[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Notices]
[Pages 30941-30944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12268]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30524; File No. 812-13783]
Frank Russell Company, et al.; Notice of Application
May 17, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (``Act'') for an exemption from section 15(a) of
the Act and rule 18f-2 under the Act, as well as from certain
disclosure requirements.
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SUMMARY: Summary of the Application: Applicants, including an
actively-managed open-end exchange traded fund, request an order that
would permit them to enter into and materially amend subadvisory
agreements without shareholder approval and would grant relief from
certain disclosure requirements.
Applicants: Frank Russell Company (``Russell''), Russell Investment
Management Company (``RIMCo''), Russell Investment Company (``RIC''),
Russell Investment Funds (``RIF''), and Russell Exchange Traded Funds
Trust (``RET'', and together with RIC and RIF, the ``Trusts'')
(collectively, the ``Applicants'').
DATES: Filing Dates: The application was filed on June 9, 2010, and
amended on November 22, 2010, April 27, 2012, November 22, 2012, and
March 15, 2013.
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 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 June 11, 2013, 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 Commission's Secretary.
ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants:
1301 Second Avenue, 18th Floor, Seattle, Washington 98101.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel,
at (202) 551-6990, or Jennifer L. Sawin, Branch Chief, at (202) 551-
6821 (Division of Investment Management, Exemptive Applications
Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. RIC and RIF are organized as Massachusetts business trusts and
are registered under the Act as open-end management investment
companies. RIC is comprised of forty-two separate registered funds and
RIF is comprised of ten separate registered funds, each with its own
investment objective, policies and restrictions. RET is organized as a
Delaware statutory trust and is registered under the Act as an open-end
management investment company. RET is comprised of one separate
registered fund and twelve separate funds in registration, each with
its own investment objective, policies and restrictions.\1\
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\1\ Applicants request relief with respect to existing or future
series of the Trusts and any other existing or future registered
open-end management investment company or series thereof that: (a)
is advised by RIMCo or an entity controlling, controlled by, or
under common control with RIMCo or its successors (each such entity,
together with RIMCo, an ``Adviser''); (b) uses the manager-of-
managers structure described in the application (``Managers of
Managers Structure''); and (c) complies with the terms and
conditions of the application (the ``Funds'' and each, individually,
a ``Fund''). Every existing registered open-end investment company
that currently intends to rely on the requested order is named as an
Applicant. For the purposes of the requested order, ``successor'' is
limited to an entity or entities that result from a reorganization
into another jurisdiction or a change in the type of business
organization. Every existing or future entity that intends to rely
on the order in the future will do so only in accordance with the
terms and conditions in the application. If the name of any Fund
contains the name of a Money Manager (as defined below), the name of
the Fund's Adviser, or a trademark or trade name that is owned or
publicly used to identify that Adviser, will precede the name of the
Money Manager.
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2. RIMCo, a corporation organized under the laws of the State of
Washington, is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (``Advisers Act''). RIMCo serves as
the investment adviser of the Funds and RIMCo or another Adviser will
serve as investment adviser to the future Funds, in each case pursuant
to an investment advisory agreement with the Fund (each an ``Advisory
Agreement'').\2\ The Advisory Agreements have been approved (and future
Advisory Agreements will be approved) by the applicable board of
trustees of a Trust (the ``Board''),\3\ including a majority of the
trustees who are not ``interested persons,'' (as defined in section
2(a)(19) of the Act) of the applicable Trust, the applicable Fund,
RIMCo or other Adviser, or any Money Manager (as defined below) (the
``Independent Trustees'') and by shareholders in the manner required by
sections 15(a) and 15(c) of the Act and rule 18f-2 thereunder. With
respect to new Funds offered in the future, the applicable Advisory
Agreement will be approved by the Board and the initial shareholder of
the Fund in the manner required by sections 15(a) and 15(c) of the Act
and rule 18f-2 thereunder. Applicants are not seeking any exemptions
from the provisions of the
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Act with respect to the Advisory Agreements.
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\2\ Other Advisers are or will be registered as investment
advisers under the Advisers Act.
\3\ The term ``Board'' also includes the board of trustees or
directors of a future Fund, if different.
