[Federal Register Volume 60, Number 167 (Tuesday, August 29, 1995)]
[Notices]
[Pages 44909-44913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21361]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21318; 812-7734]
Consulting Group Capital Markets Funds and Smith Barney Mutual
Funds Management Inc.; Notice of Application
August 23, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
[[Page 44910]]
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Consulting Group Capital Markets Funds (the ``Trust''), and
Smith Barney Mutual Funds Management Inc.
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act from the provisions of section 15(a) and rule 18f-2; and from
certain proxy disclosure requirements set forth in item 22 of Schedule
14A under the Securities Exchange Act of 1934 (the ``Exchange Act'');
items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A; item 3 of Form N-14;
item 48 of Form N-SAR; and sections 6-07(2)(a), (b), and (c) of
Regulation S-X.
SUMMARY OF APPLICATION: Applicants seek a conditional order permitting
the Trust's investment adviser, The Consulting Group (a division of
Smith Barney Mutual Funds Management Inc.) (the ``Manager''), to enter
into sub-advisory agreements on behalf of the Trust without receiving
approval by the Trust's shareholders, and permitting the Trust to
disclose only aggregate sub-advisory fees for each series of the Trust
in their prospectuses and other reports.
FILING DATES: The application was filed on June 6, 1991, and amended
and restated on August 11, 1993, March 9, 1994, and August 23, 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 September 18,
1995, 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 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. Applicant, 222 Delaware Avenue, Wilmington, Delaware 19801.
FOR FURTHER INFORMATION CONTACT: Mary Kay Frech, Senior Attorney, at
(202) 942-0579, or C. David Messman, 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 at the
SEC's Public Reference Branch.
Applicant's Representations
1. The Trust is a registered open-end management investment company
organized as a Massachusetts business trust. The Trust is a series
company currently consisting of thirteen operating series (each a
``Portfolio'' and, collectively, the ``Portfolios'').\1\ Shares of the
Portfolios are available exclusively to participants in TRAK
Personalized Investment Advisory Service (``TRAK'') and are proposed to
be made available to other investment advisory services offered by
qualified professional asset managers. TRAK and other investment
advisory services and the Trust are designed to relieve investors of
the burden of devising an asset allocation strategy to meet their
individual needs as well as selecting individual investments within the
available asset categories.
\1\Applicants also request relief with respect to any series of
the Trust organized in the future and for any open-end, management
investment company advised by the Manager, or a person controlling,
controlled by or under common control with the Manager, in the
future, provided that such investment company operates in
substantially the same manner as the Trust and complies with the
conditions to the requested order.
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2. The Manager, a division of Smith Barney Mutual Funds Management
Inc., is a registered investment adviser that is a wholly owned
subsidiary of Smith Barney Holdings Inc., which in turn is a wholly
owned subsidiary of Travelers Group Inc. The Trust has entered into an
investment management agreement (the ``Management Agreement'') with the
Manager who, in turn, has entered into an investment advisory agreement
(``Advisory Agreement'') with one or more separate registered
investment advisers (each, a ``Sub-Adviser'') to the Portfolios. It is
the Manager's responsibility under the Management Agreement to select,
subject to the review and approval of the board of trustees of the
Trust (the ``Board''), Sub-Advisers who have distinguished themselves
by able performance in their respective areas of expertise in asset
management and to review their continued performance. Each Sub-
Adviser's responsibilities are limited to managing the assets held by
the Portfolio it serves in accordance with the Portfolio's stated
investment objectives and policies.
3. Subject to the supervision and direction of the Board, the
Manager provides to the Trust investment management evaluation services
by performing initial due diligence on prospective Sub-Advisers for
each Portfolio and thereafter monitoring Sub-Adviser performance
through quantitative and qualitative analysis, as well as periodic in-
person, telephonic, and written consultations with Sub-Advisers. The
Manager has responsibility for communicating performance expectations
and evaluations to Sub-Advisers and ultimately recommending to the
Board whether Sub-Advisers' contracts should be renewed, modified, or
terminated. The Manager also is responsible for conducting all
operations of the Trust except those operations contracted to the Sub-
Advisers or the Trust's custodian, transfer agent, or administrator.
Each Portfolio pays the Manager a fee for its services, and the Manager
in turn pays each Sub-Adviser a fee for the services it provides to the
Portfolio.
4. Smith Barney Mutual Fund Management Inc. (``Smith Barney Mutual
Fund Management'') serves as the Trust's administrator and The Boston
Company Advisors, Inc. (``Boston Advisors''), a wholly owned subsidiary
of The Boston Company, Inc., serves as the Trust's sub-administrator.
