[Federal Register Volume 60, Number 29 (Monday, February 13, 1995)]
[Notices]
[Pages 8262-8265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3459]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20883; 812-9304]


Frank Russell Investment Company, et al.; Notice of Application

February 6, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: Frank Russell Investment Company, including all current and 
future series thereof, (the ``Investment Company''); Frank Russell 
Investment Management Company (``FRIMCo''), Russell Fund Distributors, 
Inc. (``RFD''), and all future registered open-end management 
investment companies distributed by RFD or for which FRIMCo serves in 
the future as investment adviser, or for which any person controlling, 
controlled by, or under common control with FRIMCo (within the meaning 
of section 2(a)(9) of the Act) may in the future serve as investment 
adviser.

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for conditional exemptions from sections 18(f), 18(g), and 18(i) of the 
Act.

SUMMARY OF APPLICATION: Applicants seek an order that would permit them 
to issue an unlimited number of classes of shares representing 
interests in the same portfolio of securities.

FILING DATE: The application was filed on October 25, 1994, and was 
amended on January 9, 1995, and on February 1, 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 March 3, 1995, 
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, 909 A Street, Tacoma, Washington 98402.

FOR FURTHER INFORMATION CONTACT:
Sarah A. Wagman, Staff Attorney, (202) 942-0654, or Barry D. Miller, 
Senior Special Counsel, (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.

Applicants' Representations

    1. The Investment Company is a Massachusetts business trust 
registered under the Act as an open-end management investment company. 
The Investment Company is a series company and consists of twenty-two 
separate series, each of which has separate investment objectives and 
policies (the existing and future series of the Investment Company are 
collectively referred to as the ``Funds''). FRIMCo is the investment 
adviser (the [[Page 8263]] ``Adviser'') and RFD is the distributor of 
the Investment Company. The Funds consist of both money market funds 
and funds with fluctuating net asset values, the shares of which are 
sold and redeemed daily at net asset value without a sales or 
redemption change.
    2. Applicants proposed to create a multi-class distribution 
system.\1\ The Investment Company would be permitted to offer an 
unlimited number of additional classes of shares (``New Shares'') in 
connection with (a) a plan adopted pursuant to rule 12b-1 under the Act 
(the ``Services Plan''); and/or (b) a non-rule 12b-1 administrative 
plan (the ``Shareholder Administrative Plan''); or (c) neither the 
Services Plan nor the Shareholder Administrative Plan (collectively, 
the ``Plans''). The services provided pursuant to the Plans will 
augment or replace (and not be duplicative of) the services to be 
provided to the Funds by FRIMCo and RFD. Applicants propose to 
``unbundle'' the services to be provided to the Funds to permit 
organizations, such as broker-dealers or banks, to select those 
services they wish to provide to their customers under Services Plan 
agreements and/or Shareholder Administrative Plan agreements 
(collectively, ``Plan Agreement'').\2\