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3. Under the terms of an Advisory Agreement, and subject to the
authority of the applicable Board, RIMCo will provide or oversee the
provision of investment advisory and portfolio management services for
a Fund, including the development of the investment program for the
Fund all in accordance with the investment objectives, policies and
limitations of each such Fund. For the advisory services it provides to
the Funds, RIMCo receives the fee specified in the Advisory Agreements
from the Funds based on each Fund's average daily net assets. The
Advisory Agreement will permit the Adviser to: (a) Select certain money
managers that are not Affiliated Money Managers \4\ (each a
``Discretionary Money Manager'') to manage all or a portion of the
assets of the Funds pursuant to portfolio management agreements (each
agreement with a Money Manager (as defined below) a ``Portfolio
Management Agreement''); (b) select certain money managers that are not
Affiliated Money Managers (each a ``Non-Discretionary Money Manager''
and together with the Discretionary Money Managers, the ``Money
Managers'') to provide model portfolios to an Adviser pursuant to a
Portfolio Management Agreement, which such Adviser would utilize in
connection with the management of a Fund. Each Money Manager to a Fund
is, or will be, an ``investment adviser'' as defined in section
2(a)(20)(B) of the Act and registered as an investment adviser under
the Advisers Act unless not subject to such registration. An Adviser
will continuously supervise and monitor each Money Manager for
adherence to its specific strategy. An Adviser will evaluate Money
Managers, allocate assets to Discretionary Money Managers, implement
the model portfolios of Non-Discretionary Money Managers, oversee the
Money Managers, and make recommendations about the hiring, termination
and replacement of Money Managers to the applicable Board, at all times
subject to the authority of the applicable Board. A Fund's Adviser will
manage the portion of the Fund's assets that the Adviser determines not
to allocate to one or more Discretionary Money Managers, including
implementing model portfolios of Non-Discretionary Money Managers.
Assets not allocated to a Discretionary Money Manager may also include
a Fund's liquidity reserves and assets which may be managed directly by
the Adviser. The applicable Adviser will compensate each Money Manager
out of the fees that are paid to such Adviser under the Advisory
Agreement.
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\4\ If an Adviser wishes to use money managers that would be
``affiliated persons'' (as defined in Section 2(a)(3) of the Act) of
a Trust, the Funds or of any Adviser (other than by reason of
serving as a Subadviser to the Funds) (``Affiliated Money
Manager''), shareholder approval of the Portfolio Management
Agreement with any Affiliated Money Manager will be obtained. The
requested relief will not extend to Affiliated Money Managers.
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4. Applicants request an order to permit an Adviser, subject to the
approval of the applicable Board, including a majority of the
Independent Trustees, to enter into and materially amend Portfolio
Management Agreements with Money Managers without shareholder
approval.\5\
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\5\ Pursuant to a prior order obtained by RIMCo, RIC, and RIF,
RIMCo has entered into Portfolio Management Agreements with certain
Money Managers to provide investment advisory services to the RIC
and RIF Funds. The relief granted pursuant to the application would
supersede the Prior Order. See In the Matter of Frank Russell
Investment Company, et al., Investment Company Act Release No. 21108
(June 2, 1995) (notice) and 21169 (June 28, 1995) (order) (``Prior
Order''). Except for Portfolio Management Agreements covered by the
Prior Order, all Portfolio Management Agreements have been approved
by the shareholders of the applicable Fund in the manner required by
section 15(a) of the Act and rule 18f-2 thereunder.
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5. Applicants also request an order exempting them from certain
disclosure requirements described below that may require the Funds to
disclose fees paid by the Advisor to the Money Managers. An exemption
is requested to permit the Funds to disclose (as both a dollar amount
and as a percentage of each Fund's net assets) (i) the aggregate fees
paid to an Adviser and any Affiliated Money Managers, and (ii) the
aggregate fees paid to Money Managers (collectively, ``Aggregate Fee
Disclosure''). Any Fund that employs an Affiliated Money Manager will
provide separate disclosure of any fees paid to the Affiliated Money
Manager.
6. Applicants state that the requested relief is no longer novel
insofar as the requested order seeks exemptions to include as Funds
open-end investment companies, the shares of which will be traded on
the national securities exchanges, as defined in section 2(a)(26) of
the Act (``ETFs''). Applicants note that the requested relief is
substantially identical to multimanager relief recently granted by the
Commission to other ETFs. Applicants believe that the requested relief
is equally appropriate for ETFs as for mutual funds, and that the
operations of the Funds under the requested order address the concerns
historically considered by the Commission when granting identical
relief to mutual funds. Applicants believe that similar to shareholders
of a mutual fund who may ``vote with their feet'' by redeeming their
individual shares at net asset value (``NAV'') if they do not approve
of a change in subadviser or subadvisory agreement, shareholders of a
Fund that is an ETF will be able to sell shares in the secondary market
at negotiated prices that usually closely track the relevant Fund's NAV
if they do not approve of a change. Applicants state that each Fund
that is an ETF intends to ensure that shareholders who purchase its
shares in the secondary market receive a prospectus and all of the
information that would have been provided with a proxy statement,
except for the modifications discussed below, under the Modified Notice
and Access Procedures and that Applicants' prospectus delivery
obligation is satisfied by relying on the same mechanisms currently
used by the Funds.
