[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)]
[Notices]
[Pages 16833-16837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8929]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23094; 812-10660]
SunAmerica Asset Management Corp., et al.; Notice of Application
March 31, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'') granting an exemption under section 6(c) of
the Act from section 17(e) of the Act and rule 17e-1 under the Act,
under sections 6(c) and 17(b) of the Act from section 17(a) of the Act,
and under section 10(f) of the Act from section 10(f) of the Act and
rule 10f-3 under the Act.
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Summary of Application: The order would permit certain registered
open-end management investment companies advised by several investment
advisers to engage in principal and brokerage transactions with a
broker-dealer affiliated with one of the investment advisers. The
transactions would be between the broker-dealer and a portion of the
investment company's portfolio not advised by the adviser affiliated
with that broker-dealer. The order also would permit these investment
companies not to aggregate certain purchases from an underwriting
syndicate in which an affiliated person of one of the investment
advisers is a principal underwriter.
[[Page 16834]]
Applicants: SunAmerica Asset Management Corp. (``SAAMCo''), Style
Select Series, Inc. (``Style Select''), and Seasons Series Trust
(``Season'') (together, with Style Select, the ``Funds''), Janus
Capital Corporation (``Janus''), Miller Anderson & Sherrerd, LLP
(``MAS''), Lazard Asset Management (``Lazard''), Davis Selected
Advisers, LP (``Davis''), Neuberger&Berman, LLC (``Neuberger''), Berger
Associates, Inc. (``Berger''), Perkins Wolf, McDonnell & Company
(``PWM''), Rowe Price-Fleming International, Inc. (``Rowe-Fleming''),
Pilgrim Baxter & Associates, Ltd. (``Pilgrim''), Warburg Pincus Asset
Management, Inc. (``Warburg''), T. Rowe Price Associates, Inc. (``T.
Rowe Price''), Strong Capital Management, Inc. (``Strong''), Bankers
Trust Company (``Bankers''), and Glenmede Trust Company (``Glenmede'').
Filing Dates: The application was filed on May 13, 1997. Applicants
have agreed to file an amendment, the substance of which is
incorporated in this notice, during the notice period.
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 April
27, 1998, 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: SAAMCo and the Funds, SunAmerica Center, 733 Third
Avenue, New York, New York 10017-3204; Janus, 100 Fillmore Street,
Denver, Colorado 80206; MAS, One Tower Bridge, West Conshohocken,
Pennsylvania 19428; Lazard, 30 Rockefeller Plaza, New York, New York
10020; Davis, 124 East March Street, Santa Fe, New Mexico 87502;
Neuberger, 605 Third Avenue, New York, New York 10158; Berger, 210
University Blvd., Suite 900, Denver, Colorado 80206; PWM, 53 West
Jackson Blvd., Suite 818, Chicago, Illinois 60604; and Rowe-Fleming and
T. Rowe-Price, 100 East Pratt Street, Baltimore, Maryland 21202;
Pilgram, 825 DuPortail Road, Wayne, Pennsylvania 18087; Warburg, 466
Lexington Ave., New York, NY 10017; Strong, P.O. Box 2936, Milwaukee,
Wisconsin 53201; Bankers, 130 Liberty Street, New York, New York 10006;
and Glenmede, One Liberty Place, 1650 Market Street, Suite 1200,
Philadelphia, Pennsylvania 19103.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Senior Counsel, at
(202) 942-0572, or Christine Y. Greenlees, 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, 450 5th Street, N.W., Washington,
D.C. 20549 (telephone (202) 942-8090).
Applicants' Representations
1. The Funds are open-end management investment companies
registered under the Act. Style Select consists of eight separate
Portfolios, each of which is advised by SAAMCo and several investment
subadvisers (the ``Style Select Portfolios''). Each Style Select
Portfolio is designed to provide investors with access to several
different professional investment advisers, each seeking the same
investment objective and utilizing a similar style with respect to a
separate portion of the respective Portfolio's assets. Seasons was
established to serve as a funding medium for variable annuity contracts
offered by Anchor National Life Insurance Company, an affiliated person
of SAAMCo. Seasons consists of six separate Portfolios, four of which
are advised by SAAMCo and several investment subadvisers (the ``Seasons
Portfolios''). Each of the Seasons Portfolios represents a different
asset allocation strategy, with the assets of each Portfolio being
allocated among the same three subadvisers in differing proportions.