    \1\Existing shares of the Funds are expected to comprise one or 
more different classes.
    \2\ Twelve of the Funds (the ``Internal Fee Funds'') follow the 
conventional practice of paying FRIMCo a management fee from Fund 
assets. Ten of the Funds (the ``External Fee Funds'') require 
investors to pay a management fee directly to FRIMCo pursuant to 
contracts between each investor and FRIMCo. Each shareholder of an 
External Fee Fund pays the same pro rata amount for advisory 
services as each other shareholder of the Fund. In the future, 
FRIMCo may elect to ``internalize'' the portion of the management 
fee attributable to advisory services, administrative services, or 
both, so that fees for those services are deducted from Fund assets 
in the same manner as done for the Internal Fee Funds. In no event, 
if the requested relief is granted, would a Fund issue both a class 
of shares with an internal fee arrangement and one with an external 
fee arrangement.
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    3. A Fund would pay the distributor and/or an organization for its 
services and assistance in accordance with the terms of its particular 
Plan Agreement(s) (the ``Plan Payments''). Plan Payments will not 
exceed the limits imposed under Article III, Section 26 of the Rules of 
Fair Practice of the National Association of Securities Dealers 
(``NASD'').
    4. The New Shares of a Fund would be identical in all respects, 
except that: (a) Each class of New Shares would have a different class 
designation; (b) each class of New Shares offered in connection with a 
Plan would bear the expense of the Plan Payments applicable to such 
class; (c) each class of New Shares could, as more fully described 
below, also bear certain other expenses (``Class Expenses'') that are 
directly attributable only to the class; (d) only the holders of the 
New Shares of the class or classes involved would be entitled to vote 
on matters pertaining to a Plan and any related agreements relating to 
such class or classes; and (e) classes of New Shares may have different 
exchange privileges.
    5. Expenses of the Investment Company that cannot be attributed 
directly to any one Fund will be allocated to each Fund based on the 
relative net assets of such Fund (``Investment Company Expenses''). 
Expenses that may be attributable to a Fund but not to a particular 
class will be allocated to a class (``Fund Expenses'').
    6. FRIMCo may choose to reimburse or waive Class Expenses of 
certain classes on a voluntary, temporary basis. The amount of Class 
Expenses waived or reimbursed by FIRMCo may vary from class to class. 
Class Expenses are, by their nature, specific to a given class and 
therefore are expected to vary from one class to another. Applicants 
thus believe that it is acceptable and consistent with shareholder 
expectations to reimburse or waive Class Expenses at different levels 
for different classes of the same Fund.
    7. In addition, FRIMCo may waive or reimburse Investment Company 
Expenses and/or Fund Expenses (with or without a waiver or 
reimbursement of Class Expenses) but only if the same proportionate 
amount of Investment Company Expenses and/or Fund Expenses is waived or 
reimbursed for each class. Thus, any Investment Company Expenses that 
are waived or reimbursed would be credited to each class of a Fund 
based on the relative net assets of the classes. Similarly, any Fund 
Expenses that are waived or reimbursed would be credited to each class 
of that Fund according to the relative net assets of the classes. 
Investment Company Expenses and Fund Expenses apply equally to all 
classes of a given Fund. Accordingly, it may not be appropriate to 
waive or reimburse Investment Company Expenses or Fund Expenses at 
different levels for different classes of the same Fund.
    8. The Investment Company may also offer classes of shares 
(``Institutional Shares'') that are available solely to: (a) 
Unaffiliated benefit plans, such as qualified retirement plans, other 
than individual retirement accounts and self-employed retirement plans, 
with total assets in excess of such minimum amounts as the Funds may 
establish and with such other characteristics as the Funds may 
establish;\3\ (b) tax-exempt retirement plans of FRIMCo and its 
affiliates, including the retirement plans of FRIMCo's affiliated 
brokers; (c) banks and insurance companies that are not affiliated with 
FRIMCo purchasing for their own investment; (d) investment companies 
not affiliated with FRIMCo; and (e) endowment funds of non-profit 
organizations that are not affiliated with FRIMCo (each, an 
``Institutional Investor'').

    \3\These plans will have a separate trustee who is vested with 
investment discretion as to plan assets, will have limitations on 
the ability of plan beneficiaries to access their plan investments 
without incurring adverse tax consequences, and will not include 
self-directed plans.
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    9. Each class of Institutional Shares will have attributes designed 
to meet specific investment needs of a particular category of 
Institutional Investor. Institutional Shares will be subject to either 
lower or no servicing fees under any Plan, and may bear lower transfer 
agency fees and other operating expenses than some other classes of 
shares. Only Institutional Investors will be eligible to invest in 
Institutional Shares. Applicants may choose not to make a particular 
class of Institutional Shares available to one or more categories of 
Institutional Investors.
    No Institutional Investor that is eligible to invest in any class 
of Institutional Shares will be permitted to invest in any class other 
than a class of Institutional Shares. Accordingly, there will be no 
overlap between the investors eligible to invest in Institutional 
Shares and investors eligible to invest in other shares of a Fund.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to section 6(c) of the Act 
exempting them from sections 18(f)(1) and 18(g) of the Act to the 
extent that the proposed issuance and sale of an unlimited number of 
classes of new Shares may result in a ``senior security'' prohibited by 
section 18(f), and in a violation of section 18(i), to the extent that 
the different voting rights associated with such classes may be deemed 
to result in one or more classes of shares having unequal voting rights 
with other classes of shares.
    2. The proposed allocation of expenses and voting rights relating 
to the Plans in the manner described is equitable and would not 
discriminate against any group of shareholders. The proposed 
arrangement does not involve borrowing and does not affect a Fund's 
existing assets or reserves. Nor will the proposed arrangement increase 
the speculative character of a Fund's shares, [[Page 8264]] since all 
such shares will participate pro rata in all of the Fund's income and 
all of the Fund's expenses (with the exception of the proposed Plan 
Payments and Class Expenses).

