RESPONSE OF THE OFFICE OF CHIEF COUNSEL

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RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF INVEST-1V~NT MANAGEMENT

August 31, 1998

Our Ref. No. 98-510-CC

Zurich Insurance Company;

Scudder Kemper Investments, Inc:

File No. 801-252

Your letter dated August 26, 1998 requests our concurrence that Scudder Kemper

Investments, Inc. ("Scudder Kemper") may rely on Rule 202(a)(1)-1 under the Iri'vestment

Advisers Act of 1940 (the "Advisers Act") and Rule 2a-6 under the Investment Company Act of

1940 (the "Investment Company Act")xo deternune whether an "assignment" will occur for

purposes of Section 205(a)(2) of the Advisers Act and. Section 15(a)(4) of the Investment

Company Act, in connection with the reorganization transaction described in your letter.l

Facts

You state that Scudder Kemper, a Delaware corporation that is registered as an

investment adviser under the Advisers Act, acts as investment adviser to registered investmen

t

companies ("Funds") and other advisory clients ("Advisory Clients"). Zurich Insurance Company

("Zurich") is a Swiss corporation engaged in various financial services businesses including

insurance and asset management. Zurich, through its subsidiaries, owns approximately 70% of

Scudder Kemper's outstanding voting securities, and the oi~icers and employees of Scudder

Kemper own the remaining 30%. B.A.T. Industries p.l.c. ("B.A.T.") is a U.K. corporation

engaged in various financial and non-financial related businesse,~s, . Zurich has entered into a

merger agreement with B.A.T. (the "Transaction"), pursuant to which Zurich and B.A.T. will

combine their financial services businesses through a new holding company, Zurich Financial

Services ("ZFS"). Zurich and B.A.T. shareholders will in turn own ZFS through interests in dual

public holding companies with a unified governance structure.

You state that the Transaction will be effected as follows. Zurich intends to establish a

new holding company, Zurich Allied AG ("Zurich Allied"), which will conduct a public exchange

offer for shaxes of Zurich. As a result of the exchange offer, current shareholders of Zurich will

become shareholders of Zurich Allied. Zurich Allied will then contribute all of the Zurich shares

received in the exchange offer to ZFS. In return, Zurich Allied will receive approximately 57% of

the outstanding voting securities of ZFS. B.A.T. also will establish a new holding company,

You state that, as a precautionary measure, Zurich Insurance Company and Scudder

Kemper have applied to the Commission for an exemptive order to permit Scudder Kemper to

continue to serve as investment adviser to the registered investment companies advised by

Scudder Kemper for up to 150 days following consummation of the transaction, and thus may not

need to rely on Rule 2a-6. See Zurich Insurance Company, Investment Company Act Release

No. 23389 (Aug. 14, 1998) (notice). You nevertheless request our concurrence that Rule 2a-6

would be available in connection with the transaction.

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Allied Zurich p.l.c. ("Allied Zurich"); the shares of which will be distributed to current B.A.T.

shareholders. Allied Zurich will then transfer B.A:T.'s financial services businesses to ZFS in

exchange for the remaining 43% ofthe outstanding voting securities ofZFS. ZFS thus will

directly or indirectly hold all ofthe financial services businesses of both Zurich and B_AT. You

state that to your knowledge, no individual shareholder currently owns 5% or more ofthe

outstanding voting securities ofZurich or B.A.T, and that following the Transaction, no individual

shareholder will own 5% or more ofthe outstanding voting securities ofZurich Allied or Allied

Zurich, or otherwise constitute a "control" person of either company.

~r

You state that upon the closing ofthe Transaction, Zurich Allied and Allied Zurich will

enter into a Governing Agree~~nt. Tk~@ purpose ofthe Governing Agreement is to ac}ueve a

unified governance structure for the entiie ZFS group, which will replicate the effect ofa direct

merger ofthe financial services businesses ofZurich and B.A.T. Zurich Allied and Allied Zurich

will be restricted from engaging in any business operations other than owning shazes ofZFS:

ZFS, Zurich Allied and Allied Zurich initially will have three separate boards of directors with

certain common members. The Governing Agreement provides that the companies will use their

best efforts to assure that the membership ofthe three boards converge as soon as possible.

Zurich will designate five ofthe ten initial directors ofZFS, and B.A.T. will designate the other

five directors. Zurich's current ChiefExecutive Officer will become CEO and Chairman ofthe

Board ofZFS, with the ability to cast atie-breaking vote on most matters.

