenses and/or Fund Expenses is waived or
reimbursed for each class. Thus, any Investment Company Expenses that
are waived or reimbursed would be credited to each class of a Fund
based on the relative net assets of the classes. Similarly, any Fund
Expenses that are waived or reimbursed would be credited to each class
of that Fund according to the relative net assets of the classes.
Investment Company Expenses and Fund Expenses apply equally to all
classes of a given Fund. Accordingly, it may not be appropriate to
waive or reimburse Investment Company Expenses or Fund Expenses at
different levels for different classes of the same Fund.
8. The Investment Company may also offer classes of shares
(``Institutional Shares'') that are available solely to: (a)
Unaffiliated benefit plans, such as qualified retirement plans, other
than individual retirement accounts and self-employed retirement plans,
with total assets in excess of such minimum amounts as the Funds may
establish and with such other characteristics as the Funds may
establish;\3\ (b) tax-exempt retirement plans of FRIMCo and its
affiliates, including the retirement plans of FRIMCo's affiliated
brokers; (c) banks and insurance companies that are not affiliated with
FRIMCo purchasing for their own investment; (d) investment companies
not affiliated with FRIMCo; and (e) endowment funds of non-profit
organizations that are not affiliated with FRIMCo (each, an
``Institutional Investor'').
\3\These plans will have a separate trustee who is vested with
investment discretion as to plan assets, will have limitations on
the ability of plan beneficiaries to access their plan investments
without incurring adverse tax consequences, and will not include
self-directed plans.
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9. Each class of Institutional Shares will have attributes designed
to meet specific investment needs of a particular category of
Institutional Investor. Institutional Shares will be subject to either
lower or no servicing fees under any Plan, and may bear lower transfer
agency fees and other operating expenses than some other classes of
shares. Only Institutional Investors will be eligible to invest in
Institutional Shares. Applicants may choose not to make a particular
class of Institutional Shares available to one or more categories of
Institutional Investors.
No Institutional Investor that is eligible to invest in any class
of Institutional Shares will be permitted to invest in any class other
than a class of Institutional Shares. Accordingly, there will be no
overlap between the investors eligible to invest in Institutional
Shares and investors eligible to invest in other shares of a Fund.
Applicants' Legal Analysis
1. Applicants request an order pursuant to section 6(c) of the Act
exempting them from sections 18(f)(1) and 18(g) of the Act to the
extent that the proposed issuance and sale of an unlimited number of
classes of new Shares may result in a ``senior security'' prohibited by
section 18(f), and in a violation of section 18(i), to the extent that
the different voting rights associated with such classes may be deemed
to result in one or more classes of shares having unequal voting rights
with other classes of shares.
2. The proposed allocation of expenses and voting rights relating
to the Plans in the manner described is equitable and would not
discriminate against any group of shareholders. The proposed
arrangement does not involve borrowing and does not affect a Fund's
existing assets or reserves. Nor will the proposed arrangement increase
the speculative character of a Fund's shares, [[Page 8264]] since all
such shares will participate pro rata in all of the Fund's income and
all of the Fund's expenses (with the exception of the proposed Plan
Payments and Class Expenses).
Applicants' Conditions
Applications agree that the order granting the requested relief
will be subject to the following conditions:
1. Each class of shares of a Fund will represent interests in the
same portfolio of investments, and be identical in all respects, except
for differences related to: (a) Class designation; (b) expenses
assessed to a class pursuant to a Services Plan or Shareholder
Administrative Plan; (c) certain Class Expenses, which would be limited
to (i) transfer agent fees identified by the transfer agent as being
attributable to a specific class of shares; (ii) stationery, printing,
postage, and delivery expenses related to preparing and distributing
materials such as shareholder reports, prospectuses, and proxies to
current shareholders of a specific class; (iii) blue sky registration
fees incurred by a class of shares; (iv) SEC registration fees incurred
by a class of shares; (v) the expense of the Investment Company's
administrative personnel and services as required to support the
shareholders of a specific class; (vi) litigation or other legal
expenses relating to one class of shares; (vii) Trustees' fees incurred
as a result of issues relating to one class of shares; (viii)
independent accountants' fees related solely to a specific class of
shares; (ix) expenses incurred in connection with shareholder meetings
as a result of issues relating to one class of shares; and (x) account
expenses relating to a particular class of shares; (d) voting rights as
to matters exclusively affecting one class of shares; and (e) exchange
privileges. Any additional incremental expenses not specifically
identified above which are subsequently identified and determined to be
properly allocated to one class of shares shall not be so allocated
until approved by the Commission pursuant to an amended order.
