[Federal Register Volume 63, Number 161 (Thursday, August 20, 1998)]
[Notices]
[Pages 44663-44665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22434]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23391; 812-10842]
Diversified Investors Portfolios, et al.; Notice of Application
August 17, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for an order under the Investment Company
Act of 1940 (the ``Act'').
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RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
act from the provisions of section 15(a) of the Act and rule 18f-2
under the Act.
SUMMARY OF APPLICATION: Applicants seek an order to permit them to
enter into and materially amend contracts with subadvisers without
shareholder approval.
APPLICANTS: Diversified Investors Portfolios (``DIP'') and Diversified
Investment Advisors, Inc. (the ``Manager'').
FILING DATE: The application was filed on October 28, 1997, and amended
on April 20, 1998. Applicants have agreed to file an amendment during
the notice period, the substance of which is reflected in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving the applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on September 8, 1998, and should be accompanied by proof of
service on the applicants, in the form of an affidavit or, for lawyers,
a certificate of service. Hearing requests should state the nature of
the writers' request, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, 4 Manhattanville
Road, Purchase, New York 10577, Attention: Robert F. Colby.
FOR FURTHER INFORMATION CONTACT:
Lawrence W. Pisto, Senior Counsel, at (202) 942-0527, or Nadya B.
Roytblat, Assistant Director, 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 at the
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. (202) 942-8090).
Applicants' Representations
1. DIP is organized as a New York trust and is registered under the
Act as an open-end management investment company. DIP currently
consists of thirteen portfolios (the ``Core Portfolios''). Beneficial
interests in the Core Portfolios are issued solely in private placement
transactions that do not involve any ``public offering'' within the
meaning of Section 4(2) of the Securities Act of 1933 (the ``Securities
Act''). Investments in the Core Portfolios may only be made by
investment companies, insurance company separate accounts (including
accounts registered under the Act and accounts not so registered),
common or commingled trust funds or similar organizations or entities
that are ``accredited investors'' within the meaning of Regulation D
under the Securities Act. Each Core Portfolio serves as a master fund
in a master/feeder structure. Each registered investment company (or
series thereof) which invests its investable assets in a Core Portfolio
is referred to as a feeder fund (``Feeder Fund'').
2. DIP has entered into investment management agreements with the
Manager with respect to each of the Core Portfolios (each a
``Management Agreement''). The Manager is registered under the
Investment Advisers Act of 1940 (the ``Advisers Act''). Under the terms
of the Management Agreements, the Manager supervises the overall
administration of the Core Portfolios, providing or overseeing the
provision of all business, administrative, investment advisory and, if
applicable, portfolio management services. For its services, the
Manager receives a management fee at an annual rate based on a
percentage of the applicable Core Portfolio's average net assets.
3. The Manager seeks to enhance performance of the Core Portfolios
and reduce risk by selecting one or more ``specialist'' subadvisers
(``Subadvisers''). The Manager selects Subadvisers based on a rigorous
process which includes researching each Subadviser's asset class, track
record, organizational structure, management team, consistency of
performance, assets under management, and other factors. The Manager
continuously monitors a Subadviser's performance on both a quantitative
and qualitative basis.
4. The specific investment decisions for each Core Portfolio are
made by one or more Subadvisers, each of which has discretionary
authority to invest all or a portion of the assets of the particular
Core Portfolio, subject to general supervision by the Manager and DIP's
Broad of Trustees (``Board''). Each Subadviser is or will be registered
under the Advisers Act.\1\ Each of the Subadvisers receives a
subadvisory fee from the Manager at an annual rate based on a
percentage of the applicable Core Portfolio's average net assets. Of
the thirteen Core Portfolios, eleven currently have one Subadviser, one
has two Subadvisers, and one has four Subadvisers.
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\1\ Each Subadviser will be registered under the Advisers Act
unless it is a ``bank'' as defined in the advisers Act or is
otherwise excluded from the definition of ``investment adviser''
under section 202(a)(11) of the Advisers Act.
