[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Notices]
[Pages 65710-65713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30861]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21597; 812-9476]


The Diversified Investors Funds Group, et al.; Notice of 
Application

December 13, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for an Order Under the Investment Company 
Act of 1940 (the ``Act'').

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APPLICANTS: The Diversified Investors Funds Group (``Diversified 
Fund''); Diversified Investors Portfolios (``Diversified Portfolios''); 
Diversified Investment Advisors, Inc. (``Diversified''), on behalf of 
itself and each open-end management investment company or series 
thereof organized in the future (the ``Future Funds'') which is a 
member of the same ``group of investment companies'' as defined in rule 
11a-3 under the Act; and Diversified Investors Securities Corp. (the 
``Distributor'').

RELEVANT ACT SECTIONS: Order of exemption requested pursuant to section 
6(c) of the Act from section 12(d)(1) of the Act, pursuant to sections 
6(c) and 17(b) of the Act from section 17(a) of the Act, and pursuant 
to rule 17d-1 under the Act permitting certain joint transactions in 
accordance with section 17(d) of the Act and rule 17d-1 thereunder.

SUMMARY OF APPLICATION: The requested order would permit applicants to 
create a ``fund of funds'' that initially will have three portfolios. 
Each portfolio would allocate substantially all of its assets among the 
series of Diversified Fund or of the Future Funds (each such series and 
Future Fund is referred to individually as an ``Underlying Spoke,'' and 
all such series and Future Funds, collectively, as the ``Underlying 
Spokes'') without regard to the percentage limitations of section 
12(d)(1). The Underlying Spokes, in turn, will invest in a 
corresponding series of Diversified Portfolios or of a Future Fund 
(each such series and Future Fund is referred to individually as an 
``Underlying Hub,'' and all such series and Future Funds, collectively, 
as the ``Underlying Hubs''). The requested order also would permit 
certain affiliated joint transactions in accordance with section 17(d) 
of the Act and rule 17d-1.

FILING DATES: The application was filed on February 6, 1995, and 
amended and restated on June 2, 1995, July 12, 1995, and December 12, 
1995.

HEARING OR NOTIFICATION OF HEARINGS: 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 8, 1996, 
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, 4 Manhattanville Road, Purchase, New York 10577.

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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Diversified Fund is organized as a Massachusetts business trust. 
Diversified Portfolios is organized as a trust under the laws of the 
State of New York. Each of Diversified Fund and Diversified Portfolios 
is registered as an open-end management investment company under the 
Act. Diversified Fund currently consists of eight separate series and 
Diversified Portfolios currently consists of nine separate series.
    2. Diversified is a registered investment adviser under the 
Investment Advisers Act of 1940. Diversified is an indirect, wholly-
owned subsidiary of AEGON USA, Inc., a financial services holding 
company whose primary emphasis is life and health insurance and annuity 
and investment products. AEGON USA, Inc. is an indirect, wholly-owned 
subsidiary of AEGON nv, a Netherlands corporation which is a publicly 
traded international insurance group. Diversified currently is the 
investment manager for Diversified Portfolios and acts as administrator 
and transfer agent for Diversified Fund. Each Underlying Spoke 
organized in the future will be administered by Diversified, and each 
Underlying Hub organizer in the future will be advised by Diversified. 
Diversified Investors Securities Corp. 

