[Federal Register Volume 63, Number 155 (Wednesday, August 12, 1998)]
[Notices]
[Pages 43223-43226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21594]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23381, 812-10990]
Morgan Stanley, Dean Witter, Discover & Co., et al.; Notice of
Application
August 6, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application under (a) sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the ``Act'') requesting an exemption
from section 17(a) of the Act; (b) section 6(c) of the Act requesting
an exemption from section 17(e) of the Act and rule 17e-1 under the
Act; and (c) section 10(f) of the Act requesting an exemption from
section 10(f) and rule 10f-3 under the Act.
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SUMMARY OF APPLICATION: Applicants request an order to permit
registered open-end investment companies that have one or more
investment advisers and for which Morgan Stanley Asset Management
(``MSAM'') or Miller, Anderson & Sherred, LLP (``MA&S'') acts as an
investment adviser, to engage in certain principal and brokerage
transactions with Morgan Stanley, Dean Witter, Discover & Co.
(``MSDWD'') and to purchase securities in certain underwritings. The
transactions would be between MSDWD, or a member of an underwriting
syndicate in which MSDWD is a participant, and those portions of the
investment companies' portfolios that are not advised by MSAM or MA&S.
The order also would permit the investment companies not to aggregate
certain purchases from an underwriting syndicate in which MSDWD is a
principal underwriter.
[[Page 43224]]
APPLICANTS: AMR Investment Services Trust (``AMR Trust''), Variable
Annuity Portfolios, MSDWD, MSAM, and MA&S.
FILING DATE: The application was filed on February 3, 1998. Applicants
have ageeed to file an amendment, the substance of which is
incorporated in this notice, during the notice period.
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 August 31, 1998,
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 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: AMR Trust, 4333 Amon Carter Blvd., MD 5645, Fort
Worth, Texas 76155; Variable Annuity Portfolios, 21 Milk Street, 5th
Floor, Boston, Massachusetts 02109; MSDWD, 1585 Broadway, New York, New
York 10036; MSAM, 1221 Avenue of the Americas, New York, New York
10020; and MA&S, One Tower Bridge, West Conshohocken, Pennsylvania
19428.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Senior Counsel, at
(202) 942-0572, or Christine Y. Greenlees, Branch Chief, at (202) 942-
0564 (Office of Investment Company Regulation, Division of Investment
Management).
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, 450 Fifth Street, N.W., Washington,
DC 20549 (tel. 202-942-8090).
Applicants' Representations
1. MSDWD is registered as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser under the Investment
Advisers Act of 1940 (``Advisers Act''). MSAM and MA&S are controlled
by MSDWD and are registered as investment advisers under the Advisers
Act.
2. AMR Trust and Variable Annuity Portfolios are open-end
investment companies registered under the Act and each consists of
several portfolios. AMR Trust is advised by AMR Investment Services,
Inc. and is a ``master fund'' with several feeder funds. Variable
Annuity Portfolios is advised by Citibank, N.A. MSAM currently serves
as a subadviser to a portion of one portfolio of AMR Trust and MA&S
currently serves as a subadviser to a portion of several portfolios of
the Variable Annuity Portfolios, each of which are otherwise
unaffiliated with MSAM, MA&S, or MSDWD (the ``Portfolios''). In each
case, the other portions are advised by investment subadvisers
(``Subadvisers'') that are not affiliated persons, or affiliated
persons of an affiliated person, of MSDWD (each, an ``Unaffiliated
Subadviser,'' and each portion, an ``Unaffiliated Portion'').\1\
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\1\ The term Unaffiliated Subadviser includes investment
advisers that manage discrete portions of multi-managed Portfolios,
whether or not the Portfolios have a primary adviser that is
responsible for the overall investment performance of the fund and
monitoring the Subadvisers. In addition, the term includes a primary
adviser to the extent the primary adviser is responsible for a
portion of a multi-managed Portfolio.
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3. Applicants request that the relief apply to any registered open-
end investment company for which MSAM, MA&S, or any entity controlled
by, controlling, or under common control with MSDWD now or in the
future acts as investment adviser (collectively with MSAM and MA&S,
``MSDWD Advisers'').\2\ Applicants also request relief for any broker-
dealer controlling, controlled by, or under common control with MSDWD
(collectively with MSDWD, ``Affiliated Broker-Dealers'').
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\2\ All registered open-end investment companies that currently
intend to rely on the order are named as applicants. Any other
existing or future registered open-end investment company that
relies on the order will comply with the terms and conditions of the
application. Any registered open-end investment company for which an
MSDWD Adviser may act as investment adviser is also a ``Portfolio.''
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4. The Portfolios use a multi-manager structure in which separate
Subadvisers, including MSDWD Advisers, are used to manage discrete
portions of the Portfolio. Each Subadviser acts as if it were managing
a separate investment company. The Subadvisers do not collaborate, and
each is responsible for making independent investment and brokerage
allocation decisions for its portion based on its own research and
analysis. The Subadvisers do not receive information about investment
or brokerage allocation decisions of another portion of the Portfolio
before they are implemented. Each Subadviser is compensated based only
on a percentage of the value of the Portfolio's assets allocated to it.