Each subadviser manages its discrete portion or portions of the Seasons
Portfolios according to a distinct investment strategy, which is
different from that employed by the other subadvisers to the same
Portfolio.
2. SAAMCo is an investment adviser registered under the Investment
Advisers Act of 1940 (the ``Advisers Act''). SAAMCo selects the
subadvisers for the Style Select and Seasons Portfolios (the
``Subadvisers''), provides various administrative services, and
supervises the Portfolios' daily business affairs, subject to general
review by the board of directors or trustees of each Fund. SAAMCo also
directly advises discrete portions of two Style Select Portfolios and
each Seasons Portfolio. The Subadvisers for the Style Select and
Seasons Portfolios are: Janus; Berger; Lazard; Warburg; MAS; Pilgrim;
T. Rowe Price; Davis; Neuberger; Strong; Rowe-Fleming; Wellington
Management Company, LLP; L. Roy Papp & Associates; Montag & Caldwell,
Inc.; David L. Babson & Co., Inc.; Bankers; and Glenmede.\1\ Each
Subadviser is registered under the Advisers Act. The Subadvisers that
are affiliated with broker-dealers within the meaning of section
2(a)(3)(C) of the Act are: Janus, MAS, Lazard, Davis, Neuberger,
Berger, PWM, Bankers, and Rowe-Fleming.
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\1\ Each Subadviser that currently intends to rely on the order
has been named as an applicant.
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3. The requested relief would permit a portion of a Style Select or
Seasons Portfolio (``Unaffiliated Portion'') to engage in principal
transactions with a broker-dealer that is, or is an affiliated person
of, a Subadviser to another portion of the Portfolio (``Affiliated
Broker-Dealer''). The requested relief also would permit an Affiliated
Broker-Dealer to provide brokerage services to an Unaffiliated Portion
without complying with the requirements of rule 17e-1(b) and (c) under
the Act. Finally, the requested relief would permit an Unaffiliated
Portion to purchase securities in an underwriting syndicate in which an
Affiliated Broker is a participant, and would permit a purchase by a
portion of a Style Select or Seasons Portfolio advised by the
Subadviser affiliated with the Affiliated Broker-Dealer (``Affiliated
Subadviser'') not to be aggregated with the purchase by the
Unaffiliated Portion for purposes of determining compliance with rule
10f-3(b)(7) under the Act. The requested relief would apply only if the
Affiliated Broker-Dealer is not an affiliated person or an affiliated
person of an affiliated person of SAAMCo, the Subadviser making the
investment decision with respect to the Unaffiliated Portion
(``Unaffiliated Subadviser''),\2\ or an officer, director, or employee
of the Fund engaging in the transaction.
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\2\ The terms ``Unaffiliated Subadviser,'' ``Subadviser'' and
``Unaffiliated Portion'' include SAAMCo and the discrete portion of
a Multi-Managed Portfolio (as defined below) directly advised by
SAAMCo, respectively, provided that SAAMCo manages its portion of
the Portfolio independently of the portions managed by the other
Subadvisers to the Portfolio, and SAAMCo does not control or
influence any other Subadviser's investment decisions for its
portion of the Portfolio.
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4. Applicants request relief for the Style Select and Seasons
Portfolios, as well as any future portfolio of the Funds and any other
registered open-end management investment company or portfolio thereof
advised by SAAMCo and at least one other investment
[[Page 16835]]
adviser (collectively, ``Multi-Managed Portfolios'').\3\ In a Multi-
Managed Portfolio, the advisory contract with each of the Subadviers to
the Multi-Managed Portfolios assigns the Subadviser responsibility to
manage a discrete portion of the respective Multi-Managed Portfolio.
Each Subadviser is responsible for making independent investment and
brokerage allocation decision based on its own research and credit
evaluations. SAAMCo does not dictate or influence brokerage allocation
decisions with respect to the Multi-Managed Portfolios (except for
those portions actually advised by SAAMCo). Each Subadviser to a Multi-
Managed Portfolio is compensated based on a percentage of the value of
assets allocated to that Subadviser. Applicants state that SAAMCo will
take steps designed to ensure that any other existing or future entity
that relies on the order will comply with the terms and conditions of
the application.
