[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Notices]
[Pages 29152-29154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14360]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21999; 812-10010]


GMO Trust and Grantham, Mayo, Van Otterloo & Co.; Notice of 
Application

May 31, 1996.
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: GMO Trust and Grantham, Mayo, Van Otterloo & Co. (``GMO'').

Relevant Act Sections: Order requested under section 6(c) of the Act 
from sections 12(d)(1) (A) and (B) of the Act and under sections 6(c) 
and 17(b) of the Act from section 17(a) of the Act.

Summary of Application: Applicants request an order that would permit 
certain series of GMO Trust to operate as ``funds of funds.''

Filing Dates: The application was filed on February 23, 1996 and 
amended on May 23, 1996.

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 June 25, 1996, 
and should be accompanied by proof of service on applicants, in the 
form of an affidavit, or, for lawyers, a certificate or 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, 40 Rowes Wharf, Boston, MA 02110.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E. 
Baur, 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. GMO Trust is an open-end series management investment company 
organized as a Massachusetts business trust. GMO Trust's existing and 
prospective shareholders are highly sophisticated individual investors 
and institutional investors such as endowments, foundations, 
international tax-exempt organizations, and ERISA/pension funds. The 
minimum initial investment in the GMO Trust is $10,000,000. GMO Trust 
consists of 22 separate series (each a ``Portfolio''), including: 
International Equity Allocation Fund; Global Equity Allocation Fund; 
U.S. Equity with International Allocation Fund; and Global Balanced 
Allocation Fund (collectively, the ``Allocation Funds''). Each 
Allocation Fund is designed to serve the needs and objectives of long-
term investors who seek a simple and cost-effective response to their 
asset allocation demands.
    2. GMO is a Massachusetts general partnership registered as an 
investment adviser under the Investment Advisers Act of 1940 that 
serves each Portfolio, including the Allocation Funds, as investment 
adviser and principal underwriter. With respect to each Portfolio, GMO 
voluntarily reduces its management fees and bears certain expenses to 
the extent that each portfolio's total annual operating expenses, 
excluding certain expenses such as brokerage commissions, extraordinary 
expenses, and transfer taxes exceed specified percentages of net assets 
(the ``Voluntary Expense Limits''). The Voluntary Expense Limits vary 
among Portfolios primarily because of each Portfolio's type of asset 
class and the style of GMO's management. In the case of each Allocation 
Fund, GMO expects to waive any advisory fees, and bear expenses, to the 
extent that the Allocation Fund's total operating costs would exceed 
the relevant Voluntary Expense Limit.
    3. Applicants propose a fund of funds arrangement whereby each 
Allocation Fund will invest in shares of Portfolios other than 
Allocation Funds (the ``Underlying Funds''). Applicants request that 
any relief granted pursuant to the application also apply to any future 
Portfolio and to any open-end management investment company that 
currently or in the future is part of the same ``group of investment 
companies,'' as defined in rule 11a-3 under the Act, as GMO Trust 
(collectively, the ``GMO Funds'').\1\
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    \1\ Rule 11a-3 under the Act defines a ``group of investment 
companies'' as two or more companies that: (a) hold themselves out 
to investors as related companies for purposes of investment and 
investor services; and (b) that have a common investment adviser or 
principal underwriter.
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Applicants' Legal Analysis

    1. Section 12(d)(1)(A) of the Act 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) of the Act provides that the SEC may exempt persons 
or transactions from any provision of the Act if 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

[[Page 29153]]