Pursuant to its administration agreement with the Trust, Smith Barney
Mutual Fund Management provides senior executive management for the
Trust and generally oversees and directs all aspects of the Trust's
administration and operation. Boston Advisors calculates the net asset
value of the Portfolios' shares and generally assists in various
aspects of the Trust's administration and operation. Each Portfolio
pays Smith Barney Mutual Fund Management a fee of the services provided
by it and Boston Advisors. Boston Advisors is paid a portion of this
fee.
5. Purchases of shares of a Portfolio must be made through a
brokerage account maintained with Smith Barney Inc. (``SB''). SB,
through its Consulting Group division in its capacity as investment
adviser to participants in TRAK, provides advisory services in
connection with investments among the Portfolios by identifying the
investor's risk tolerances and investment objectives, identifying and
recommending in writing an appropriate allocation of assets among the
Portfolios that conforms to those tolerances and objectives, and
providing on a periodic basis a monitoring report to the investor
containing an analysis and evaluation of the investor's TRAK account
and recommending any appropriate changes in the allocation of assets
among the Portfolios. Investors pay an annual fee for their
participation in TRAK, which they may terminate at
[[Page 44911]]
any time. Termination of a TRAK account must be accompanied by a
redemption order for all Portfolio shares held in the account.
6. Applicants request an order permitting the Manager to enter into
Advisory Agreements for the Portfolios without obtaining shareholder
approval, including new Advisory Agreements necessitated because a
prior Advisory Agreement terminated as a result of an assignment (as
defined in section 2(a)(4) of the Act). Although shareholders will not
vote on Sub-Adviser changes, applicants will provide shareholders with
an information statement that includes all the information about a new
Sub-Adviser or Advisory Agreement that would be included in a proxy
statement. The Management Agreement between the Manager and the Trust
would in all cases be subject to the shareholder voting requirements of
the Act.
7. Applicants propose to disclose (both as a dollar amount and as a
percentage of a Portfolio's net assets) in the Trust's registration
statement and other public documents only the aggregate amount of fees
paid by the Manager to all the Sub-Advisers of a Portfolio (``Aggregate
Fee Disclosure''). Aggregate Fee Disclosure means: (a) the total
advisory fee charged by the Manager with respect to each Portfolio; (b)
the aggregate fees paid by the Manager to all Sub-Advisers managing
assets of each Portfolio; and (c) the net advisory fee retained by the
Manager with respect to each Portfolio after the Manager pays all Sub-
Advisers managing assets of the Portfolio. The ``Aggregate Fee
Disclosure'' also will include separate disclosure of any fees paid to
any Sub-Adviser who is an affiliated person (as defined in section
2(a)(3) of the Act) of the Trust or the Manager other than by reason of
serving as a Sub-Adviser to a Portfolio (an ``Affiliated Sub-
Adviser'').
Applicants' Legal Analysis
1. Section 15(a) makes it unlawful for any person to act as an
investment adviser to a registered investment company except pursuant
to a written contract which precisely describes all compensation to be
paid thereunder and which has been approved by a majority of the
investment company's outstanding securities. Rule 18f-2 provides that
each series or class of stock in a series company affected by a matter
must approve such matter if the Act requires shareholder approval.
2. Applicants state that primary responsibility for management of
the Trust, in particular, the selection and supervision of the Sub-
Advisers, is vested in the Manager, subject to oversight and approval
by the Board. Applicants point out that the cover page of the Trust's
prospectus makes clear that the Manager is the primary service provider
to the Trust. Applicants argue that the distinctly different structure
of the Trust renders the identity of a Sub-Adviser of a Portfolio less
relevant to the investment decisions of shareholders of that Portfolio.
Applicants believe that investors who seek the investment advice of
Consulting Group or any other professional asset manager typically have
determined that they are unwilling to assume the burden of selecting an
appropriate mix of investment media to attain their investment
objectives, let alone the appropriate money manager or managers to make
specific investments in accord with those objectives.
3. Applicants also assert that the ability to enter into Advisory
Agreements without shareholders approval would permit the Manager to
perform to the fullest extent the principal function the Portfolios are
paying it to perform--selecting Sub-Advisers, monitoring their
performance, and changing Sub-Advisers when appropriate. To require
that shareholders approve each new Sub-Adviser would result not only in
unnecessary administrative expense to the Portfolios, but could result
in harmful delays in executing changes in Sub-Advisers that the Manager
and the Trustees may determine are necessary.