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\3\ For purposes of this application, the term ``Unaffiliated
Portion'' defined above includes a portion of any Multi-Managed
Portfolio; and the term ``Affiliated Broker-Dealer'' includes a
broker-dealer that is an affiliated person of an investment adviser
of another portion of any Multi-Managed Portfolio.
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Applicants' Legal Analysis
A. Relief From 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 or an affiliated person of such
affiliated person (``second-tier affiliate''). Section 2(a)(3) of the
Act defines an affiliated person of another person to be any person
directly or indirectly controlling, controlled by, or under common
control with such person and any investment adviser of an investment
company.
2. Under section 2(a)(3), an Affiliated Broker-Dealer would be an
affiliated person or a second-tier affiliate of a Multi-Managed
Portfolio. As a result, any transactions sought to be effected by the
Unaffiliated Subadviser on behalf of its portion of a Multi-Managed
Portfolio with an Affiliated Broker-Dealer would be subject to the
provisions of section 17(a). Applicants seek relief from section 17(a)
to exempt principal transactions entered into in the ordinary course of
business between the Unaffiliated Subadviser to an Unaffiliated Portion
of a Multi-Managed Portfolio and an Affiliated Broker- Dealer. The
requested exemption would apply only where an Affiliated Broker-Dealer
is deemed to be an affiliated person or a second-tier affiliate of an
Unaffiliated Portion of a Multi-Managed Portfolio solely because an
Affiliated Subadviser manages another discrete portion of the same
Portfolio.
3. Section 17(b) permits the SEC to grant an order permitting a
transaction otherwise prohibited by section 17(a) if it finds that the
terms of the proposed transaction are fair and reasonable and do not
involve overreaching on the part of any person concerned. Section 6(c)
permits the SEC to exempt any person or transaction from any provision
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 policies of the Act. For the reasons
stated below, applicants believe that the terms of the proposed
transactions meet the standards of sections 6(c) and 17(b).
4. Applicants state that when the person acting on behalf of an
investment company has no direct or indirect pecuniary interest in a
party to a principal transaction, the abuses that section 17(a) is
designed to prevent are not present. Applicants state that this is the
situation in each transaction for which relief is requested because if
an Unaffiliated Subadviser were to purchase securities on behalf of an
Unaffiliated Portion of a Multi-Managed Portfolio in a principal
transaction with an Affiliated Broker-Dealer, any benefit that might
inure to the Affiliated Broker-Dealer would not be shared by the
Unaffiliated Subadviser.
5. Applicants state that each Subadviser's contract assignes it
responsibility to manage a discrete portion of the Multi-Managed
Portfolio. The contracts neither require nor authorize collaboration
between or among Subadvisers. Each Subadviser is responsible for making
independent investment and brokerage allocation decisions based on its
own research and credit evaluations. Applicants state that SAAMCo does
not dictate or influence brokerage allocation decisions for the Multi-
Managed Portfolios, except where SAAMCo actually advises an
Unaffiliated Portion of a Multi-Managed Portfolio. Applicants submit
that in managing a discrete portion of a Portfolio, each Subadviser
acts for all practical purposes as though it is managing a separate
investment company. Further, applicants state that, for each
transaction for which relief is requested, the Unaffiliated Subadviser
would be dealing with an Affiliated Broker-Dealer that is a competitor
of that subadviser. Applicants believe, therefore, that each such
transaction would be the product of arm's length bargaining.
6. In addition, applicants state that the method of compensating
Subadvisers in the context of a Multi-Managed Portfolio furthers
competition among them. Applicants state that Subadvisers are paid on
the basis of a percentage of the value of the assets allocated to their
management. Applicants argue that the execution of a transaction to the
disadvantage of the Unaffiliated Portion of a Multi-Managed Portfolio
would disadvantage the Unaffiliated Subadviser to the extent that it
diminishes the value of the Unaffiliated Portion of the Portfolio, with
no countervailing benefit to the Unaffiliated Subadviser. Applicants
further submit that SAAMCo's power to dismiss Subadvisers or to change
the portion of a Multi-Managed Portfolio allocated to each reinforces a
subadviser's incentive to maximize the investment performance of its
own portion of the Multi-Managed Portfolio.