[[Page 65711]]
(the ``Distributor''), a Delaware corporation, acts as distributor for 
Diversified Fund.
    3. Applicants propose to organize The Diversified Investors 
Strategic Allocation Funds (``Strategic Fund''), which will operate as 
a ``fund of funds.'' Strategic Fund will be organized as a 
Massachusetts business trust, and, subject to the receipt of the 
requested order, will be registered under the Act as a non-diversified, 
open-end, management investment company. Strategic Fund initially will 
have three series or portfolios, identified as the Aggressive 
Portfolio, the Moderate Portfolio, and the Conservative Portfolio 
(collectively referred to as the ``Portfolios,'' or individually as a 
``Portfolio''). Each Portfolio will invest all of its investable assets 
in shares of the Underlying Spokes and will allocate and reallocate its 
assets among the Underlying Spokes. Investments also may be made in 
money market investments for cash management and temporary defensive 
purposes.
    4. The Underlying Spokes are, or will be, ``feeder'' (or ``spoke'') 
funds in a ``master-feeder'' (or ``Hub and Spoke<Register>'') \1\ 
structure in which there are other feeders investing in the master 
funds. Each of the existing Underlying Spokes invests, and each future 
Underlying Spoke will invest, all of its investable assets in an 
Underlying Hub having the same investment objective and policies as the 
Underlying Spoke. Each current Underlying Hub has one or more sub-
advisers who are responsible for its day-to-day investment selections. 
In addition to the Underlying Spokes, each of the existing Underlying 
Hubs has a number of additional ``spokes,'' including a bank sponsored 
collective trust, insurance company separate accounts established in 
respect of variable annuity contracts which are registered as unit 
investment trusts, and non-registered insurance company separate 
accounts. In the future, each Underlying Hub may sell interests to 
other eligible entities to the extent permitted by applicable law.

    \1\ Hub and Spoke<Register> is a registered service mark of 
Signature Financial Group, Inc.
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    5. Allocations of a Portfolio's assets among shares of the 
Underlying Spokes will be made consistent with its investment 
objective. For example, it is anticipated that the Aggressive Portfolio 
would, under normal circumstances, invest substantially all of its 
assets in Underlying Spokes/Hubs that invest in equity securities. The 
Underlying Spokes/Hubs in which each Portfolio may invest will be 
described in the Portfolio's prospectus. In addition, the prospectus 
will disclose the general ranges for investment by the Portfolio in 
each type of Underlying Spoke (i.e., equity, fixed-income, and money 
market), and in each specific Underlying Spoke. Shareholders will 
receive disclosure of any changes in the identity of the Underlying 
Spokes in which the Portfolio may invest (e.g., if a new Underlying 
Spoke is included) or any changes in the investment ranges. Allocations 
of a Portfolio's assets among Underlying Spokes initially will be made, 
and subsequently adjusted, consistent with quantitative and other 
market and economic analyses administered by Diversified in its role as 
investment manager to Strategic Fund.
    6. It currently is contemplated that Strategic Fund will be sold 
without a front-end or deferred sales charge, and will not have a rule 
12b-1 distribution plan. The only direct expense payable by Strategic 
Fund will be an asset allocation and administrative fee, which 
initially will be at a rate of .20% per annum of average daily net 
assets for each Portfolio.\2\ In return for the fee, Diversified will 
furnish Strategic Fund with all operating and administrative services 
and will pay all of the operating expenses (e.g., the fees and expenses 
of Strategic Fund's independent trustees and the minimal fees and 
expenses associated with the preparation and audit of its financial 
statements, but not portfolio brokerage expenses) for Strategic Fund.