Applicants state that MSDWD does not and will not control any Portfolio
for which an MSDWD Adviser acts as Subadviser.
5. Applicants request relief to permit (a) Unaffiliated Portions to
engage in principal transactions with Affiliated Broker-Dealers and to
purchase securities in an underwriting in which an Affiliated Broker-
Dealer acts as a principal underwriter. (b) Unaffiliated Portions to
engage in brokerage transactions with Affiliated Broker-Dealers, when
the Affiliated Broker-Dealer acts as broker in the ordinary course of
business, without complying with subsections (b) and (c) of rule 17e-1
under the Act, and (c) portions of Portfolios advised by an MSDWD
Adviser (``Affiliated Portions'') to purchase securities in an
underwriting without aggregating that Portion's purchase with purchases
of Unaffiliated Portions as required by rule 10f-3(b)(7) under the Act.
Applicants' Legal Analysis
A. Principal Transactions Between Unaffiliated Portions and Affiliated
Broker-Dealers
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and an affiliated
person, or an affiliated person of an affiliated person, of the
company. Sections 2(a)(3)(C) and (E) of the Act define an ``affiliated
person'' of another person to be any person controlling, controlled by,
or under control with the person, and any investment adviser of an
investment company, respectively. Applicants believe that an MSDWD
Adviser acting as a Subadviser of a Portfolio would be an affiliated
person of that Portfolio, and each Affiliated Broker-Dealer would be an
affiliated person of the MSDWD Adviser and as affiliated person of an
affiliated person (``second-tier affiliate'') of the Portfolio. As a
result, applicants believe that any principal transaction between an
Unaffiliated Portion and an Affiliated Broker-Dealer would be
prohibited by section 17(a).
2. Applicants request relief from section 17(a) to permit principal
transactions entered into in the ordinary course of business between
the Unaffiliated Portion and an Affiliated Broker-Dealer. Applicants
state that the relief would apply only when an Affiliated Broker-Dealer
is deemed to be an affiliated person or a second-tier affiliate of a
Portfolio solely because an MSDWD Adviser is the subadviser to another
portion of the same Portfolio.
3. Section 6(c) permits the SEC to exempt any person or transaction
from
[[Page 43225]]
any provision of the Act, if the exemption is necessary or appropriate
in the public interest and consistent with the protection of investors
and the purposes fairly intended by the policies of the Act. Section
17(b) permits the SEC to grant an order permitting a transaction
otherwise prohibited by section 17(a) if it finds that the terms of the
proposed transaction are fair and reasonable and do not involve
overreaching on the part of any person concerned, and the proposed
transaction is consistent with the policy of each registered investment
company and the general purposes of the Act. For the reasons stated
below, applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b).
4. Applicants contend that section 17(a) is intended to prevent
persons who have the power to influence an investment company from
using that influence to their own pecuniary advantage. Applicants
assert that when a person acting on behalf of an investment company has
no direct or indirect pecuniary interest in a party to a principal
transaction, then the abuses that section 17(a) was designed to prevent
are not present.
5. Applicants assert that each Subadviser's contract assigns it
responsibility to manage a discrete portion of the Portfolio. Each
Subadviser is responsible for making independent investment and
brokerage allocation decisions based on its own research and credit
evaluations. Applicants state that no MSDWD Adviser will serve as
Subadviser to any Portfolio where the primary adviser to the Portfolio
dictates or influences brokerage allocation or investment decisions, or
has the contractual right to do so. Applicants submit that in managing
a discrete portion of a Portfolio, each Subadviser acts for all
practical purposes as though it is managing a separate investment
company. Further, applicants state that, for each transaction for which
relief is requested, the Unaffiliated Subadviser would be dealing with
an Affiliated Broker-Dealer that is a competitor of that Subadviser.
Applicants believe therefore, that each transaction would be the
product of arm's length bargaining.
6. Applicants state that the proposed transactions will be
consistent with the policies of the Portfolio, since each Unaffiliated
Subadviser is required to manage the Unaffiliated Portion of the
Portfolio in accordance with the investment objectives and related
investment policies of the Portfolio as described in its registration
statement. Applicants also assert that permitting the transactions will
be consistent with the general purposes of the act and in the public
interest because the ability to engage in the transactions will
increase the likelihood of a Portfolio achieving best price and
execution on its principal transactions while giving rise to none of
the abuses that section 17(a) was designed to prevent.
B. Payment of Brokerage Compensation by Unaffiliated Portions to
Affiliated Broker-Dealers
1. Section 17(e)(2) of the Act prohibits an affiliated person or a
second-tier affiliate of a registered investment company from receiving
compensation for acting as broker in connection with the sale of
securities to or by the company if the compensation exceeds the limits
prescribed by the section unless otherwise permitted by rule 17e-1
under the Act. Rule 17e-1(a) provides that brokerage compensation paid
pursuant to the rule must be reasonable and fair compared with
compensation paid in comparable transactions. Rule 17e-1(b) requires
the investment company's board of directors, including a majority of
the directors who are not interested persons under section 2(a)(19) of
the act, to adopt procedures regarding brokerage compensation paid
pursuant to the rule and to determine at least quarterly that all
transactions effected in reliance on the rule complied with the
procedures. Rule 17e-1(c) specifies the records that must be maintained
by each investment company with respect to any transaction effected
pursuant to rule 17e-1.