B. Relief From Section 17(e) and Rule 17e-1
1. Section 17(e)(2)(A) of the Act prohibits an affiliate or a
second-tier affiliate of a registered investment company acting as
broker in connection with the sale of securities to or by the
investment company, to receive a commission, fee or other remuneration
for effecting such transaction which exceeds the usual and customary
broker's commission if the sale is effected on a securities exchange.
2. Rule 17e-1 sets forth the conditions under which an affiliated
person or a second-tier affiliate of an investment company may receive
a commission, fee, or other remuneration which would not exceed the
``usual and customary broker's commission'' for purposes of section
17(e)(2)(A). Paragraph (b) of rule 17e-1 requires the investment
company's board of directors, including a majority of the disinterested
directors, to adopt certain procedures and to determine at least
quarterly that all transactions effected in reliance on rule 17e-1 in
the preceding quarter were effected in compliance with the company's
rule 17e-1 procedures. Rule 17e-1(c) specifies the records that must be
maintained by each investment company with respect to any transactions
effected pursuant to rule 17e-1.
3. Applicants request relief under section 6(c) to the extent
necessary to permit the Unaffiliated Portion of each Multi-Managed
Portfolio to pay commissions, fees, or other remuneration to an
Affiliated Broker-Dealer, acting as broker in the ordinary course of
business, in connection with the sale of securities to or by such
[[Page 16836]]
Unaffiliated Portion of a Multi-Managed Portfolio, without complying
with the requirements of subparagraphs (b) and (c) of rule 17e-1 under
the Act. In addition, applicants request that such relief extend to
transactions in futures contracts and related options as well as
securities.
4. Applicants state that the transactions for which relief is
requested will involve no conflict of interest and that there is no
possibility of self-dealing. Applicants submit that the pecuniary
interests of the particular Unaffiliated Subadviser are directly
aligned with those of the Unaffiliated Portion of the Multi-Managed
Portfolio. Applicants further submit that there is no possibility of
self-dealing in situations in which a particular Unaffiliated
Subadviser is not affiliated with any other Subadviser's Affiliated
Broker-Dealer. For these reasons, applicants believe that the brokerage
commissions, fees, or other remuneration to be paid by the Unaffiliated
Portion will be reasonable and fair and that there is no danger that
commissions will exceed the usual or customary level.
5. Applicants argue that the procedures required by rule 17e-1 (b)
and (c) are unduly burdensome to the Unaffiliated Portions and the
Unaffiliated Subadvisers. Applicants state that the costs to an
Unaffiliated Subadviser of complying with those provisions of rule 17e-
1 with respect to broker-dealers that have no affiliation with the
Unaffiliated Subadviser may discourage that Subadviser from accepting
or continuing a Multi-Managed Portfolio as a client. Applicants further
state that to facilitate management of its portion of a Multi-Managed
Portfolio, an Unaffiliated Subadviser would normally place orders for
trades for its portion of a Portfolio at the same time and with the
same broker-dealer as trades for other clients. Because Affiliated
Broker-Dealers are not affiliated persons of an Unaffiliated
Subadviser, the Unaffiliated Subadviser's computer systems are not
generally programmed to detect transactions through these brokers.
Applicants state that as a result, in order to compile the necessary
records under rule 17e-1, one or more individuals employed by the
Unaffiliated Subadviser must manually sift through the Unaffiliated
Subadviser's trading records relating to the Portfolio. Applicants
state that an Unaffiliated Subadviser may choose to forego trading its
portion of a Multi-Managed Portfolio in block transactions with its
other clients and may avoid executing transactions through Affiliated
Broker-Dealers entirely, which may result in increased execution costs
to the Unaffiliated Portion.
6. Applicants state that each Unaffiliated Subadviser that selects
an Affiliated Broker-Dealer as broker will do so in accordance with the
brokerage allocation practices set forth in the prospectus and
statement of additional information for the respective Fund (i.e.,
subject to best price and execution). In addition, applicants state
that each Unaffiliated Subadviser selecting broker-dealers for its
Unaffiliated Portion of a Multi-Managed Portfolio has an inherent
interest in obtaining best price and execution, so as to maximize the
Unaffiliated Portion's potential return. Conversely, applicants submit
that such Unaffiliated Subadvisers have no interest in benefiting an
Affiliated Broker-Dealer at the expense of the Unaffiliated Portions of
the Multi-Managed Portfolios they manage.
