[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Notices]
[Pages 69694-69696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33364]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23596; 812-10730]
Northern Institutional Funds, et al.; Notice of Application
December 10, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under section 6(c) of the
Investment Company Act of 1940 (``Act'') from section 15(a) of the Act
and rule 18f-2 under the Act as well as certain disclosure
requirements.
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SUMMARY OF APPLICATION: Applicants request an order to permit them to
hire subadvisers and materially amend subadvisory agreements without
shareholder approval, and grant relief from certain disclosure
requirements.
APPLICANTS: Northern Institutional Funds (``NIF''), Northern Funds
(``Northern Funds'') (collectively, the ``Trusts''), The Northern Trust
Company (``Northern''), Northern Trust Quantitative Advisors, Inc.
(``Quantitative''), and The Northern Trust Company of Connecticut
(``Connecticut'') (collectively, the ``Advisers'').
FILING DATE: The application was filed on July 21, 1997, and amended on
July 6, 1998, and December 7, 1998.
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 January 4, 1999,
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 SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 50 South LaSalle Street, Chicago, Illinois 60675.
FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, 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, 450 Fifth Street, N.W. Washington, D.C.
20549 (tel. 202-942-8090).
Applicant's Representations
1. The Trusts are open-end management investment companies
organized as Massachusetts business trusts and registered under the
Act. NIF currently has 17 portfolios and Northern Funds currently has
25 portfolios (collectively, the ``Portfolios''), each of which has its
own investment objectives and policies.
2. Northern, the investment adviser for thirty-five Portfolios, is
an Illinois state-chartered bank and is exempt from registration under
the Investment Advisers Act of 1940 (``Advisers Act''). Quantitative,
the investment adviser to four NIF Portfolios and three Northern
Portfolios, is registered under the Advisers Act. Connecticut,
currently not an investment adviser to any of the Portfolios, is a
state-chartered trust company exempt from registration under the
Advisers Act. Connecticut specializes in evaluating and monitoring the
qualifications and performance of investment advisers. Quantitative,
Northern, and Connecticut are all under the common control of Northern
Trust Corporation.
3. Applicants propose to implement an Adviser/Subadviser structure
for the Portfolios. Under Applicants' proposed structure, Northern and/
or Quantitative each would serve as a co-Adviser with Connecticut, who
would offer its expertise in evaluating and monitoring
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investment subadvisers (``Subadvisers''), to one or more Portfolios.
The Advisers would have overall responsibility for the Portfolios and
would recommend Subadvisers to the Trusts' boards of trustees
(``Boards''). The Advisers would monitor each Subadviser's compliance
with each Portfolio's investment objectives and policies, would review
the performance of each Subadviser, and would periodically report each
Subadviser's performance to the Board. As compensation for their
services, the Advisers would receive a fee from the Portfolios.
4. Under investment advisory agreements between the Advisers and
the Subadvisers (``Subadvisory Agreements'') the specific investment
decisions for each Portfolio would be made by each Subadviser subject
to supervision by the Advisers and ultimately the Boards. The
Subadvisers' fees would be paid by the Advisers out of the fee they
receive from the Portfolios.
5. Applicants request an exemption from section 15(a) of the Act
and rule 18f-2 under the Act to permit Subadvisers approved by the
Boards to serve as portfolio managers for the Portfolios without
obtaining shareholder approval.\1\ Shareholder approval would continue
to be required for any Subadviser that is an ``affiliated person,'' as
defined in section 2(a)(3) of the Act, of the Portfolio or an Adviser
other than by reason of serving as a Subadviser of the Portfolio (an
``Affiliated Subadviser'').
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\1\ Applicants request that the relief also apply to any
registered open-end management investment company created in the
future and each series for which Northern and Connecticut, or any
entity controlling, controlled by, or under common control with
Northern and Connecticut acts as investment adviser (``Future
Funds''). All registered open-end management investment companies
that currently intend to rely on the requested order are named as
applicants and any Future Fund that relies on the order will do so
only in accordance with the terms and conditions contained in the
application.