2. Applicants state that, for the reasons discussed above,
Affiliated Broker-Dealers are second-tier affiliates of the
Unaffiliated Portions and thus subject to section 17(e). Applicants
request an exemption under section 6(c) from the provisions of section
17(e) and rule 17e-1 to the extent necessary to permit the Unaffiliated
Portions to pay brokerage compensation to Affiliated Broker-Dealers,
when the Affiliated Broker-Dealer acts as broker in the ordinary course
of business, without complying with the requirements of rule 173-1(b)
and (c). Applicants believe that the proposed brokerage transactions
meet the standards of section (c) of the Act for the same reasons that
the proposed principal transactions satisfy the standards. In addition,
applicants state that the brokerage transactions will comply with the
requirement of rule 17e-1(a) that the brokerage compensation be fair
and reasonable. Applicants also note that the Unaffiliated Subadvisers
will be subject to a fiduciary duty to obtain best execution for the
Unaffiliated Portion. Applicants thus believe that an exemption from
the requirements of rule 17e-1(b) and (c) would be appropriate.
C. Purchases of Certain Securities by Unaffiliated Portions
1. Section 10(f) of the Act, in relevant part, prohibits a
registered investment company from knowingly purchasing or otherwise
acquiring during the existence of any underwriting or selling
syndicate, any security (except a security of which the company is the
issuer) a principal underwriter of which is an officer, director,
member of an advisory board, investment adviser, or employee of the
company, or an affiliated person of any of the foregoing. Section 10(f)
also provides that the SEC may exempt by order any transaction or
classes of transactions from any of the provisions of section 10(f), if
and to the extent that such exemption is consistent with the protection
of investors. Rule 10f-3 exempts certain transactions from the
prohibitions of section 10(f) if specified conditions are met.
Paragraph (b)(7) of rule 10f-3 provides that the amount of securities
of any class of an issue to be purchased by the investment company, or
by two or more investment companies having the same investment adviser,
shall not exceed certain percentages specified in the rule.
2. Applicants state that when an MSDWD Adviser acts as a Subadviser
to a Portfolio, it is considered to be an investment adviser to the
entire Portfolio. Applicants therefore believe that all purchases of
securities by an Unaffiliated Portion from an underwriting syndicate a
principal underwriter of which is an Affiliated Broker-Dealer would be
subject to section 10(f).
3. Applicants request relief under section 10(f) from that section
to permit Unaffiliated Portions to purchase securities during the
existence of an underwriting or selling syndicate, a principal
underwriter of which is an Affiliated Broker-Dealer. In addition, in
the event an Affiliated Portion purchases securities in reliance on
rule 10f-3, applicants request an exemption under section 10(f) from
rule 10f-3 so that an MSDWD Adviser will not be required to aggregate
those purchases with any purchases of the same security by Unaffiliated
Portions. Applicants request relief only to the extent that section
10(f) applies because an MSDWD Adviser is an investment adviser to the
Portfolio. Applicants believe that the proposed transactions meet the
standards set forth in section 10(f).
[[Page 43226]]
4. Applicants state that section 10(f) was adopted in response to
concerns about the ``dumping'' of otherwise unmarketable securities on
investment companies, either by forcing the investment company to
purchase unmarketable securities from its underwriting affiliate, or by
forcing or encouraging the investment company to purchase the
securities from another member of the syndicate. Applicants submit that
these abuses are not present in the context of the Portfolios because,
as discussed above, a decision by a Subadviser to one discrete portion
of a Portfolio to purchase securities from an underwriting syndicate, a
principal underwriter of which is an affiliated person of a Subadviser
to a different portion of the same Portfolio, involves no potential for
``dumping.'' In addition, applicants assert that aggregating purchases
would serve no purpose because any common purchases would be
coincidence, and not the result of a decision by a single Subadviser,
because there is no collaboration among Subadvisers.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. Each Portfolio will be advised by a MSDWD Adviser and at least
one Unaffiliated Subadviser and will be operated consistent with the
manner described in the application.
2. Neither the MSDWD Adviser (except by virtue of serving as
Subadviser) nor the Affiliated Broker-Dealer will be an affiliated
person or a second-tier affiliate of any Unaffiliated Subadviser or any
officer, trustee or employee of the Portfolio engaging in the
transaction.
3. No MSDWD Adviser will directly or indirectly consult with any
unaffiliated Subadviser concerning allocation of principal or brokerage
transactions.
4. No. MSDWD Adviser will participate in any arrangement under
which the amount of its subadvisory fees will be affected by the
investment performance of an Unaffiliated Subadviser.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-21594 Filed 8-11-98; 8:45 am]
BILLING CODE 8010-01-M