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in relevant part, that it is
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 vote of a majority of the company's outstanding voting
securities. Rule 18f-2 under the Act provides that each series or class
of stock in a series investment company affected by a matter must
approve the matter if the Act requires shareholder approval.
2. Form N-1A is the registration statement used by open-end
investment companies. Item 19(a)(3) of Form N-1A requires disclosure of
the method and amount of the investment adviser's compensation.
3. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the
Securities Exchange Act of 1934 (``Exchange Act''). Items 22(c)(1)(ii),
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A, taken together,
require a proxy statement for a shareholder meeting at which the
advisory contract will be voted upon to include the ``rate of
compensation of the investment adviser,'' the ``aggregate amount of the
investment adviser's fees,'' a description of the ``terms of the
contract to be acted upon,'' and, if a change in the advisory fee is
proposed, the existing and proposed fees and the difference between the
two fees.
4. Regulation S-X sets forth the requirements for financial
statements required to be included as part of investment company
registration statements and shareholder reports filed with the
Commission. Sections 6-
[[Page 30943]]
07(2)(a), (b) and (c) of Regulation S-X require that investment
companies include in their financial statements information about
investment advisory fees.
5. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction or any class or classes of
persons, securities, or transactions from any provisions of the Act, or
from any rule thereunder, 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 state that the requested relief meets the necessary
standards for the reasons discussed below.
6. Applicants state that the shareholders expect the Adviser and
the applicable Board to select the Money Managers for the Funds that
they believe are best suited to achieve each Fund's investment
objective. Applicants assert that, from the perspective of the
investor, the role of the Money Managers with respect to the Funds is
substantially equivalent to the role of a traditional individual
portfolio manager for a fund that does not employ a manager-of-managers
structure. In the absence of exemptive relief from Section 15(a) of the
Act, when a new Money Manager is proposed for retention by a Fund or a
Trust on behalf of the Fund, shareholders would be required to approve
the Portfolio Management Agreement with that Money Manager. Similarly,
if an existing Portfolio Management Agreement were to be amended in any
material respect, approval by the shareholders of the Fund would be
required. In addition, a Fund would be prohibited from continuing to
retain an existing Money Manager whose Portfolio Management Agreement
had been ``assigned'' as a result of a change of control of the Money
Manager unless shareholder approval had been obtained. Applicants state
that obtaining shareholder approval would be costly and slow, and
potentially harmful to the Fund and its shareholders. Applicants also
note that the Advisory Agreement is and will remain fully subject to
the requirements of section 15(a) of the Act and rule 18f-2 under the
Act, including the requirement for shareholder voting.\6\
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\6\ In addition, any subadvisory agreement with any Affiliated
Money Manager is subject to section 15(a) of the Act and rule 18f-2
under the Act.
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7. If a new Money Manager is hired, the Funds will inform
shareholders of the hiring of a new Money Manager pursuant to the
following procedures (``Modified Notice and Access Procedures''): (a)
Within 90 days after a new Money Manager is hired for any Fund, that
Fund will send its shareholders either a Multi-manager Notice or a
Multi-manager Notice and Multi-manager Information Statement; \7\ and
(b) the Fund will make the Multi-manager Information Statement
available on the Web site identified in the Multi-manager Notice no
later than when the Multi-manager Notice (or Multi-manager Notice and
Multi-manager Information Statement) is first sent to shareholders, and
will maintain it on that Web site for at least 90 days. In the
circumstances described in the Application, a proxy solicitation to
approve the appointment of new Money Managers provides no more
meaningful information to shareholders than the proposed Multi-manager
Information Statement. Moreover, as indicated above, the applicable
Board would comply with the requirements of Sections 15(a) and 15(c) of
the 1940 Act before entering into or amending Portfolio Management
Agreements.
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\7\ A ``Multi-manager Notice'' will be modeled on a Notice of
Internet Availability as defined in rule 14a-16 under the Exchange
Act, and specifically will, among other things: (a) Summarize the
relevant information regarding the new Money Manager; (b) inform
shareholders that the Multi-manager Information Statement is
available on a Web site; (c) provide the Web site address; (d) state
the time period during which the Multi-manager Information Statement
will remain available on that Web site; (e) provide instructions for
accessing and printing the Multi-manager Information Statement; and
(f) instruct the shareholder that a paper or email copy of the
Multi-manager Information Statement may be obtained, without charge,
by contacting the Funds.