2. The Trustees of the Investment Company, including a majority of
the independent Trustees, will approve the offering of different
classes of New Shares (the ``Multi-Class System'') with respect to a
particular Fund, prior to the implementation of the Multi-Class System
by the Fund. The minutes of the meetings of the Trustees regarding the
deliberations of the Trustees with respect to the approval necessary to
implement the Multi-Class System will reflect in detail the reasons for
the Trustees' determination that the proposed Multi-Class System is in
the best interests of the Fund and its shareholders.
3. The initial determination of the Class Expenses, if any, that
will be allocated to a particular class and any subsequent changes
thereto will be reviewed and approved by a vote of the Board of
Trustees of the Investment Company, including a majority of the
independent Trustees. Any person authorized to direct the allocation
and disposition of monies paid or payable by a Fund to meet Class
Expenses shall provide to the Board of Trustees, and the Trustees shall
review, at least quarterly, a written report of the amounts so expanded
and the purposes for which such expenditures were made.
4. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the Act and otherwise, will monitor the Funds
for the existence of any material conflicts among the interests of the
various classes of shares. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary
to eliminate any such conflicts that may develop. FRIMCo and RFD will
be responsible for reporting any potential or existing conflicts to the
Trustees. If a conflict arises, FRIMCo and RFD at their own cost will
remedy such conflict up to and including establishing a new registered
management investment company.
5. RFD, as the Investment Company's distributor, will adopt
compliance standards as to when each class of shares may be sold to
particular investors. Applicants will require all persons selling
shares of the Funds to agree to conform to such standards. Such
compliance standards will require that all investors eligible to
purchase Institutional Shares be sold only Institutional Shares, rather
than any other class of shares offered by the Fund.
6. The Shareholder Administrative Plan will be adopted and operated
in accordance with the procedures set forth in rule 12b-1 (b) through
(f) as if the expenditures made thereunder were subject to rule 12b-1,
except that shareholders need not enjoy the voting rights specified in
rule 12b-1.
7. The Trustees will receive quarterly and annual statements
concerning the amounts expended under the Shareholder Administrative
Plan and Services Plan and the related Plan Agreements complying with
paragraph (b)(3)(ii) of rule 12b-1, as it may be amended from time to
time. In the statements, only expenditures properly attributable to the
sale or servicing of a particular class of shares will be used to
justify any distribution or servicing fee charged to that class.
Expenditures not related to the sale or servicing of a particular class
will not be presented to the Trustees to justify any fee attributable
to that class. The statements, including the allocations upon which
they are based, will be subject to the review and approval of the
independent Trustees in the exercise of their fiduciary duties.
8. Dividends paid by a Fund with respect to a class of shares will
be calculated in the same manner, at the same time, on the same day,
and will be in the same per share amount as dividends paid by that Fund
with respect to each other class of shares of the Fund, except that the
amount of dividends declared and paid by a particular class may be
different from another class because Plan Payments made by a class
under its Plan and any Class Expenses will be borne exclusively by the
affected class.
9. The methodology and procedures for calculating the net asset
value and dividends/distributions of the various classes and the proper
allocation of expenses among the classes has been reviewed by an expert
(the ``Expert'') who has rendered a report to the applicants concluding
that such methodology and procedures are adequate to ensure that such
calculations and allocations would be made in an appropriate manner.