    \2\ Because Strategic Fund under normal circumstances will 
invest exclusively in shares of the Underlying Spokes, it is not 
anticipated that it will bear any portfolio brokerage expenses 
except those associated with the short-term investment of cash, if 
any.
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    7. Each existing Underlying Spoke and Underlying Hub is, and, 
subject to the right to institute such fees and charges to the extent 
permitted in condition 5 below, each future Underlying Spoke and 
Underlying Hub will be, sold without a front-end or deferred sales 
charge. The shareholders of Strategic Fund, however will pay indirectly 
their proportional share of the expenses of each Underlying Spoke in 
which Strategic Fund invests. These expenses include (a) an 
administration fee payable to Diversified, which covers, among other 
things, the expenses of transfer agency services, (b) rule 12b-1 fees, 
which are payable by the existing Underlying Spokes at a maximum rate 
of .25% per annum of net assets, and (c) other customary expenses of 
registered investment companies, primarily consisting of compensation 
to independent trustees, insurance premiums, fees and expenses of 
independent auditors and legal counsel, and accounting expenses. The 
expenses also include the Underlying Spokes proportional share of the 
expenses of the Underlying Hubs in which they invest, which include 
advisory fees and other customary expenses of registered investment 
companies.
    8. Applicants may, although they do not contemplate doing so in the 
near future, enter into a special servicing agreement (the ``Servicing 
Agreement''), pursuant to which the Distributor will provide all 
distribution and distribution-related services relating to Strategic 
Fund. The Servicing Agreement would provide that a portion of each 
Underlying Spoke's rule 12b-1 fees attributable to shares held by 
Strategic Fund may be used to reimburse the Distributor for expenses 
incurred in rendering distribution and distribution-related services to 
the Portfolios. Each Underlying Spoke thus would be permitted to pay 
rule 12b-1 fees in respect of distribution of shares of a Portfolio, 
but only to the extent that the Portfolio has invested in the 
Underlying Spoke.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) provides that no registered investment 
company may acquire securities of another investment company if such 
securities represent more than 3% of the acquired company's outstanding 
voting stock, more than 5% of the acquiring company's total assets, or 
if such securities, together with the securities of any other acquired 
investment companies, represent more than 10% of the acquiring 
company's total assets. Section 12(d)(1)(B) provides that no registered 
open-end investment company may sell its securities to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies.
    2. Section 6(c) provides that the SEC may exempt persons or 
transactions if, and to the extent that, 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 request an order under section 6(c) 
exempting them from section 12(d)(1) to permit Strategic Fund to invest 
in the Underlying Spokes in excess of the percentage limitations of 
section 12(d)(1).

[[Page 65712]]

    3. Applicants propose to organize Strategic Fund to provide 
investors with a simple means of investing in a diversified mutual fund 
investment program tailored by investment professionals to different 
investment goals and risk tolerances. Applicants believe that Strategic 
Fund will provide an alternative to other programs that investors turn 
to for diversification and asset allocation advice, such as wrap fee 
programs using mutual funds and inter-complex funds of funds.
    4. Section 12(d)(1) is intended to mitigate or eliminate actual or 
potential abuses which might arise when one investment company acquires 
shares of another investment company. These abuses include the 
acquiring fund imposing undue influence over the management of the 
acquired funds through the threat of large-scale redemptions, the 
acquisition by the acquiring company of voting control of the acquired 
company, the layering of sales charges, advisory fees, and 
administrative costs, and the creation of a complex pyramidal structure 
which may be confusing to investors.
    5. Applicants believe that Strategic Fund is structured in a manner 
consistent with the intent of section 12(d)(1) and which avoids the 
abuses intended to be prevented by that section. Applicants state that 
the proposed structure of Strategic Fund is very different from the 
structure of the investment companies whose practices led to the 
adoption of section 12(d)(1) and its amendment in 1970. Strategic Fund 
and the Underlying Spokes and the Underlying Hubs are part of the same 
group of investment companies, and each of these funds is or will be a 
registered investment company subject to the protections of the Act. In 
addition, because Diversified will be the investment adviser to 
Strategic Fund and each of the Underlying Hubs, applicants assert that 
it will be obligated to treat each fund fairly and impartially in the 
exercise of its fiduciary obligations. Diversified also will be subject 
to its fiduciary obligation to avoid self-dealing, therefore, it may 
not enter into transactions solely for the purpose of benefitting 
Diversified at the expense of Strategic Fund or any of the Underlying 
Hubs. Finally, applicants argue that Diversified's self-interest will 
prompt it to maximize benefits to all shareholders, and not disrupt the 
operations of Strategic Fund or any of the Underlying Spokes or 
Underlying Hubs.
    6. Applicants believe that, although the proposed structure of 
Strategic Fund could be deemed to involve three levels of fees rather 
than two levels, this does not change the analysis with respect to the 
requested relief. Applicants assert that the structure of the 
Underlying Spokes and the Underlying Hubs does not create a layering of 
fees of the type that section 12(d)(1) was meant to address. They argue 
that this structure, which is specifically permitted by section 
12(d)(1)(E), merely separates typical mutual fund expenses into two 
distinct levels. The expenses of the Underlying Spokes generally are 
limited to fund administrative and operating expenses (primarily the 
administration fee and the rule 12b-1 fee). The expenses of the 
Underlying Hubs generally are limited to investment advisory fees, 
custodian fees, portfolio accounting fees, and fees for transfer/
accounting services. Thus, applicants assert that there is no 
significant overlap in the various expenses incurred at the hub level 
and at the spoke level, and that it is appropriate to collapse these 
two levels for purposes of the analysis of the operation of Strategic 
Fund.
    7. Applicants believe that, while Strategic Fund could invest 
directly in the Underlying Hubs (and accordingly impose the same 
expenses that are charged at the level of the Underlying Spokes 
directly on Strategic Fund), the proposed structure has advantages for 
shareholders. Applicants assert that the proposed structure will offer 
shareholders a clearly defined choice either to allocate and reallocate 
their assets among the Underlying Spokes of their choosing, or to pay 
the incremental asset allocation fee so that Strategic Fund will make 
the asset allocation decisions. In addition, they argue that investing 
in the Underlying Spokes rather than directly in the Underlying Hubs 
serves to facilitate the Hub and Spoke<Register> accounting function 
and avoid the extra costs that would be incurred if a Portfolio 
invested directly in several Underlying Hubs.
    8. Applicants assert that there will be no layering of fees as a 
consequence of the Strategic Fund structure which will result in fees 
in excess of those permitted to be imposed by a single fund. Subject to 
the right to institute such fees and charges to the extent permitted in 
condition 5 below, it currently is contemplated that Strategic Fund 
will not impose, and no Underlying Spoke will impose, any front-end or 
deferred sales charge. The existing Underlying Spokes currently are 
permitted to pay the Distributor rule 12b-1 fees at a maximum rate of 
.25% per annum of net assets. Applicants have agreed that any sales 
charges or service fees charged with respect to Strategic Fund 
(including those paid at the Underlying Spoke level) will not exceed 
the limits set forth in the Rules of Fair Practice of the National 
Association of Securities Dealers, Inc.
    9. Applicants believe that Strategic Fund's asset allocation and 
administrative fee will be justified by the incremental benefits, not 
otherwise available, of the professional asset allocation service that 
Diversified will provide for investors choosing to invest in Strategic 
Fund rather than in specific Underlying Spokes, as well as compensate 
Diversified for the operating and administrative obligations it will 
undertake with respect to Strategic Fund. Applicants assert that many 
investors who have little interest or experience in selecting 
investments feel a need to seek professional advice in order to achieve 
successful asset allocation and diversification for initial investments 
and changes in their mutual fund mix. Applicants believe that Strategic 
Fund will provide investors with a competitive and viable alternative 
to other mutual fund based asset allocation programs. Accordingly, 
applicants believe that the requested exemption from section 12(d)(1) 
is appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies of the Act.