You state that the Transaction will not result in a change of actual control or management

of Scudder Kemper. Allied Zurich will have no right to direct the day-to-day management ofZFS

or its subsidiaries, including Scudder Kemper, and Zurich has represented to the boards of

directors ofthe Funds that Allied Zuri~i~ believes that the consummation ofthe Transaction will

not result in any change in the management or governance ofthe U.S. investment advisory

businesses of Scudder Kemper. In addition, you note that Allied Zurich will abstain from voting

on the designation of any members to the Board ofDirectors or Executive Committee of Scudder

Kemper that is submitted to ZFS for approval. Lastly, you state that Scudder Kemper's CEO is

expected to continue to be a member ofZurich's Corporate Executive Board with responsibility

for asset management, and is expected to be a member ofZFS' Group Management Board with

responsibility for asset management.

You state that the primary business objective ofthe Transaction is not a combination of

the asset management business of Scudder Kemper with B.A.T. You note that at the time the

agreement in principle relating to the Transaction was announced, Zurich's acquisition ofits

interest in Scudder Kemper had not been consummated. You represent that you do not expect

any material change in the level ofinvestment advisory services provided or the fees charged by

Scudder Kemper as a result ofthe Transaction. You also state that the officers and employees of ;.,

2

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Scudder Kemper will continue to own~in the aggregate approximately 30% of Scudder Kemper's

voting securities after the Transaction. You note~t~hat governance arrangements were put in place

at the time ofZurich's acquisition ofits interest in Scudder Kemper that preclude certain major

decisions affecting Scudder Kemper's business from being made without the approval of Scudder

Kemper's directors who axe elected by the officers and employees of Scudder Kemper, and that

these governance arrangements will be unaffected by the Transaction. You represent that there

will be no change in the Board ofDirectors or Executive Committee of Scudder Kemper as a

result ofthe Transaction, although in the foreseeable future it is possible that a person currently

associated with B.AT.'s financial services businesses may join the Board if a va~,ancy arises. You

also do not expect any material changes in the investment management personnel of Scudder

Kemper who currently provid~'investment advisory services as a result ofthe Transaction.

,

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Analysis

Section 205(a)(2) ofthe Advisers Act generally makes it unlawful for any investment

adviser that is not exempt from registration under Section 203(b)to enter into or perform any

investment advisory contract unless the contract provides that no assignment ofthe contract shall

be made by the adviser without the consent ofthe client. Similarly, Section 15(a)(4) and Section

15(b)(2) ofthe Investment Company Act make it unlawful for any person to serve as an

investment adviser or principal underwriter, respectively, to a registered investment company

except'pursuant to a written contract that provides for its automatic termination in the event ofits

assignment. -Each Act defines "assignment" to include any direct or indirect transfer of a

controlling block ofthe assignor's outstanding voting securities by a security holder ofthe

assignor.2 Although "controlling block" of voting securities is not defined under either Act, both

Acts define "control" as "the power to;exercise a controlling influence over the management or

policies of a company, unless such power is solely the result of an official position with such

company.i3 In addition, the Investment Company Act provides a rebuttable presumption of

control when any person beneficially owns, either directly or indirectly, more than 25% ofthe

voting securities of a company. Conversely, a person who does not own more than 25% ofthe

voting securities of a company is presumed not to control a company.4 The Advisers Act contains

no similar presumptions.

Section 202(a)(1) ofthe Advisers Act and Section 2(a)(4) ofthe Investment Company

Act.

Section 202(a)(12) ofthe Advisers Act and Section 2(a)(9) ofthe Investment Company

Act.

Section 2(a)(9) of the Investment Company Act.

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The issue presented by the Transaction is v~hether the acquisition by Allied Zurich of43%

ofthe outstanding voting securities ofZFS would result in an assignment of Scudder Kemper'

s

advisory contracts. Ifthere is an assignment, Scudder Kemper's investment advisory contract

s

with the Funds would be ternunated automatically, and the contracts with Advisory Clients could

continue only with the cgnsent ofthe Advisory Clients.

Rule 202(a)(1)-1 under the Advisers Act provides that a transaction which does not result

in a change of actual control or management of an investment adviser is not an assignment

for

purposes of Section 205(2)ofthe Advisers Act. Similarly, Rule 2a-6 under the Investment

Company Act provides that a t`i-ansaction which does not result in a change of actual control

or

management of an investment adviser to;or principal underwriter of, an investment company

is

not an assignment for purposes of Section 15(a)(4) or Section 15(b)(2) ofthat Act. In your

opinion, the Transaction will not result in a change ofactual control or management of Scudder

Kemper. You therefore believe that under the terms ofRule 202(a)(1)-1 and Rule 2a-6, there

will

be no assignment of Scudder Kemper's advisory contracts with its Advisory Clients and the Funds

as a result ofthe Transaction.