The Expert's report is attached as Exhibit F to the originally filed
application, and is incorporated by reference. On an ongoing basis, the
Expert, or an appropriate substitute Expert, will monitor the manner in
which the calculations and allocations are being made and, based upon
such review, will render at least annually a report to the Investment
Company that the calculations and allocations are being made properly.
The reports of the Expert will be filed as part of the periodic reports
filed with the Commission pursuant to sections 30(a) and 30(b)(1) of
the Act and the work papers of the Expert with respect to such reports,
following request by the Investment Company (which the Investment
Company agrees to provide), will be available for inspection by the
Commission staff upon written request by a senior member of the
Division of Investment Management or a regional office of the
Commission. Authorized staff members would be limited to the director,
an associate director, the chief accountant, the chief financial
analyst, an assistant director, and any regional administrators or
associate and assistant administrators. The initial report of the
Expert is a ``Special Purpose'' report on [[Page 8265]] ``policies and
procedures placed in operation'' in accordance with Statements on
Auditing Standards (``SAS'') No. 70. ``Reports on the Processing of
Transactions by Service Organizations,'' of the American Institute of
Certified Public Accountants (``AICPA''). Ongoing reports will be
reports on ``policies and procedures placed in operation and tests of
operating effectiveness'' prepared in accordance with SAS No. 70 of the
AICPA, as it may be amended from time to time, or in similar auditing
standards as may be adopted by the AICPA from time to time.
10. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset value and dividends/distributions of the various classes of
shares and the proper allocation of expenses among the classes of
shares and this representation has been concurred with by the Expert in
the initial report referred to in condition 9, above, and will be
concurred with by the Expert or an appropriate substitute Expert on an
ongoing basis, at least annually, in the ongoing reports referred to in
that condition. Applicants will take immediate corrective action if the
Expert, or appropriate substitute Expert, does not so concur in the
ongoing reports.
11. The prospectuses of each class of a Fund will include a
statement to the effect that a salesperson and any other person
entitled to receive compensation for selling or servicing shares may
receive different compensation with respect to one particular class of
shares over another in the Fund.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the Trustees with respect to the
Multi-Class System will be set forth in guidelines to be furnished to
the Trustees.
13. Each Fund will disclose the respective expenses, performance
data, distribution arrangements, exchange privileges, services,
Shareholder Administrator Fees, and Services Fees applicable to each
class of shares, other than Institutional Shares, in every prospectus,
regardless of whether all classes of shares are offered through each
prospectus. Institutional Shares will be offered solely pursuant to
separate prospectuses. The prospectus for a class of Institutional
Shares will disclose the existence of the Fund's other classes, and a
prospectus for a non-Institutional share class will disclose the
existence of Institutional Shares and will identify the persons
eligible to purchase Institutional Shares. The Fund will disclose the
respective expenses and performance data applicable to all classes of
shares in every shareholder report. The shareholder reports will
contain, in the statement of assets and liabilities and statement of
operations, information related to the Fund as a whole generally and
not on a per class basis. Each Fund's per share data, however, will be
prepared on a per class basis with respect to all classes of shares of
such Fund. To the extent any advertisement or sales literature
describes the expenses or performance data applicable to any class of
shares, it will also disclose the respective expenses and/or
performance data applicable to all classes of shares, except
Institutional Shares. Advertising materials reflecting the expenses or
performance data for a class of Institutional Shares will be available
only to those persons eligible to purchase that class of Institutional
Shares. The information provided by applicants for publication in any
newspaper or similar listing of the Fund's net asset value and public
offering price will present each class of shares, except Institutional
Shares, separately.
14. Applicants acknowledge that the grant of the requested
exemptive order does not imply Commission approval, authorization of,
or acquiescence in, any particular level of payments that a Fund may
make to organizations pursuant to any Plan in reliance on the exemptive
order.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3459 Filed 2-10-95; 8:45 am]
BILLING CODE 8010-01-M
