[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Notices]
[Pages 29152-29154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14360]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21999; 812-10010]
GMO Trust and Grantham, Mayo, Van Otterloo & Co.; Notice of
Application
May 31, 1996.
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: GMO Trust and Grantham, Mayo, Van Otterloo & Co. (``GMO'').
Relevant Act Sections: Order requested under section 6(c) of the Act
from sections 12(d)(1) (A) and (B) of the Act and under sections 6(c)
and 17(b) of the Act from section 17(a) of the Act.
Summary of Application: Applicants request an order that would permit
certain series of GMO Trust to operate as ``funds of funds.''
Filing Dates: The application was filed on February 23, 1996 and
amended on May 23, 1996.
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 June 25, 1996,
and should be accompanied by proof of service on applicants, in the
form of an affidavit, or, for lawyers, a certificate or 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, 40 Rowes Wharf, Boston, MA 02110.
FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E.
Baur, 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. GMO Trust is an open-end series management investment company
organized as a Massachusetts business trust. GMO Trust's existing and
prospective shareholders are highly sophisticated individual investors
and institutional investors such as endowments, foundations,
international tax-exempt organizations, and ERISA/pension funds. The
minimum initial investment in the GMO Trust is $10,000,000. GMO Trust
consists of 22 separate series (each a ``Portfolio''), including:
International Equity Allocation Fund; Global Equity Allocation Fund;
U.S. Equity with International Allocation Fund; and Global Balanced
Allocation Fund (collectively, the ``Allocation Funds''). Each
Allocation Fund is designed to serve the needs and objectives of long-
term investors who seek a simple and cost-effective response to their
asset allocation demands.
2. GMO is a Massachusetts general partnership registered as an
investment adviser under the Investment Advisers Act of 1940 that
serves each Portfolio, including the Allocation Funds, as investment
adviser and principal underwriter. With respect to each Portfolio, GMO
voluntarily reduces its management fees and bears certain expenses to
the extent that each portfolio's total annual operating expenses,
excluding certain expenses such as brokerage commissions, extraordinary
expenses, and transfer taxes exceed specified percentages of net assets
(the ``Voluntary Expense Limits''). The Voluntary Expense Limits vary
among Portfolios primarily because of each Portfolio's type of asset
class and the style of GMO's management. In the case of each Allocation
Fund, GMO expects to waive any advisory fees, and bear expenses, to the
extent that the Allocation Fund's total operating costs would exceed
the relevant Voluntary Expense Limit.
3. Applicants propose a fund of funds arrangement whereby each
Allocation Fund will invest in shares of Portfolios other than
Allocation Funds (the ``Underlying Funds''). Applicants request that
any relief granted pursuant to the application also apply to any future
Portfolio and to any open-end management investment company that
currently or in the future is part of the same ``group of investment
companies,'' as defined in rule 11a-3 under the Act, as GMO Trust
(collectively, the ``GMO Funds'').\1\
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\1\ Rule 11a-3 under the Act defines a ``group of investment
companies'' as two or more companies that: (a) hold themselves out
to investors as related companies for purposes of investment and
investor services; and (b) that have a common investment adviser or
principal underwriter.
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Applicants' Legal Analysis
1. Section 12(d)(1)(A) of the Act 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) of the Act provides that the SEC may exempt persons
or transactions 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 policy
and provisions of the Act. Applicants request an order
[[Page 29153]]
permitting each Allocation Fund to acquire shares of the Underlying
Funds in excess of the limits imposed under section 12(d)(1).
3. The restrictions in section 12(d)(1) were intended to prevent
certain abuses perceived to be associated with the pyramiding of
investment companies, including: (a) undue influence by the fund
holding company over its underlying funds through the threat of large
scale redemptions of the securities of the underlying funds; (b)
layering of costs, e.g. sales loads, advisory fees, and administrative
costs; and (c) creation of structure that could cause investor
confusion. For the following reasons, applicants believe that the
proposed arrangement will not create these dangers and, therefore, that
the requested relief is appropriate.
4. Applicants argue that the proposed arrangement will be
structured to minimize large scale redemption concerns. Each Allocation
Fund seeks to provide existing and prospective long-term investors with
a sophisticated asset allocation service on a cost-effective basis.
This investment objective will not result in large-scale redemptions
from the Underlying Funds, but rather will involve small adjustments on
a continuing basis to maintain balance in the allocation of investors'
assets among the Underlying Funds. Thus, applicants assert that the
operation of each Allocation Fund actually decreases the possibility
for undue influence to any particular Underlying Fund through a threat
of redemption.