B. Section 17(a)

    1. Section 17(a) makes it unlawful for an affiliated person of a 
registered investment company to sell securities to, or purchase 
securities from, the company. Section 17(b) provides that the SEC shall 
exempt a proposed transaction from section 17(a) if evidence 
establishes that: (a) the terms of the proposed transaction are 
reasonable and fair and do not involve overreaching; (b) the proposed 
transaction is consistent with the policies of the registered 
investment company involved; and (c) the proposed transaction is 
consistent with the general provisions of the Act.
    2. Applicants request exemptive relief from the prohibitions of 
section 17(a) to allow the transactions described in the application. 
Applicants believe that the relief is consistent with the standards of 
section 17(b). Applicants assert that the terms of the proposed 
transaction are reasonable and fair because the shareholders in 
Strategic Fund will benefit from the valuable incremental services 
provided as a result of the proposed structure and from savings that 
accrue based upon their individual situations, such as by not having to 
pay fees to a financial adviser or sales commissions to a broker-
dealer. Strategic Fund shareholders also will receive practical 
benefits from the 

[[Page 65713]]
consolidation of records and reports, and the general ease of investing 
in one fund instead of several. In addition, in return for the indirect 
expenses of investing in the Underlying Spokes and the Underlying Hubs, 
the Portfolios and their shareholders will benefit to the same extent 
as other shareholders in the Underlying Spokes from the administrative 
services provided to the Underlying Spokes and the portfolio management 
services provided to the Underlying Hubs.