A ``Multi-manager Information Statement'' will meet the
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule
14A under the Exchange Act for an information statement, except as
modified by the requested order to permit Aggregate Fee Disclosure.
Multi-manager Information Statements will be filed electronically
with the Commission via the EDGAR system.
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8. Applicants assert that many Money Managers use a ``posted'' rate
schedule to set their fees. Applicants state that while Money Managers
are willing to negotiate fees lower than those posted in the schedule,
they are reluctant to do so where the fees are disclosed to other
prospective and existing customers. Applicants submit that the
requested Aggregate Fee Disclosure relief will allow an Adviser to
negotiate more effectively with each Money Manager.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Before a Fund may rely on the requested order, the operation of
the Fund in the manner described in the application will be approved by
a majority of the Fund's outstanding voting securities, as defined in
the Act, or in the case of a Fund whose public shareholders purchase
shares on the basis of a prospectus containing the disclosure
contemplated by condition 2 below, by the initial shareholder(s) before
offering shares of that Fund to the public.
2. Each Fund relying on the requested order will disclose in its
prospectus the existence, substance, and effect of any order granted
pursuant to the application. Each Fund will hold itself out to the
public as utilizing the Manager of Managers Structure. The prospectus
will prominently disclose that the applicable Adviser has ultimate
responsibility (subject to oversight by the applicable Board) to
oversee the Money Managers and recommend their hiring, termination, and
replacement.
3. Funds will inform shareholders of the hiring of a new Money
Manager within 90 days after the hiring of the new Money Manager
pursuant to the Modified Notice and Access Procedures.
4. An Adviser will not enter into a Portfolio Management Agreement
with any Affiliated Money Manager without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Fund.
5. At all times, at least a majority of each Board will be
Independent Trustees, and the nomination of new or additional
Independent Trustees will be placed within the discretion of the then-
existing Independent Trustees.
6. Whenever a money manager change is proposed for a Fund with an
Affiliated Money Manager, the applicable Board, including a majority of
the Independent Trustees, will make a separate finding, reflected in
the applicable Board minutes, that such change is in the best interests
of the Fund and its shareholders, and does not involve a conflict of
interest from which the applicable Adviser or the Affiliated Money
Manager derives an inappropriate advantage.
7. Independent legal counsel, as defined in rule 0-1(a)(6) under
the Act, will be engaged to represent the Independent Trustees. The
selection of such counsel will be within the discretion of the then
existing Independent Trustees.
8. Each Adviser will provide the Board, no less frequently than
quarterly, with information about the profitability of such Adviser on
a per-Fund basis. The information will reflect the impact on
profitability of the hiring or termination of any money manager during
the applicable quarter.
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9. Whenever a money manager is hired or terminated, the applicable
Adviser will provide the applicable Board with information showing the
expected impact on the profitability of such Adviser.
10. Each Adviser will provide general management services to each
Fund, including overall supervisory responsibility for the general
management and investment of each Fund's assets, and, subject to review
and approval of the Board, will: (a) Set each Fund's overall investment
strategies; (b) evaluate, select and recommend Money Managers to manage
all or a part of each Fund's assets and/or provide model portfolios for
the Funds; (c) in the case of Discretionary Money Managers, allocate
and, when appropriate, reallocate each Fund's assets among one or more
Money Managers; (d) monitor and evaluate the performance of Money
Managers; and (e) implement procedures reasonably designed to ensure
that the Money Managers comply with each Fund's investment objective,
policies and restrictions.
11. No trustee or officer of a Trust or the Funds, or director,
manager or officer of an Adviser, will own, directly or indirectly
(other than through a pooled investment vehicle that is not controlled
by such person), any interest in a Money Manager, except for (a)
ownership of interests in such Adviser or any entity that controls, is
controlled by, or is under common control with such Adviser, or (b)
ownership of less than 1% of the outstanding securities of any class of
equity or debt of any publicly traded company that is either a Money
Manager or an entity that controls, is controlled by or is under common
control with a Money Manager.
12. Each Fund will disclose in its registration statement the
Aggregate Fee Disclosure.
13. In the event the Commission adopts a rule under the Act
providing substantially similar relief to that in the order requested
in the application, the requested order will expire on the effective
date of that rule.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-12268 Filed 5-22-13; 8:45 am]
BILLING CODE 8011-01-P