You note, however, that there maybe some uncertainty as to whether Rule 202(a)(1)-1

and Rule 2a-6 are available for all types oftransactions, or whether the rules are available only for

certain nominal reorganizations, such as changes in an investment adviser's domicile or legal

form. The uncertainty may arise from statements that appear in the proposing and adopting

releases for the rules. For example, when the Commission proposed Rule 202(a)(1)-1 and

Rule

2a-6, it noted that investment advisers "maybe involved in certain transactions -- particularly

modifications ofcorporate structure,""`~vhich may involve a transfer of a controlling block

of

voting securities but no change in actual control.5 The Commission cited several examples of

transactions that involved nominal structural changes, such as changes in an adviser's state of

incorporation. The Commission also stated that,"[i]n deternuning whether a transaction

is

J

5

Exemptions for Certain investment Advisers and Principal Underwriters ofInvestment

Companies, Investment Company Act Release No. 10809(Aug. 6, 1979)(proposing Rule 2a-6)

("Release 10809"); Certain Transactions Not Deemed Assignments, Advisers Act Release

No.

1013(Feb. 20, 1986)(proposing Rule 202(a)(1)-1)("Release 1013").

6

Release 10809 at n.3 crtin e. FMR Co

ub. avail. Dec. 16 1977 • E uitable of

Iowa Variable Annuity Account A(pub. avail. Nov. 25, 1977); Securities Management and

Research Inc.(pub. avail. Dec. 30, 1976); ITT Variable Annuity Insurance Company -Separate

Account(pub. avail. Jan. 24, 1972)).

4

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within the purview ofthe rule, rule 2a~6 should be construed narrowly in light

ofthe investor

protection concerns Congress intended to be fulfilled."'

In our view, Rule 202(a)(1)-1 and Rule 2a-6 may apply to any transaction,

provided that

there is no change in actual control or management ofthe investment adviser. The

rules are notlimited to nominal reorganizations such as changes in an adviser's domicile or legal

form. We

believe that the Commission's admonition that Rule 2a-6 be construed narrowly in

light of

investor protection concerns applies not to the type oftransaction involved,

but to whether there

is a change in actual control or management as a result ofthe transaction. The

legislative history

ofthe Advisers Act and the Investment Company Act indicates that the assignment

provisions of

the Acts were meant to address concerns about fiduciaries trafficking in investm

ent advisory

contracts.$ In our view, if there is no change in the actual control or management

of an

investment adviser, the investor protection concerns associated with the traffick

ing of advisory

contracts are not implicated.9 We therefore concur.that Scudder Kemper may rely

on Rule

202(a)(1)-1 and Rule 2a-6 to make a determination of whetli~r an assignment will

occur as a

result ofthe Transaction for purposes of Section 205(a)(2) ofthe Advisers Act

and Section

15(a)(4) ofthe Investment Company Act, notwithstanding that the Transaction

is not a nominal

reorganization.

Id. at n.5; Exemptions for Certain Investment Advisers and Principal Underwriters

of

Investment Companies, Investment Company Act Release No. 11005 at n.l (Jan.

2, 1980)

(adopting Rule 2a-6).

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See, e.g_, Investment Company Act of 1940 and Investment Advisers Act of 1940,

S. Rep.

No. 1775, 76th Cong., 3d Sess. 22(1940); and Investment Trusts and Investm

ent Companies:

Hearings on S. 3580 Before a Subcomm. ofthe Senate Comm. on Banking and

Currency, 76th

Cong., 3d Sess. 253 (1940).

y

See Release 10809 at text accompanying n.4("where there is no change in the

actual

control or management ofthe investment adviser ...and, hence, the actual

management ofthe

investment company ...the transaction would not appear to conflict with the

Congressional

concerns embodied in the Act."). See also Certain Transactions Not Deemed

Assignments,

Advisers Act Release No. 1034(Sep. 11, 1986)(when adopting Rule 202(a)(1)-1,

the

Commission stated that,"[i]fthe transaction ...does not result in an actual change

ofcontrol or

management ofthe adviser, interpreting the consent requirement of Section 205(2)

to apply .. .

appears to serve no useful purpose and, in fact, merely increases the adviser's

cost of doing

business without providing any benefit to the client.").

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The staff generally will not respond, however, to inquiries as to whether

a particular

transaction falls within Rule 202(a)(1)-1 or Rule 2a:6. The Commission

has stated that the issue

of whether a particular transaction involves a change in actual control

or management is primarily

factual in nature, and that the staff is~"not in a position to make the invest

igation necessary to

ascertain, verify, or evaluate the requisite factual information regarding

particular transactions."'o

We therefore take no position as to whether the Transaction may involv

e a change in actual

control or management of Scudder Kemper.

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Brendan .Fox

Special Counsel

to

See Release 10809 and Release 1013.

D

VUILLKIE FARR & GALLAGHER

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787 Scvcnth Avenuz

New• York, NI' 10019-6099

212 728 8000

Direct: 212 728 8265

Fax: 212 728 8111

dschloendornC~~viflkie.com

Daniel Schloendorn

August 26, 1998

6

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Douglas J. Scheidt, Esq.