C. Section 17(d) and Rule 17d-1

    1. Section 17(d) prohibits an affiliated person of a registered 
investment company, or an affiliated person of such person, acting as 
principal, from effecting any transaction in which such investment 
company is a joint, or joint and several, participant with such person 
in contravention of SEC rules and regulations. Rule 17d-1 provides that 
an affiliated person of a registered investment company or an 
affiliated person of such person, acting as principal, shall not 
participate in, or effect any transaction in connection with, any joint 
enterprise or other joint arrangement in which the registered 
investment company is a participant unless the SEC has issued an order 
approving the arrangement.
    2. Applicants believe that all shareholders of the Underlying 
Spokes, including Strategic Fund, will benefit equally from the 
distribution and distribution-related services received from the 
Distributor, which services will be financed, in part, from rule 12b-1 
fees. Under the Servicing Agreement, the distribution-related expenses 
relating to Strategic Fund would be paid from the rule 12b-1 fees of 
the Underlying Spokes only up to the amount of such fees attributable 
to the shares of the Portfolios, and no Underlying Spoke would be 
required to pay any additional distribution-related expenses 
attributable to the Portfolios. In addition to the benefit to each 
Portfolio from the sale of its shares, applicants assert that each 
Underlying Spoke would receive a benefit from the sale of shares of the 
Portfolios to the extent that a Portfolio invests in such Underlying 
Spoke. Applicants submit that, based on these considerations: (a) 
Strategic Fund may create benefits for the Underlying Spokes; (b) the 
benefits would be shared by the Underlying Spokes in proportion to 
their assets; (c) the Underlying Spokes and Strategic Fund would 
participate in the arrangement on the same or substantially the same 
basis; (d) none of the Underlying Spokes, the Underlying Hubs, 
Strategic Fund, Diversified, or the Distributor would be advantaged or 
disadvantaged over one another; and (e) the entire arrangement would be 
consistent with the provisions, policies, and purposes of the Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Strategic Fund and each Underlying Spoke and Underlying Hub will 
be part of the same ``group of investment companies,'' as defined in 
rule 11a-3 under the Act.
    2. No Underlying Hub shall acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    3. A majority of the trustees of Strategic Fund will not be 
``interested persons,'' as defined in section 2(a)(19) of the Act (the 
``Independent Trustees'').
    4. Before approving any advisory contract under section 15 of the 
Act, the trustees of Strategic Fund, including a majority of the 
Independent Trustees, shall find that advisory fees charged under such 
contract are based on services provided that are in addition to, rather 
than duplicative of, services provided pursuant to any Underlying Hub's 
advisory contract. Such finding, and the basis upon which the finding 
was made, will be recorded fully in the minute books of Strategic Fund.
    5. Any sales charges or service fees charged with respect to 
securities of Strategic Fund, when aggregated with any sales charges or 
service fees paid by Strategic Fund with respect to securities of the 
Underlying Spokes, shall not exceed the limits set forth in Article 
III, section 26, of the Rules of Fair Practice of the National 
Association of Securities Dealers, Inc.
    6. Applicants agree to provide the following information, in 
electronic format, to the Chief Financial Analyst of the Division: 
monthly average total assets for each Portfolio and each of its 
Underlying Spokes and Underlying Hubs; monthly purchases and 
redemptions (other than by exchange) for each Portfolio and each of its 
Underlying Spokes and underlying Hubs; monthly exchanges into and out 
of each Portfolio and each of its Underlying Spokes; month-end 
allocations of each Portfolio's assets among its Underlying Spokes; 
annual expense ratios for each Portfolio and each of its Underlying 
Spokes and Underlying Hubs; and a description of any vote taken by the 
shareholders of any Underlying Spoke, including a statement of the 
percentage of votes cast for and against the proposal by Strategic Fund 
and by the other shareholders of the Underlying Spoke. Such information 
will be provided as soon as reasonably practicable following each 
fiscal year-end of Strategic Fund (unless the Chief Financial Analyst 
shall notify Strategic Fund or Diversified in writing that such 
information need no longer be submitted).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-30861 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-M