Applicants' Conditions

    Applications agree that the order granting the requested relief 
will be subject to the following conditions:
    1. Each class of shares of a Fund will represent interests in the 
same portfolio of investments, and be identical in all respects, except 
for differences related to: (a) Class designation; (b) expenses 
assessed to a class pursuant to a Services Plan or Shareholder 
Administrative Plan; (c) certain Class Expenses, which would be limited 
to (i) transfer agent fees identified by the transfer agent as being 
attributable to a specific class of shares; (ii) stationery, printing, 
postage, and delivery expenses related to preparing and distributing 
materials such as shareholder reports, prospectuses, and proxies to 
current shareholders of a specific class; (iii) blue sky registration 
fees incurred by a class of shares; (iv) SEC registration fees incurred 
by a class of shares; (v) the expense of the Investment Company's 
administrative personnel and services as required to support the 
shareholders of a specific class; (vi) litigation or other legal 
expenses relating to one class of shares; (vii) Trustees' fees incurred 
as a result of issues relating to one class of shares; (viii) 
independent accountants' fees related solely to a specific class of 
shares; (ix) expenses incurred in connection with shareholder meetings 
as a result of issues relating to one class of shares; and (x) account 
expenses relating to a particular class of shares; (d) voting rights as 
to matters exclusively affecting one class of shares; and (e) exchange 
privileges. Any additional incremental expenses not specifically 
identified above which are subsequently identified and determined to be 
properly allocated to one class of shares shall not be so allocated 
until approved by the Commission pursuant to an amended order.
    2. The Trustees of the Investment Company, including a majority of 
the independent Trustees, will approve the offering of different 
classes of New Shares (the ``Multi-Class System'') with respect to a 
particular Fund, prior to the implementation of the Multi-Class System 
by the Fund. The minutes of the meetings of the Trustees regarding the 
deliberations of the Trustees with respect to the approval necessary to 
implement the Multi-Class System will reflect in detail the reasons for 
the Trustees' determination that the proposed Multi-Class System is in 
the best interests of the Fund and its shareholders.
    3. The initial determination of the Class Expenses, if any, that 
will be allocated to a particular class and any subsequent changes 
thereto will be reviewed and approved by a vote of the Board of 
Trustees of the Investment Company, including a majority of the 
independent Trustees. Any person authorized to direct the allocation 
and disposition of monies paid or payable by a Fund to meet Class 
Expenses shall provide to the Board of Trustees, and the Trustees shall 
review, at least quarterly, a written report of the amounts so expanded 
and the purposes for which such expenditures were made.
    4. On an ongoing basis, the Trustees, pursuant to their fiduciary 
responsibilities under the Act and otherwise, will monitor the Funds 
for the existence of any material conflicts among the interests of the 
various classes of shares. The Trustees, including a majority of the 
independent Trustees, shall take such action as is reasonably necessary 
to eliminate any such conflicts that may develop. FRIMCo and RFD will 
be responsible for reporting any potential or existing conflicts to the 
Trustees. If a conflict arises, FRIMCo and RFD at their own cost will 
remedy such conflict up to and including establishing a new registered 
management investment company.
    5. RFD, as the Investment Company's distributor, will adopt 
compliance standards as to when each class of shares may be sold to 
particular investors. Applicants will require all persons selling 
shares of the Funds to agree to conform to such standards. Such 
compliance standards will require that all investors eligible to 
purchase Institutional Shares be sold only Institutional Shares, rather 
than any other class of shares offered by the Fund.
    6. The Shareholder Administrative Plan will be adopted and operated 
in accordance with the procedures set forth in rule 12b-1 (b) through 
(f) as if the expenditures made thereunder were subject to rule 12b-1, 
except that shareholders need not enjoy the voting rights specified in 
rule 12b-1.
    7. The Trustees will receive quarterly and annual statements 
concerning the amounts expended under the Shareholder Administrative 
Plan and Services Plan and the related Plan Agreements complying with 
paragraph (b)(3)(ii) of rule 12b-1, as it may be amended from time to 
time. In the statements, only expenditures properly attributable to the 
sale or servicing of a particular class of shares will be used to 
justify any distribution or servicing fee charged to that class. 
Expenditures not related to the sale or servicing of a particular class 
will not be presented to the Trustees to justify any fee attributable 
to that class. The statements, including the allocations upon which 
they are based, will be subject to the review and approval of the 
independent Trustees in the exercise of their fiduciary duties.
    8. Dividends paid by a Fund with respect to a class of shares will 
be calculated in the same manner, at the same time, on the same day, 
and will be in the same per share amount as dividends paid by that Fund 
with respect to each other class of shares of the Fund, except that the 
amount of dividends declared and paid by a particular class may be 
different from another class because Plan Payments made by a class 