Associate Director

Division of Investment Management

Securities and Exchange Commission

Judiciary Plaza

450 Fifth Street, N.W.

Washington, D.C.

20549

Re:

Zurich Insurance Company et a1.

Dear Mr. Scheidt:

On behalf of Zurich Insurance Company ("Zurich") and Scudder

Kemper Investments, Inc. ("Scudder Kemper"), we are writing

to seek concurrence from the staff of the Securities and

Exchange Commission (the "Staff") that, based upon the facts

and representations set forth herein, Rule 202(a)(1)-1 under

the Investment A~visers Act of 1940, as amended (the

"Advisers Act"), will not be construed so narrowly as to

preclude Zurich and Scudder Kemper from concluding that

the

transaction described below will not constitute a change of

"actual control or management" of Scudder Kemper and

therefore will not result in an assignment under the Advisers

Act of _Scudder Kemper's adviso~y client agreements (the

"Advisory Client Agreements").

1

Rule 2o2(a)(1)-1 states that "[a] transaction which does not result

in a change of actual control or management of an investme

nt

adviser is not an assignment for purposes of Section 205(2) of

the

[Advisers] Act."

2

As further discussed below, given the presumptive change in

"control" under Section 2(a)(9) of the Investment Company Act

of

1940, as amended (the "1940 Act's), Zurich and Scudder Kemper

have

applied to the Securities and Exchange Commission (the

"Commission") for exemptive relief pursuant to Section 6(c)

of the

0489359.05

Nc~~• York

~1':uhinrron, IBC

Paris

L ondon

Douglas J. Scheidt, Esq.

August 26, 1998

Page 2

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We are seeking the concurrence~~of the Staff in light of the

fact that, in the Commission's proposing and adopting

releases for Rule 202(a)(1)-1 under the Advisers Act, the

Commission noted that the rule is substantively identical to

Rule 2a-6 under the 1940 Act, and that in proposing and

adopting Rule 2a-6, the Commission stated that it should be

construed narrowly in light of the investo4 protection

concerns the rule was intended to address.

ZURICH AND SCUDDER KEMPER

/

Zurich is a Swiss corporation whose shares are publicly

traded on the Swiss Exchange. Zurich and its subsidiaries

and affiliates (collectively, the "Zurich Group") are engaged

in various financial services businesses, including property

and casualty insurance, life insurance, reinsurance and asset

management. Zurich Group had gross written premiums, policy

fees and insurance deposits of $25.5 billion and net income

of over $1.2 billion for the fiscal year ended December 31,

1997, and gross written premiums, policy fees and insurance

deposits of $24.4 billion and net income of over $1.0 billion

for the fiscal year ended December 31, 1996.

Scudder Kemper is a Delaware corporation that is an

investment adviser registered under the Advisers Act.

Scudder Kemper is one of the largest investment management

organizations worldwide_, managing assets globally for mutual

fund investors, retirement and pension plans, institutional

and corporate clients, insurance companies and private family

and individual accounts. It is also one of the largest

mutual fund managers in the United States. As of June 30,

1940 Act in connection with the possible assignment of Scudder

Kemper's existing advisory agreements with registered investment

companies for which Scudder Kemper acts as adviser or sub-adviser.

(File No. 812-11244)

3

See IA Rel. Nos. IA-1013 (Feb. 21, 1986) and IA-1034 (Sept. 11,

1986).

Rule 2a-6 states "[a] transaction which does not result in a change

of actual control or management of an investment adviser to, or a

principal underwriter of, an investment company is not an

assignment for purposes of section 15(a)(4) or section 15(b)(2) of

the [1940] Act, respectively. ~~

4

See IC Rel No. 10809 (Aug. 6, 1979) ("Release 10809")and IC Rel.

No. IC-11005 (Jan. 2, 1980).

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 3

1998, Scudder Kemper acted as investment adviser to

approximately 1,600 ~advisory clients (excluding registered

investment companies)("Advisory Clients") with aggregate

assets over $80.5 billion. As compensation for the

investment advisory services provided to the Advisory

Clients, Scudder Kemper is typically entitled to fees based

on the Advisory Clients' net assets. Zurich, through its

subsidiaries,- owns approximately 700 of the outstanding

voting securities of Scudder Kemper. The remaining

approximately 30o is owned by officers and employees of

Scudder Kemper.

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THE TRANSACTION

Zurich and B.A.T Industries p.l.c. ("B.A.T") have entered

into a Merger Agreement (the "Merger Agreement"), pursuant to

which the financial services businesses of B.A.T will be

combined with Zurich's businesses (the "Transaction")

As

more fully described below, for legal, tax and accounting

reasons it was not possible to structure the Transaction as a

direct merger between B.A.T and Zurich, with former B.A.T and

Zurich shareholders directly owning the combined entity (as

was the case in Dean Witter, Discover & Co.; Morgan Stanley

Group Inc.S)

Rather, the parties have achieved the

functional equivalent by structuring the Transaction so that

the former B.A.T and Zurich shareholders will own the

combined company through dual public holding companies, with

a unified governance structure.