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5. Applicants request an order that would permit the Manager,
subject to the oversight by the Board, to enter into and materially
amend agreements with Subadvisers (``Subadvisory Agreements'') without
shareholder approval. Applicants believe that this relief would enable
the Core Portfolios to operate more efficiently and consistently with
the Manager-Subadviser structure.
Applicants' Legal Analysis
1. Section 15(a) of the Act makes it unlawful for any person to act
as an investment adviser to a registered investment company except
pursuant to a written contract that has been approved by a majority of
the investment company's outstanding voting securities. Rule 18f-2
provides that each series or class of stock in a series company must
approve the matter if the Act requires shareholder approval.\2\
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\2\ In the case of the Core Portfolios, which are ``master''
funds in a master/feeder structure, shareholder approval
requirements under section 15(a) and rule 18f-2 also are governed by
the voting provisions set forth in section 1 12(d)(1)(E) of the Act.
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2. Section 6(c) of the Act authorizes the Commission to exempt any
person, security, or transaction from any provision of the Act 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.
[[Page 44664]]
3. Applicants request an order under section 6(c) that would exempt
them from section 15(a) and rule 18f-2 to permit the Manager, subject
to approval by the Board, to enter into and materially amend
Subadvisory Agreements without shareholder approval. Applicants request
that the relief extend to the existing Core Portfolios as well as
future series of DIP and any other registered open-end management
investment company advised by the Manager or a person controlling,
controlled by, or under common control with the Manager that operates
in substantially the same manner as DIP with respect to the Manager-
Subadviser structure and complies with the terms and conditions of the
application (``Future Fund'').
4. Applicants state that, from the perspective of the investor in a
Core Portfolio or Feeder Fund, the role of the Subadviser is comparable
to that of the individual portfolio managers employed by other
investment advisory firms. The Subadvisers are concerned only with
selection of portfolio investments in accordance with a Core
Portfolio's investment objective and policies and have no broader
supervisory, management or administrative responsibilities with respect
to the Core Portfolio. Applicants state that the Core Portfolios thus
offer the Manager/Subadviser structure to allow investors the
opportunity to invest their assets in a selection of investment
disciplines managed by their respective Subadvisers. The Manager, based
on its own analyses and experience, determines which Subadvisers are
likely to make specific portfolio securities selections which, in the
aggregate, will achieve the desired and defined objectives of a
particular investment discipline under existing market conditions.
Investors also obtain the Manager's constant supervision of these
Subadvisers, so that new Subadvisers can be introduced in response to
changing market conditions or a Subadviser's performance, in each case
in an attempt to improve the overall performance of the Core
Portfolios.
5. Applicants believe that investors in a Feeder Fund or Core
Portfolio are, in effect, electing to have the Manager select one or
more Subadvisers best suited to achieve that Core Portfolio's
investment objective. Part of such investor's investment decision is a
decision to have those selections made by a professional management
organization, such as the Manager, with substantial experience in
making such evaluations and selections (or in recommending the
termination of Subadvisers, as deemed appropriate by the Manager).
Applicants thus believe that the requested relief will allow the Core
Portfolio to operate more efficiently and in accordance with investor
expectations. Applicants also note that the Management Agreement will
remain subject to the shareholder voting requirements of section 15(a).
Applicants' Conditions
1. Before a Core Portfolio may rely on the order requested in the
application, the operation of the Core Portfolio in the manner
described in the application will be approved by a majority of the
outstanding voting securities of the Core Portfolio, within the meaning
of the Act, pursuant to voting instructions provided by shareholders of
those Feeder Funds investing in such Core Portfolio (or by the unit
holders in the case of Feeder Funds that are insurance company separate
accounts) that are registered under the Act or other voting
arrangements that comply with section 12(d)(1)(E)(iii)(aa) of the Act,
if applicable. Before a Future Fund may rely on the order requested in
the application, the operation of the Future Fund in the manner
described in the application will be approved by a majority of the
outstanding voting securities of the Future Fund, within the meaning of
the Act, pursuant to voting instructions provided by the shareholders
of the Future Fund (or by unit holders in the case of a Future Fund
that is an insurance company separate account registered under the
Act), in accordance with section 12(d)(1)(E)(iii)(aa) of the Act, or in
the case of a Future Fund whose shareholders or unit holders, as the
case may be, purchase shares in a public offering on the basis of a
prospectus containing the disclosure contemplated by Condition 2 below,
by the initial shareholder(s) before the shares of the Future Fund are
offered to the public.