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6. Applicants also request an exemption from the various disclosure
provisions described below that may require the Portfolios to disclose
the fees paid by the Adviser to the Subadvisers. Each Portfolio will
disclose the following (both as a dollar amount and as a percentage of
a Portfolio's net assets): (1) aggregate fees paid to the Advisers and
Affiliated Subadvisers; and (2) aggregate fees paid to Subadvisers
other than Affiliated Subadvisers (``Aggregate Fee Disclosure''). For
any Portfolio that employs an Affiliated Subadviser, the Portfolio will
provide separate disclosure of any fees paid to such Affiliated
Subadviser.
Applicants' Legal Analysis
Shareholder Voting
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 which has been
approved by the vote of a majority of the outstanding voting securities
of the registered investment company. Rule 18f-2 under the Act provides
that each series of stock in a series investment company effected by a
manner must approve that matter if the Act requires shareholder
approval.
2. Section 6(c) authorizes the SEC to exempt persons or
transactions from the provisions of the Act to the extent that such
exemptions are appropriation in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policies and provisions of the Act.
3. Applicants request an order under section 6(c) of the Act from
section 15(a) of the Act and rule 18f-2 under the Act to permit them to
enter into and materially amend Subadvisory Agreements without
shareholder approval. Applicants assert that when the Portfolios
implement the Adviser/Subadviser structure, a Portfolio's investors
will rely on the Advisers to select Subadvisers best suited to achieve
the Portfolio's investment objectives. Applicants assert that
Connecticut, which will serve as co-Adviser to the Portfolios, has over
fifteen years of experience evaluating investment advisory firms. In
evaluating investment advisers, Connecticut considers, among other
factors, the adviser's level of expertise, relative performance,
consistency of performance compared with investment discipline and
philosophy, investment personnel, financial strength, and quality of
service. Applicants state that, in addition to selecting and monitoring
Subadvisers, the Advisers will supervise the Portfolios' overall
investment programs.
4. Applicants state that, from the perspective of an investor, the
role of the Subadvisers will be similar to that of individual portfolio
managers employed by traditional investment advisory firms. Applicants
assert that the requested relief would allow the Portfolios to operate
the proposed Adviser/Subadviser structure more efficiently. Applicants
also note that each Portfolio's investment advisory agreement with the
Advisers will remain subject to the shareholder approval requirements
of section 15 of the Act and rule 18f-2 under the Act.
Fee Disclosure
Applicants also request relief under section 6(c) of the Act from
certain disclosure requirements to provide Aggregate Fee Disclosure.
5. Form N-1A is the registration statement used by open-end
investment companies. Items 3, 6(a)(i), and 15(a)(3) of Form N-1A
require disclosure of the method and amount of an investment adviser's
compensation.
6. Form N-14 is the registration form for business combinations
involving open-end investment companies. Item 3 of Form N-14 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.''
7. 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''). Item 22(a)(3)(iv)
of Schedule 14A requires a proxy statement for a shareholder meeting at
which a new fee will be established or an existing fee will be
increased to include a table of the current and pro forma fees. Items
22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9), 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.
8. Form N-SAR is the semi-annual report filed with the SEC by
registered investment companies. Item 48 of Form N-SAR requires
investment companies to disclose the rate schedule for fees paid to
their investment advisers, including the Subadvisers.
9. 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 SEC.
Sections 6-07(2)(a), (b), and (c) of Regulation S-X require that
investment companies include in their financial statements information
about investment advisory fees.