Zurich intends to establish a new holding company, Zurich

Allied AG, a Swiss corporation ("Zurich Allied"), the shares

of which will be exchanged for Zurich shares by way of a

public exchange offer to the Zurich shareholders so that

ultimately the Zurich current shareholders will own shares of

Zurich Allied.

B.A.T will reorganize its existing corporate structure by

separating substantially all of its financial services

subsidiaries (the "B.A.T Financial Services Businesses") from

its tobacco-related subsidiaries in effect by way of a

spin-off. B.A.T will ultimately distribute to its

shareholders shares of a new holding company, Allied Zurich

p.l.c., a United Kingdom corporation ("Allied Zurich"), for

the B.A.T Financial Services Businesses.

1997 SEC No-Act. LEXIS 548 (April 18, 1997).

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 4

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After these reorganizations are~~effected, Allied Zurich will

transfer the B.A.T Financial Services Businesses to Zurich

Financial Services, a newly formed Swiss corporation, and

Zurich Allied will contribute all of the shares exchanged by

the Zurich shareholders to Zurich Financial Services. In

exchange therefor, Zurich Allied and Allied Zurich will

receive voting securities representing 57o and 43%,

respectively, of the voting capital stock of Zurich Financial

These relative equity percentages reflect the

Services.

parties' agreed-upon valuations of their respective

businesses to be contributed to Zurich Financial Services at

the closing of the Transaction.

Zurich Financial Services, as a holding company, will then

hold directly or indirectly all the ~urich businesses and the

B.A.T Financial Services Businesses. To Zurich's knowledge

there is no individual shareholder that currently

beneficially owns 50 or more of Zurich or B.A.T, and it is

anticipated that neither Zurich Allied nor Allied Zurich will

have any shareholder that will own 5% or more of the voting

securities of such company or otherwise constitute a

"control" person of either such entity within the meaning of

the Act.

GOVERNING AGREEMENT

Upon the closing of the Transaction, Zurich Allied and Allied

Zurich will enter into a Governing Agreement (the "Governing

Agreement") which will set out certain terms relating to the

establishment and organization of Zurich Financial Services

and the relationship of Zurich Allied and Allied Zurich

(each, a "Topco") following the closing.

6

Each of Zurich Allied and Allied Zurich will hold one series of

non-equity (or "income access") shares of Zurich Financial Services

that will not be entitled to vote and that will receive dividends

if and to the extent declared on such series. In addition, Zurich

Allied and Allied Zurich may directly hold income shares in certain

of Zurich Financial Services' subsidiaries to facilitate tax

efficient dividend payments. A small minority shareholding in

Zurich will remain with Zurich Allied for Swiss tax purposes, the

aggregate market value of which will be approximately $1.4 million.

~

The B.A.T tobacco business will be held by a separate publicly

traded holding company, British American Tobacco p.l.c., a U.K.

corporation.

0989359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 5

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Purpose. The purpose of the Governing Agreement (and the

Articles of Incorporation and Organizational Rules of Zurich

Financial Services to be adopted pursuant thereto) is to

achieve a unified governance structure for the entire Zurich

Financial Services group, replicating as closely as possible

the effect of a direct merger of Zurich with the B.A.T

Financial Services Businesses.

Under the Topco structure, the Transaction can be accounted

for as a "pooling of interests" under International

Accounting Standards, and dividends can be upstreamed from

Zurich Financial Services' operating subsidiaries in a tax

efficient manner (i.e., through the use of "income access"

shares, Zurich Financial Services can upstream dividends from

its U.K. operating subsidiaries directly to a U.K. company -Allied Zurich -- rather than through the Swiss-domiciled

Zurich Financial Services, which would subject the dividend

stream to Swiss withholding tax, which previously was not the

case). Through "dividend equalization arrangements" set

forth in the Governing Agreement, the Topcos will be able to

make distributions to the respective shareholders subject to

the 57/43 allocation. Accordingly, while the former public

shareholders of B.A.T will own their interests in Zurich

Financial Services through Allied Zurich and the public

shareholders of Zurich will own their interests through

Zurich Allied, the decision as to which Topco a future

shareholder will invest. in should be determined by such

factors as the shareholder's individual tax considerations

and not on the basis of the underlying assets owned by either

Topco. The Topcos are restricted from engaging in business

operations other than owning shares in Zurich Financial

Services and neither Topco may incur obligations of any kind,

with certain limited exceptions. As a result, an investment

in Allied Zurich or in Zurich Allied represents an equivalent

investment in Zurich Financial Services' operations. In this

regard, the structure mirrors the result that would be

achieved in a direct merger of Zurich with the B.A.T

Financial Services Businesses, if such a direct merger had

been possible.