under its Plan and any Class Expenses will be borne exclusively by the 
affected class.
    9. The methodology and procedures for calculating the net asset 
value and dividends/distributions of the various classes and the proper 
allocation of expenses among the classes has been reviewed by an expert 
(the ``Expert'') who has rendered a report to the applicants concluding 
that such methodology and procedures are adequate to ensure that such 
calculations and allocations would be made in an appropriate manner. 
The Expert's report is attached as Exhibit F to the originally filed 
application, and is incorporated by reference. On an ongoing basis, the 
Expert, or an appropriate substitute Expert, will monitor the manner in 
which the calculations and allocations are being made and, based upon 
such review, will render at least annually a report to the Investment 
Company that the calculations and allocations are being made properly. 
The reports of the Expert will be filed as part of the periodic reports 
filed with the Commission pursuant to sections 30(a) and 30(b)(1) of 
the Act and the work papers of the Expert with respect to such reports, 
following request by the Investment Company (which the Investment 
Company agrees to provide), will be available for inspection by the 
Commission staff upon written request by a senior member of the 
Division of Investment Management or a regional office of the 
Commission. Authorized staff members would be limited to the director, 
an associate director, the chief accountant, the chief financial 
analyst, an assistant director, and any regional administrators or 
associate and assistant administrators. The initial report of the 
Expert is a ``Special Purpose'' report on [[Page 8265]] ``policies and 
procedures placed in operation'' in accordance with Statements on 
Auditing Standards (``SAS'') No. 70. ``Reports on the Processing of 
Transactions by Service Organizations,'' of the American Institute of 
Certified Public Accountants (``AICPA''). Ongoing reports will be 
reports on ``policies and procedures placed in operation and tests of 
operating effectiveness'' prepared in accordance with SAS No. 70 of the 
AICPA, as it may be amended from time to time, or in similar auditing 
standards as may be adopted by the AICPA from time to time.
    10. Applicants have adequate facilities in place to ensure 
implementation of the methodology and procedures for calculating the 
net asset value and dividends/distributions of the various classes of 
shares and the proper allocation of expenses among the classes of 
shares and this representation has been concurred with by the Expert in 
the initial report referred to in condition 9, above, and will be 
concurred with by the Expert or an appropriate substitute Expert on an 
ongoing basis, at least annually, in the ongoing reports referred to in 
that condition. Applicants will take immediate corrective action if the 
Expert, or appropriate substitute Expert, does not so concur in the 
ongoing reports.
    11. The prospectuses of each class of a Fund will include a 
statement to the effect that a salesperson and any other person 
entitled to receive compensation for selling or servicing shares may 
receive different compensation with respect to one particular class of 
shares over another in the Fund.
    12. The conditions pursuant to which the exemptive order is granted 
and the duties and responsibilities of the Trustees with respect to the 
Multi-Class System will be set forth in guidelines to be furnished to 
the Trustees.
    13. Each Fund will disclose the respective expenses, performance 
data, distribution arrangements, exchange privileges, services, 
Shareholder Administrator Fees, and Services Fees applicable to each 
class of shares, other than Institutional Shares, in every prospectus, 
regardless of whether all classes of shares are offered through each 
prospectus. Institutional Shares will be offered solely pursuant to 
separate prospectuses. The prospectus for a class of Institutional 
Shares will disclose the existence of the Fund's other classes, and a 
prospectus for a non-Institutional share class will disclose the 
existence of Institutional Shares and will identify the persons 
eligible to purchase Institutional Shares. The Fund will disclose the 
respective expenses and performance data applicable to all classes of 
shares in every shareholder report. The shareholder reports will 
contain, in the statement of assets and liabilities and statement of 
operations, information related to the Fund as a whole generally and 
not on a per class basis. Each Fund's per share data, however, will be 
prepared on a per class basis with respect to all classes of shares of 
such Fund. To the extent any advertisement or sales literature 
describes the expenses or performance data applicable to any class of 
shares, it will also disclose the respective expenses and/or 
performance data applicable to all classes of shares, except 
Institutional Shares. Advertising materials reflecting the expenses or 
performance data for a class of Institutional Shares will be available 
only to those persons eligible to purchase that class of Institutional 
Shares. The information provided by applicants for publication in any 
newspaper or similar listing of the Fund's net asset value and public 
offering price will present each class of shares, except Institutional 
Shares, separately.
    14. Applicants acknowledge that the grant of the requested 
exemptive order does not imply Commission approval, authorization of, 
or acquiescence in, any particular level of payments that a Fund may 
make to organizations pursuant to any Plan in reliance on the exemptive 
order.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3459 Filed 2-10-95; 8:45 am]
BILLING CODE 8010-01-M