4. Form N-1A is the registration statement used by open-end
management investment companies to register their securities under the
Act and under the Securities Act of 1933 (the ``Securities Act'').
Items 2, 5(b)(iii), and 16(a)((iii) of Form N-1A require the Funds to
disclose in their prospectuses the investment adviser's compensation
and the method of computing the advisory fee.
5. Item 3 of Form N-14, the registration form for business
combinations involving mutual funds, requires the inclusion of a
``table showing the current fees for the registrant and the company
being acquired and pro forma fees, if different, for the registrant
after giving effect to the transaction using the format prescribed'' in
item 2 of Form N-1A.
6. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the Exchange
Act. Item 22 of Schedule 14A sets forth the requirements concerning the
information that must be included in a proxy statement. Item
22(a)(3)(iv) requires a proxy statement for a shareholder meeting at
which a new fee will be established or an existing fee increased to
include a table of the current and pro forma fees using the format
prescribed in item 2 of Form N-1A. Items 22(c)(1)(ii), 22(c)(1)(iii),
22(c)(8), and 22(c)(9), taken together, require that a proxy statement
for a shareholder meeting at which an advisory contract is to be voted
upon shall include the ``rate of compensation of the investment
adviser,'' the ``aggregate amount of the investment adviser's fee,''
the ``terms of the contract to be acted upon,'' and, if a change in
fees is proposed, the existing and proposed rate schedule for advisory
fees paid to their advisers, including the Sub-Advisers.
7. Form N-SAR is the semi-annual report filed with the SEC by
registered investment companies. Item 48 of Form N-SAR provides that
the Trust must disclose the rate schedule for advisory fees paid to
their advisers, including the Sub-Advisers.
8. Regulation S-X sets forth the requirements for financial
statements required to be included as part of the registration
statements and shareholders reports filed with the SEC under the Act
and under the Securities Act. Items 6-07(2)(a), (b), and (c) of
Regulation S-X require that the Trust's financial statements contain
information concerning fees paid to the Sub-Advisers.
9. Applicants state that all shareholders of the Trust will be
fully advised of the fees charged by the Manager for its management
services because these fees will be disclosed in the Trust's
prospectus. The fees paid to the Manager reflect the total costs and
expenses (including Sub-Advisers' compensation) to the Manager for
managing the Trust's businesses. In addition, all Trust shareholders
will be advised of the aggregate fees paid by the Manager to all Sub-
Advisers of a Portfolio through the Aggregate Fee Disclosure.
Applicants assert that the management fee paid to the Manager will be
negotiated by the Portfolio with the expectation that the Manager will
seek to pay the lowest appropriate advisory fee to the Sub-Advisers.
Applicants argue that disclosing individual Sub-Adviser fees may
inhibit or eliminate the Manager's ability to negotiate fees below the
``posted'' fee rates. Applicants maintain that any advantage that the
Manager would gain in negotiating fee arrangements with Sub-Advisers
would inure ultimately to the benefit of the shareholders of the
Portfolios because it would be possible for the Manager to pass the
benefits of a lower sub-advisory fee on to the
[[Page 44912]]
Portfolios, although the Manager is not legally or contractually
obligated to do so.\2\ They also submit that the nondisclosure of
individual Sub-Adviser's fees is in the best interest of the Portfolios
and their shareholders, because such disclosure would increase costs to
shareholders without an offsetting benefit.
\2\The Board, including the Independent Trustees, would be
required to take the amounts paid by the Manager to the Sub-Advisers
into account when assessing the profitability of the advisory
arrangements to the Manager during the course of their annual review
of the Trust's management and sub-advisory arrangements under
sections 15 and 36(b) of the Act.
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10. Applicants assert that because all shareholders of the Trust
will be fully advised of the fees charged by the Manager for its
management services (which include compensating the Sub-Advisers), each
shareholder will have the information to determine whether, in its
judgment, the total package of services is priced reasonably in
relation to the services and costs that the investor could obtain
elsewhere. Moreover, applicants believe that the Aggregate Fee
Disclosure will provide shareholders with sufficient and clear
information to determine whether they are receiving good value from the
Manager and the Sub-Advisers and whether to redeem their shares if
dissatisfied with the level of performance for the price paid.
11. Section 6(c) authorizes the Commission to exempt persons or
transactions from the provisions of the Act to the extent that such
exemptions are appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policies and provisions of the Act. Applicants assert that their
request satisfies these standards.