Composition Of Boards and Zurich Financial Services Voting

Procedures. While the Topcos and Zurich Financial Services

initially will have separate Boards of Directors (with

certain common members), the Governing Agreement provides

that the Topcos will use their best efforts to assure that

the respective Boards of Directors of the three companies

converge as soon as possible and remain identical. Initially

the Board of Directors of each Topco will have more than ten

members, including members designated by the ,other Topco.

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 6

The Chairman of the Board of orie Topco will be the Vice

Chairman of the Board of the other Topco.

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'.

The Board of Directors of Zurich Financial Services will have _

ten members, each of whom must be a member of the Board of

one or both of the Topcos. The Chief Executive Officer of

Zurich Financial Services (the "Zurich Financial Services

CEO") may also be one of the members of Zurich Financial

Services' Board. The initial Zurich Financial Services CEO

(as well as the Zurich Financial Services Chairman and a

director) will be~Mr. Rolf Huppi, the Chairman and Chief

Executive Officer of Zurich. Of the initial Board, five

members (including Mr. Huppi) will be designated by Zurich

and five members will be designated by B.A.T. Going forward,

nominations to Zurich Financial Services' Board will be made

by Nominations Committee (described below).

All Board decisions (except changing the Organizational

Rules) will be taken by majority vote of the members, with

the Chairman of the Zurich Financial Services Board (who

initially will be Mr. Huppi) having a "casting vote" (i.e.,

the right to break a deadlock in the case of a tie), except

in limited specific circumstances. The only matters in

respect of which the "casting vote" does not apply are (i)

matters recommended by the Audit Committee of the Board, (ii)

matters recommended by the Remuneration Committee of the

Board in respect of the_ remuneration of~ the Chairman of the

Board and the Zurich Financial Services CEO, (iii) the

appointment and removal of the Chairman of the Zurich

Financial Services Board and the Zurich Financial Services

CEO (if he is at the same time the Chairman), (iv)

appointments to the Nominations, Audit and Remuneration

Committees of the Board and (v) nominations to the Zurich

Financial Services Board which are not made through the

Nominations Committee.

Various procedures govern the election of replacement

directors to the Zurich Financial Services Board which are

intended to facilitate the composition of the Boards of the

Topcos and Zurich Financial Services being identical as soon

as possible.

Group Management Board. As is customary for Swiss

corporations, the Board will delegate the management of

Zurich Financial Services to the CEO and, under his

supervision, to the members of the group management board

(the "Group Management Board"). The Group Management Board

will initially consist of eleven members (including the CEO),

of which eight currently are members of the Zurich Corporate

Executive Board and one of those is the Chief Executive

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 7

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Officer of Scudder Kemper. Each member of the Group

Management Board is individually responsible to the CEO.

While the Group Management Board will meet regularly to

establish consensus-based group business policies, it will

not have decision-making powers.

Nominations Committee. Zurich Financial Services' and each

Topco's Board of Directors will have a Nominations Committee.

The Nominations Committee of each Topco and Zurich financial

Services will consist of six persons, each of whom must be a

member of the Zurich Financial Services Board. Each Topco

will have the right for `the first four years from the closing

of the Transaction to appoint three members of the

Nominations Committees of the other Topco and Zurich

Financial Services.

Zurich Financial Services Shareholder Votes. Zurich

Financial Services' Articles of Incorporation may be changed

only by a resolution passed by shareholders owning at least

580 of all the voting shares. If any matter arises which

requires a vote of the shareholders~of Zurich Financial

Services to be taken, the affirmative vote of shareholders

owning 580 of the voting shares of Zurich Financial Services

will be required to approve such matter. Such matters are,

in addition to amendments to the Articles, appointing and

dismissing board members and auditors, approving the annual

report, the annual financial statement~ and the consolidated

financial statements, discharging members of the Board of

Directors of Zurich Financial Services, declaring dividends,

approving any transfer of any of Zurich Financial Services'

shares and any other matters reserved to shareholders.

Allied Zurich and Zurich Allied Shareholders. As noted

earlier, Zurich and B.A.T are both broadly held; to Zurich's

knowledge, no one person beneficially owns 50 or more of

Zurich's or B.A.T's voting securities. Zurich does not

expect that, upon completion of the proposed merger, either

of the new public companies, Zurich Allied and Allied Zurich,

will have a shareholder that will beneficially own 5% or more

of its voting securities.