permitting each Allocation Fund to acquire shares of the Underlying 
Funds in excess of the limits imposed under section 12(d)(1).
    3. The restrictions in section 12(d)(1) were intended to prevent 
certain abuses perceived to be associated with the pyramiding of 
investment companies, including: (a) undue influence by the fund 
holding company over its underlying funds through the threat of large 
scale redemptions of the securities of the underlying funds; (b) 
layering of costs, e.g. sales loads, advisory fees, and administrative 
costs; and (c) creation of structure that could cause investor 
confusion. For the following reasons, applicants believe that the 
proposed arrangement will not create these dangers and, therefore, that 
the requested relief is appropriate.
    4. Applicants argue that the proposed arrangement will be 
structured to minimize large scale redemption concerns. Each Allocation 
Fund seeks to provide existing and prospective long-term investors with 
a sophisticated asset allocation service on a cost-effective basis. 
This investment objective will not result in large-scale redemptions 
from the Underlying Funds, but rather will involve small adjustments on 
a continuing basis to maintain balance in the allocation of investors' 
assets among the Underlying Funds. Thus, applicants assert that the 
operation of each Allocation Fund actually decreases the possibility 
for undue influence to any particular Underlying Fund through a threat 
of redemption.
    5. Applicants state that the proposed arrangement will not raise 
the fee layering concerns contemplated by section 12(d)(1). The 
proposed arrangement will not involve the layering of advisory fees 
since, before approving any advisory contract the board of trustees of 
each Allocation Fund, including a majority of the trustees who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act, will 
find that the advisory fees charged under the contract are based on 
services provided that are in addition to, rather than duplicative of, 
services provided under any Underlying Fund advisory contract. In 
addition, the proposed structure will not involve layering of sales 
charges. Currently, neither the Allocation Funds nor the Underlying 
Funds impose sales charges or 12b-1 fees. Although one or more GMO 
Funds may charge a sales load in the future, any sales charges or 
service fees relating to the shares of an Allocation Fund will 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. 
(``NASD'') when aggregated with any sales charges or service fees that 
an Allocation Fund pays relating to Underlying Portfolio shares. 
Applicants contend that although an Allocation Fund shareholder may pay 
advisory fees for the Allocation Funds directly and advisory fees for 
the Underlying Funds indirectly, these advisory fees are not unfair nor 
excessive because the shareholder is obtaining different services 
through different advisory contracts.
    6. Applicants also state that the proposed arrangement will not be 
confusing to investors. Applicants assert that each Allocation Fund's 
structure will illuminate rather than confuse its shareholders about 
the value and nature of their holdings. The prospectus for each 
Allocation Fund will state its investment objective and apprise 
shareholders of what Portfolios constitute Underlying Funds for their 
investment. In addition, GMO Trust's existing and prospective 
shareholders are highly sophisticated individuals or institutional 
investors able to understand and bear the risks of such investments.
    7. Section 17(a) of the Act makes it unlawful for an affiliated 
person of a registered investment company to sell securities to, or 
purchase securities from, the company. The Allocation Funds and the 
Underlying Funds are considered affiliated persons because they are 
under the common control of GMO. An Underlying Fund's issuance of its 
shares to an Allocation Fund may be considered a sale prohibited by 
section 17(a).
    8. Section 17(b) of the Act 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. Applicants request an exemption under sections 6(c) and 
17(b) to allow the above transactions.
    9. Applicants believe that the proposed transactions meet the 
standards of sections 6(c) and 17(b). The consideration paid for the 
sale and redemption of Underlying Fund shares will be without a sales 
load and at the same price that is available to other investors. The 
Allocation Funds' purchase and sale of Underlying Fund shares is 
consistent with the Allocation Funds' policies, as set forth in GMO 
Trust's registration statements. Applicants also believe that the 
proposed transactions are consistent with the general purposes of the 
Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each Allocation Fund and each Underlying Fund will be part of 
the same ``group of investment companies,'' as defined in rule 11a-3 
under the Act.
    No Underlying Fund will 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 board of trustees of GMO Trust will not be 
``interested persons,'' as defined in section 2(a)(19) of the Act.
    4. Before approving any advisory contract for an Allocation Fund 
under section 15, the board of trustees including a majority of the 
trustees who are not ``interested persons'' as defined in section 
2(a)(19), shall find that advisory fees charged under the contract are 
based on services provided that are in addition to, rather than 
duplicative of, services provided under any Underlying Fund's advisory 
contract. Such finding, and the basis upon which the finding was made, 
will be recorded fully in the minute books of GMO Trust.
    5. Any sales charges or distribution-related fees charged with 
respect to shares of an Allocation Fund, when aggregated with any sales 
charges and distribution-related fees paid by the Allocation Fund with 
respect to shares of the Underlying Funds, shall not exceed the limits 
set forth in Article III, section 26, of the Rules of Fair Practice of 
the NASD.
    6. Applicants agree to provide the following information, in 
electronic format, to the Chief Financial Analyst of the SEC's Division 
of Investment Management: monthly average total assets for each 
Allocation Fund and each of its Underlying Funds; monthly purchases and 
redemptions (other than by exchange) for each Allocation Fund and each 
of its Underlying Funds; monthly exchanges into and out of each 
Allocation Fund and each Underlying Fund; month-end allocations of each 
Allocation Fund portfolio's assets among the Underlying Funds; annual 
expense ratios for each Allocation Fund and each Underlying Fund; and a 
description of any vote taken by the shareholders of any Underlying 
Fund, including a statement of the percentage of votes cast for and 
against the proposal by each Allocation Fund and by the other 
shareholders of the Underlying Fund. Such information will be

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provided as soon as reasonably practicable following each fiscal year-
end of the GMO Trust (unless the Chief Financial Analyst shall notify 
applicants in writing that such information need no longer be 
submitted).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-14360 Filed 6-6-96; 8:45 am]
BILLING CODE 8010-01-M