Applicants' Conditions
Applicants agree that the following conditions may be imposed in
any order of the Commission granting the requested relief:
1. The Manager will provide general management and, alone or
together with Smith Barney Mutual Funds Management and Boston Advisors,
administrative services to the Trust, including overall supervisory
responsibility for the general management and investment of the Trust's
securities portfolio, and, subject to review and approval by the Board,
will: (a) set the Portfolios' overall investment strategies; (b) select
Sub-Advisers; (c) monitor and evaluate the performance of Sub-Advisers;
(d) allocate and, when appropriate, reallocate a Portfolio's assets
among its Sub-Advisers in those cases where a Portfolio has more than
one Sub-Adviser; and (e) implement procedures reasonably designed to
ensure that the Sub-Advisers comply with the Trust's investment
objectives, policies, and restrictions.
2. Before a Portfolio may rely on the order requested hereby, the
operation of the Portfolio in the manner described in the application
will be approved by a majority of its outstanding voting securities, as
defined in the Act, or, in the case of a new Portfolio whose public
shareholders purchased shares on the basis of a prospectus containing
the disclosure contemplated by condition 4 below, by the sole
stockholder before offering of shares of such Portfolio to the public.
3. The Trust will furnish to shareholders all information about a
new Sub-Adviser or Advisory Agreement that would be included in a proxy
statement, except as modified by the order with respect to the
disclosure of fees paid to the Sub-Advisers. Such information will
include Aggregate Fee Disclosure and any change in such disclosure
caused by the addition of a new Sub-Adviser or any proposed material
change in a Portfolio's Advisory Agreement. The Trust will meet this
condition by providing shareholders with an informal information
statement complying with the provisions of Regulation 14C and Schedule
14C under the Exchange Act. With respect to a newly retained Sub-
Adviser, or a change in an Advisory Agreement, this information
statement will be provided to shareholders of the Portfolio a maximum
of 90 days after the addition of the new Sub-Adviser or the
implementation of any change in an Advisory Agreement. The information
statement will also meet the requirements of Schedule 14A, except as
modified by the order with respect to the disclosure of fees paid to
the Sub-Advisers.
4. The Trust will disclose in its prospectus the existence,
substance, and effect of the order granted pursuant to the application.
5. No Trustee or officer of the Trust or director or officer of the
Manager will own directly or indirectly (other than through a pooled
investment vehicle that is not controlled by such director, trustee, or
officer) any interest in any Sub-Adviser except for: (a) ownership of
interests in the Manager or any entity that controls, is controlled by,
or is under common control with the Manager; or (b) ownership of less
than 1% of the outstanding securities of any class of equity or debt of
a publicly-traded company that is either a Sub-Adviser or an entity
that controls, is controlled by, or is under common control with a Sub-
Adviser.
6. Shares of the Trust will be offered exclusively to participants
in TRAK and other asset allocation services offered by professional
asset managers who, for compensation, engage in the business of
advising others as to the value of securities or as to the advisability
of investing in, purchasing or selling securities.
7. The Trust will disclose in its registration statement the
Aggregate Fee Disclosure.
8. The Manager will not enter into an Advisory Agreement with any
Affiliated Sub-Adviser without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Portfolio.
9. At all times, a majority of the members of the Board will be
persons each of whom is not an ``interested person'' of the Trust as
defined in section 2(a)(19) of the Act (``Independent Trustees''), and
the nomination of new or additional Independent Trustees will be placed
within the discretion of the then existing Independent Trustees.
10. Independent counsel knowledgeable about the Act and the duties
of Independent Trustees will be engaged to represent the Independent
Trustees. The selection of such counsel will be placed within the
discretion of the then existing Independent Trustees.
11. The Manager will provide the Board, no less frequently than
quarterly, information about the Manager's profitability on a per-
Portfolio basis. Such information will reflect the impact on
profitability of the hiring or termination of any Sub-Adviser during
the applicable quarter.
12. Whenever a Sub-Adviser is hired or terminated, the Manager will
provide the Board information showing the expected impact on the
Manager's profitability.
13. When a Sub-Adviser change is proposed for a Portfolio with an
Affiliated Sub-Adviser, the Board, including a majority of the
Independent Trustees, will make a separate finding, reflected in the
Board's minutes, that such change is in the best interests of the
Portfolio and its shareholders and does not involve a conflict of
interest from which the Manager or the Affiliated Sub-Adviser derives
an inappropriate advantage.
[[Page 44913]]
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21361 Filed 8-28-95; 8:45 am]
BILLING CODE 8010-01-M