2. A Feeder Fund's prospectus, DIP's or Future Fund's offering
documents and, if applicable, DIP's or Future Fund's prospectus, will
disclose the existence, substance and effect of any order granted
pursuant to this application. In addition, the Feeder Funds, the Core
Portfolios and Future Funds will hold themselves out as employing the
Manager/Subadviser approach described in the application. A Feeder
Fund's prospectus, DIP's or Future Fund's offering documents and, if
applicable, DIP's or Future Fund's prospectus, will prominently
disclose that the Manager has ultimate responsibility to oversee the
Subadvisers and recommend their hiring, termination, and replacement.
3. The Manager will provide management and administrative services
to the core Portfolios and, subject to the review and approval by the
Board, will, as necessary: set each Core Portfolio's overall investment
strategies; select Subadvisers; allocate and reallocate, as
appropriate, each Core Portfolio's assets among Subadvisers; monitor
and evaluate Subadviser performance; and oversee Subadviser compliance
with the investment objective, policies and restrictions of the
applicable Core Portfolio.
4. At all times, a majority of the Board will be persons who are
not ``interested persons'' of DIP, within the meaning of section
2(a)(19) of the Act (the ``Independent Trustees''), and the nomination
of new or additional Independent Trustees will be placed within the
discretion of the then existing Independent Trustees.
5. Neither the Manager nor a Core Portfolio will enter into a
Subadvisory Agreement with any subadviser that is an affiliated person
of DIP or the Manager, within the meaning of section 2(a)(3) of the Act
(each an ``Affiliated Subadviser''), other than by reason of serving as
Subadviser to one or more Core Portfolios, without such Subadvisory
Agreement, including the compensation to be paid thereunder, being
approved by the shareholders of the applicable Core Portfolio pursuant
to voting instructions provided by shareholders of those Feeder Funds
investing in such Core Portfolios (or by unit holders in the case of
Feeder Funds that are insurance company separate accounts) that are
registered under the Act or other voting arrangements that comply with
12(d)(1)(E)(iii)(aa) of the Act, if applicable.
6. When a Subadviser change is proposed for a Core Portfolio with
an Affiliated Subadviser, the Board, including a majority of the
Independent Trustees, will make a separate finding, reflected in the
minutes of the meetings of the Board that such change is in the best
interests of the applicable Core Portfolio and its investors
(including, in the case of a Core Portfolio offered to insurance
company separate accounts, the unit holders of any separate account for
which that Core Portfolio serves as a funding medium) and does not
involve a conflict of interest from which the Manager or the Affiliated
Subadviser derives an inappropriate advantage.
7. No director, trustee or officer of DIP or the Manager will own
directly or indirectly (other than through a pooled investment vehicle
that is not controlled by the director, trustee or officer) any
interest in a Subadviser except for ownership of (i) interests in the
Manager
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or any entity that controls, is controlled by, or is under common
control with the Manager; or (ii) less than 1% of the outstanding
securities of any class of equity or debt of a publicly-traded company
that is either a Subadviser or an entity that controls, is controlled
by, or is under common control with a Subadviser.
8. Within 75 days of the hiring of any new Subadviser, the Manager
will furnish the shareholders of the applicable Core Portfolio and
Feeder Funds (including in the case of a Feeder Fund that is an
insurance company separate account, the unit holders of that separate
account) all the information that would have been included in a proxy
statement. Such information will include any changes in such
information caused by the addition of a new Subadviser. To meet this
obligation, the Manager will provide the shareholders of the applicable
Core Portfolios and Feeder Funds (including in the case of a Feeder
Fund that is an insurance company separate account, the unit holders of
that separate account) with an information statement meeting the
requirements of Regulation 14C and Schedule 14C under the Securities
Exchange Act of 1934 (the ``Exchange Act''), as well as the
requirements of Item 22 of Schedule 14A under the Exchange Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-22434 Filed 8-19-98; 8:45 am]
BILLING CODE 8010-01-M