10. Applicants assert that the information provided in the
Aggregate Fee Disclosure would give investors adequate information to
compare the
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advisory fees of the Portfolios with those of other funds. Applicants
also assert that some Subadvisers use a ``posted'' rate schedule to set
their fees, particularly at lower asset levels. Based upon the
Advisers' discussions with prospective Subadvisers, applicants believe
that some organizations may be unwilling to serve as Subadvisers at any
fee rate other than their ``posted'' fee rates, unless the rate
negotiated for the Portfolios is not publicly disclosed. Applicants
state that requiring disclosure of each Subadviser's fees may deprive
the Advisers of their bargaining power while producing no benefit to
shareholders, since the total advisory fee the shareholders pay would
not be affected.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. The Advisers will provide general investment management services
to the Portfolios, including overall supervisory responsibility for the
general management and investment of the Portfolios' securities, and,
subject to review and approval by each Board with respect to its
respective Portfolios, will: (a) set the Portfolios' overall investment
strategies; (b) recommend and select Subadvisers; (c) allocate and
reallocate the Portfolio's assets among Subadvisers in those cases
where a Portfolio has more than one Subadviser; (d) monitor and
evaluate Subadviser performance; and (e) implement procedures to ensure
that the Subadvisers comply with the relevant Portfolio's investment
objective, policies, and restrictions.
2. Before a Portfolio may rely on the requested order, the
operation of the Portfolio as described in the application will be
approved by a majority of the Portfolio's outstanding voting
securities, as defined in the Act, or, in the case of a new Portfolio
whose public shareholders purchase shares on the basis of a prospectus
containing the disclosure addressed in condition 3 below, by the sole
shareholder before offering shares of such Portfolio to the public.
3. Each Portfolio relying on the requested order will disclose in
its prospectus the existence, substance, and effect of the order
granted pursuant to this application. In addition, each Portfolio will
hold itself out to the public as employing the Adviser/Subadviser
structure described in the application. The prospectus will prominently
disclose that the Advisers have ultimate responsibility to oversee
Subadvisers and to recommend their hiring, termination, and
replacement.
4. Within ninety (90) days of the hiring of any new Subadviser, the
affected Portfolio will furnish its shareholders all information about
the new Subadviser. The information will include any change in the
disclosure caused by the addition of a new Subadviser of the Portfolio.
The Portfolios will meet this obligation by providing shareholders
within 90 days of the hiring of a new Subadviser an information
statement meeting the requirements of Regulation 14C, Schedule 14C, and
Item 22 of Schedule 14A under the Exchange Act, except as modified by
Aggregate Fee Disclosure.
5. No Trustee, director, or officer of a Trust or the Advisers will
own direct or indirectly (other than through a pooled investment
vehicle over which such person does not have control) any interest in
any Subadviser except for (a) ownership of interests in the Advisers or
any entity that controls, is controlled by or is under common control
with the Advisers; 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 Subadviser or an entity that controls, is controlled
by or is under common control with a Subadviser.
6. The Advisers will not enter into a Subadvisory Agreement with
any Affiliated Subadviser without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Portfolio.
7. At all times, a majority of the members of each Board, including
a majority of the trustees will be persons who are not ``interested
persons'' of the Trusts 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.
8. When a Subadviser change is proposed for a Portfolio with an
Affiliated Subadviser 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 Advisers or the Affiliated Subadviser derives
an inappropriate advantage.
9. Each Portfolio will disclose in its registration statement the
respective Aggregate Fee Disclosure.
10. At all times, independent counsel knowledgeable about the Act
and the duties of Independent Trustees will be engaged to represent the
Independent Trustees of the Trust involved. The selection of such
counsel will be placed within the discretion of the Independent
Trustees.
11. The Advisers will provide the Board of each Trust, no less
frequently than quarterly, with information about the Advisers'
profitability for each Portfolio using an Adviser/Subadviser structure.
Such information will reflect the impact on profitability of the hiring
or termination of Subadvisers during the quarter.
12. Whenever a Subadviser to a particular Portfolio is hired or
terminated, the Advisers will provide the Board with information
showing the expected impact on the Advisers' profitability.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33364 Filed 12-16-98; 8:45 am]
BILLING CODE 8010-01-M