Limitations on Topco Activities and Dividend Ecrualization

Arrangements. Neither Topco may sell, or create or permit

any lien to exist on, any of its shares in Zurich Financial

Services. Zurich Financial Services may not issue additional

shares of stock unless otherwise approved by the vote of

shareholders owning 58% or more of its shares. To prevent a

takeover bid for one Topco ("Topco one") but not for the

other ("Topco two"), Topco two would have the right to

purchase Zurich Financial Services shares held by Topco one

0989359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 8

j

for cash, shares in Topco two or other defined consideration,

if such a bid were made. In certain limited cases -principally a bankruptcy of a Topco or certain violations of

covenants of a Topco relating to disposals of its Zurich

Financial Services shares and the like -- the other Topco

will have a call on Zurich Financial Services shares owned by

the bankrupt or breaching Topco.

Neither Topco may engage in business activities otHer than

owning Zurich Financial Services shares or incur obligations

of any kind, with certain limited exceptions relating to

investment of cash balances, liabilities incidental to

maintaining stock exchange listings or corporate housekeeping

and similar matters. All costs and expenses of the Topcos

are to be satisfied out of dividends from Zurich Financial

Services.

Dividend equalization arrangements in the Governing Agreement

provide for the Topcos to receive dividends from Zurich

Financial Services (or directly from Zurich Financial

Services' operating subsidiaries through the use of nonequity shares) in proportion to their respective equity

interests in Zurich Financial Services (i.e., 43o to Allied

Zurich and 57% to Zurich Allied). The dividend equalization

arrangements are intended to ensure that the Topcos will be

able to pay dividends subject to the 43/57 allocation.

The Transaction is contemplated to be completed in early

September 1998, although unforeseen circumstances could

result in a delay.

Legal Analysis

For the reasons set forth below, Zurich and Scudder Kemper

believe that the Transaction does not result in a change of

actual control or management of Scudder Kemper.

l.Acquisition by Allied Zurich of a 43o Interest in

Zurich Financial Services Does Not Constitute the

Introduction of a New Control Person

Upon the consummation of the Transaction, in substance the

Zurich businesses and the B.A.T Financial Services Businesses

will be combined in a single enterprise owned by public

s hareholders with no concentrated block of ownership, which

in analogous circumstances the Staff has concluded would not

trigger a change in control. In Dean Witter, Discover & Co.;

Morgan Stanley Group Inc., the Staff agreed that the merger

of Dean Witter, Discover & Co. ("DWD") and Morgan Stanley

Group Inc. ("MS") would not result in an assignment of

0989359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 9

_, ;~,

~

advisory contracts under the 1940 Act or the Advisers Act

notwithstanding the fact that DWD would issue stock equal to

more than 250 of its outstanding common stock to accomplish

the merger and MS would cease to exist after the merger. In

that letter, the Staff summarized its position as follows:

In our view, the transfer or issuance of a

block of stock in connection with a merger

involving two issuers generally would not' by

itself cause an assignment of the advisory

contracts of their advisory subsidiaries, for

purposes of t`Yie Investment Company Act or the

Advisers Act, unless (1) a person who had

control of either issuer prior to the

transaction does not have control of the

surviving entity after the transaction, (2) a

person who did not have control of either

issuer prior to the transaction gains control

of the surviving entity, or (3) the

transaction results in an advi~ory subsidiary

being merged out of existence.

Prior to the consummation of the Transaction, each of Zurich

and B.A.T was publicly held with no controlling shareholder.

Subsequent to the Transaction, each of Zurich Allied and

Allied Zurich are expected to have no controlling

shareholder, and none of Zurich's advisory subsidiaries will

be merged out of existence. The only question, then, is

whether the fact that former B.A.T shareholders will own a

43o interest in Zurich Financial Services through Allied

Zurich fails the second part of the test by constituting the

introduction of a new control person. Zurich and Scudder

Kemper submit that in substance it does not.

The dual Topco structure described above is being employed

primarily to address various legal, accounting and tax issues

presented by a cross-border merger. Given the express

agreement of the parties to cause each of Zurich Financial

Services and the two Topcos to maintain identical Boards of

Directors, Zurich and Scudder Kemper believe that it would

elevate form over substance to regard Allied Zurich as a

separate legal entity holding a controlling block of voting

securities sufficient to warrant a finding of a change in

control under the Advisers Act.

8

1997 SEC No-Act. Lexis 548 at page 13 n.14.

0989359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 10

As a substantive matter, the Transaction should not give rise

to a concern over "trafficking" in advisory contracts that

Section 205(a) {2) of the Advisers Act and its corollary

provision, Section 15(a) under the 1940 Act, seek to address.

While asset management is one of the core business segments

of the combined enterprise, it has three other core business

segments as well: non-life insurance, life insurance and

reinsurance. For example, Zurich Financial Services is

expected to be the third largest writer of personal%lines

property and casualty premiums and of total property and

casualty premiums~in the United States, and one of the top

ten firms in the global~~einsurance business. On a pro forma

basis, Zurich Financial Services total 1996 aggregated gross

premium income would have been approximately $40.0 billion.