C. Relief From Section 10(f) and Rule 10f-3
1. Section 10(f), in relevant part, prohibits a registered
investment company from knowingly purchasing or otherwise acquiring
during the existence of any underwriting or selling syndicate, any
security (except a security of which the company is the issuer) a
principal underwriter of which is an officer, director, member of an
advisory board, investment adviser, or employee of the company, or an
affiliated person of any of the foregoing. Section 10(f) also provides
that the SEC may exempt by order any transaction or classes of
transactions from any of the provisions of section 10(f), if and to the
extent that such exemption is consistent with the protection of
investors.
2. Applicants acknowledge that each Subadviser to a Multi-Managed
Portfolio, although under contract to manage only a distinct portion of
the Portfolio, is an investment adviser to the Multi-Managed Portfolio
itself, not just the portion of the Portfolio it manages. All purchases
of securities by any Unaffiliated Subadviser on behalf of its
Unaffiliated Portion of a Multi-Managed Portfolio from an underwriting
syndicate a principal underwriter of which is an affiliated person of
another Subadviser to that Multi-Managed Portfolio, thus fall within
the prohibitions of section 10(f).
3. Applicants request relief pursuant to section 10(f) exempting
from the provisions of section 10(f) any purchase of securities by an
Unaffiliated Portion of a Multi-Managed Portfolio in the ordinary
course of business during the existence of an underwriting or selling
syndicate, a principla underwriter of which is an Affiliated Broker-
Dealer. Applicants believe that the requested relief meets the
standards set forth in section 10(f).
4. Applicants state that section 10(f) was designed to prevent the
practice of ``dumping'' otherwise unmarketable securities on investment
companies, either by forcing the investment company to purchase
unmarketable securities from the underwriting affiliate itself, or by
forcing or encouraging the investment company to purchase such
securities from another member of the syndicate. Applicants submit that
such abuses are not present in the context of Multi-Managed Portfolios
to any greater extent than is the case with a series investment company
with unaffiliated advisers to separate Portfolios. As stated above in
the conext of transactions under sections 17(a) and (e), in each
underwriting transaction that would be subject to the requested relief,
the Unaffiliated Subadviser would be dealing, on behalf of the
Unaffiliated Portion of the Multi-Managed Portfolio, with an Affiliated
Broker-Dealer that is an unrelated entity in an arm's length
arrangement.
5. Rule 10f-3 exempts certain transactions from the prohibitions of
section 10(f) if specified conditions are met. Paragraph (b)(7) of rule
10f-3 provides that the amount of securities of any class of an issue
to be purchased by the investment company, or by two or more investment
companies having the same investment adviser, shall not exceed certain
percentages specified in the rule. Applicants request exemptive relief
pursuant to section 10(f) to the extent necessary so that where a
portion of a Multi-Managed Portfolio managed by an Affiliated
Subadviser purchases securities in reliance upon rule 10f-3, for
purposes of determining the Affiliated Subadviser's compliance with the
percentage limits of rule 10f-3(b)(7), such purchases will not be
aggregated with any purchases that might be made by an Unaffiliated
Portion of the same Multi-Managed Portfolio. Applicants believe the
requested relief meets the standards of section 10(f) for the reasons
discussed above.
Applicants' Conditions
Applicants agree that the requested order will be subject to the
following conditions:
1. Each Multi-Managed Portfolio will be advised by SAAMCo and at
least one other Unaffiliated Subadviser and will be operated consistent
with the manner described in the application.
2. The Affiliated Broker-Dealer will not be an affiliated person or
a second-
[[Page 16837]]
tier affiliate of SAAMCo, any Unaffiliated Subadviser, or any officer,
director, or employee of the Fund engaging in the transaction.
3. No Affiliated Subadviser will directly or indirectly consult
with any Unaffiliated Subadviser concerning allocation of principal or
brokerage transactions.
4. No Affiliated Subadviser will participate in any arrangement
under which the amount of its subadvisory fees will be affected by the
investment performance of an Unaffiliated Subadviser.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-8929 Filed 4-3-98; 8:45 am]
BILLING CODE 8010-01-M