5. Applicants state that the proposed arrangement will not raise
the fee layering concerns contemplated by section 12(d)(1). The
proposed arrangement will not involve the layering of advisory fees
since, before approving any advisory contract the board of trustees of
each Allocation Fund, including a majority of the trustees who are not
``interested persons,'' as defined in section 2(a)(19) of the Act, will
find that the advisory fees charged under the contract are based on
services provided that are in addition to, rather than duplicative of,
services provided under any Underlying Fund advisory contract. In
addition, the proposed structure will not involve layering of sales
charges. Currently, neither the Allocation Funds nor the Underlying
Funds impose sales charges or 12b-1 fees. Although one or more GMO
Funds may charge a sales load in the future, any sales charges or
service fees relating to the shares of an Allocation Fund will 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.
(``NASD'') when aggregated with any sales charges or service fees that
an Allocation Fund pays relating to Underlying Portfolio shares.
Applicants contend that although an Allocation Fund shareholder may pay
advisory fees for the Allocation Funds directly and advisory fees for
the Underlying Funds indirectly, these advisory fees are not unfair nor
excessive because the shareholder is obtaining different services
through different advisory contracts.
6. Applicants also state that the proposed arrangement will not be
confusing to investors. Applicants assert that each Allocation Fund's
structure will illuminate rather than confuse its shareholders about
the value and nature of their holdings. The prospectus for each
Allocation Fund will state its investment objective and apprise
shareholders of what Portfolios constitute Underlying Funds for their
investment. In addition, GMO Trust's existing and prospective
shareholders are highly sophisticated individuals or institutional
investors able to understand and bear the risks of such investments.
7. Section 17(a) of the Act makes it unlawful for an affiliated
person of a registered investment company to sell securities to, or
purchase securities from, the company. The Allocation Funds and the
Underlying Funds are considered affiliated persons because they are
under the common control of GMO. An Underlying Fund's issuance of its
shares to an Allocation Fund may be considered a sale prohibited by
section 17(a).
8. Section 17(b) of the Act 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. Applicants request an exemption under sections 6(c) and
17(b) to allow the above transactions.
9. Applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b). The consideration paid for the
sale and redemption of Underlying Fund shares will be without a sales
load and at the same price that is available to other investors. The
Allocation Funds' purchase and sale of Underlying Fund shares is
consistent with the Allocation Funds' policies, as set forth in GMO
Trust's registration statements. Applicants also believe that the
proposed transactions are consistent with the general purposes of the
Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each Allocation Fund and each Underlying Fund will be part of
the same ``group of investment companies,'' as defined in rule 11a-3
under the Act.
No Underlying Fund will 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 board of trustees of GMO Trust will not be
``interested persons,'' as defined in section 2(a)(19) of the Act.
4. Before approving any advisory contract for an Allocation Fund
under section 15, the board of trustees including a majority of the
trustees who are not ``interested persons'' as defined in section
2(a)(19), shall find that advisory fees charged under the contract are
based on services provided that are in addition to, rather than
duplicative of, services provided under any Underlying Fund's advisory
contract. Such finding, and the basis upon which the finding was made,
will be recorded fully in the minute books of GMO Trust.
5. Any sales charges or distribution-related fees charged with
respect to shares of an Allocation Fund, when aggregated with any sales
charges and distribution-related fees paid by the Allocation Fund with
respect to shares of the Underlying Funds, shall not exceed the limits
set forth in Article III, section 26, of the Rules of Fair Practice of
the NASD.
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
Allocation Fund and each of its Underlying Funds; monthly purchases and
redemptions (other than by exchange) for each Allocation Fund and each
of its Underlying Funds; monthly exchanges into and out of each
Allocation Fund and each Underlying Fund; month-end allocations of each
Allocation Fund portfolio's assets among the Underlying Funds; annual
expense ratios for each Allocation Fund and each Underlying Fund; and a
description of any vote taken by the shareholders of any Underlying
Fund, including a statement of the percentage of votes cast for and
against the proposal by each Allocation Fund and by the other
shareholders of the Underlying Fund. Such information will be
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provided as soon as reasonably practicable following each fiscal year-
end of the GMO Trust (unless the Chief Financial Analyst shall notify
applicants in writing that such information need no longer be
submitted).
For the Commission, by the Division of Investment Management,
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-14360 Filed 6-6-96; 8:45 am]
BILLING CODE 8010-01-M