It is thus apparent that the primary business objective of

the Transaction was not a combination with the asset

management business of Scudder Kemper. (Indeed, at the time

the agreement in principle relating to the Transaction was

first announced, Zurich's acquisition of its interest in

Scudder Kemper had not yet been consummated.)

2.Allied Zurich Will Have No Right To Direct the Dayto-Day Management of Zurich Financial Services or

Scudder Kemper

In this respect, the recent no-action letter is~ued by the

Staff to J.P. Morgan &.Co. Incorporated ("JP~I")

while

predicated upon a different factual setting

is

instructive. In that letter, JPM proposed to purchase a 450

equity interest in American Century Companies, Inc. ("ACC")

which, due to ACC's dual class structure, entitled JPM to a

maximum of 10.830 of the voting power in ACC. Pursuant to a

stockholders agreement, ACC agreed not to take certain

specified actions (relating to transactions that could

significantly alter ACC's structure or business as currently

conducted) without JPM's prior consent. JPM also had the

right, upon a 250 or greater decline in ACC's assets under

management (net of market changes) or extraordinary turnover

American Century Companies, Inc./J.P. Morcfan & Co. Incorporated,

1997 SEC No-Act. LEXIS 1107 (December 23, 1997).

10

No-action relief was sought to ensure that certain voting rights

granted to a holder of less than 25% of the voting stock of a

company were not sufficient to rebut the presumption under Section

2(a)(9) of the 1940 Act that any person who does not own more than

25s of the voting securities of a company shall be presumed not to

control such company.

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 11

-~

",

in ACC's senior management, to~~replace certain members of

ACC's senior management.11 Counsel for JPM successfully

argued that these rights did not justify rebutting the

presumption of no control on the basis that they (i) were not.

intended to, and would not, give JPM the right to direct the

day-to-day management of ACC, (ii) would apply only in

extraordinary situations and (iii) merely provided JPM with

limited consent rights, as opposed to the right to direct

affirmatively the activities of ACC.

~

In the present case, Allied Zurich will have no right to

direct the day-to-day management of Zurich Financial Services

or its subsidiaries, including Scudder Kemper and its

subsidiaries, but rather has only the limited shareholder and

contractual rights granted by the Governing Agreement, the

Articles of Incorporation and Organizational Rules, such as

approval of amendments to the Zurich Financial Services

Articles, changes in Zurich Financial Services board members

or auditors, the declaration of dividends by Zurich Financial

Services, and transfers of Zurich Financial Services shares.

None of these rights has any direct bearing on the day-to-day

operations of Scudder Kemper or the services it provides to

its clients. In that regard, Zurich has represented to the

Boards of Directors of registered investment companies

managed by Scudder Kemper, and Allied Zurich has confirmed

its belief, that the consummation of the Transaction should

not result in any change in the management or governance of

the U.S. investment advisory businesses of Scudder Kemper.

Furthermore, Zurich and Scudder Kemper do not anticipate any

material changes in the investment management personnel who

currently provide investment advisory services, or any

material change in the level of services provided or the fees

charged, as a result of the Transaction.

11

If any three of ACC's Chief Executive Officer, Chief Operating

Officer, Chief Investment Officer and Chief Marketing Officer cease

to be employed by ACC in any 12-month period (other than by death,

disability or normal retirement) or if any five of the individuals

holding specified senior management positions (including those

individuals holding the foregoing positions) cease to be employed

by ACC in any 12-month period (other than as aforesaid), JPM can

veto any replacement named by ACC's Board of Directors, and if no

agreement with respect to the replacement is reached within three

^'

months of the event causing the replacement, JPM has the right to

fill such position. In addition, if the Chief Operating Officer of

ACC is one of those who has ceased to be employed, then JPM can

either replace his successor or name his successor, as well as veto

any selection of his replacement made by ACC's Board of Directors.

0989359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 12

_ _~

Another factor that points strongly towards the absence of

any change in the management or operations of Scudder Kemper

is the governance arrangements that were put in place at the

time of the acquisition of Zurich's 70o interest in Scudder

Kemper and that remain unaffected by the Transaction. These

arrangements preclude certain major decisions affecting

_ Scudder Kemper being taken without the approval of Scudder

Kemper directors elected by the non-Zurich shareholders of

Scudder Kemper -- namely, officers and employees of% Scudder

Kemper, who currently own in the aggregate (and will continue

to own following the Transaction) approximately 30% of

Scudder Kemper's stock.` Approval of a majority of the

directors elected by the non-Zurich shareholders is required

for matters that include: causing Scudder Kemper to engage

substantially in a business not related to investment

management; making material acquisitions or divestitures;

making material changes in the company's capital structure;

dissolving or liquidating the company; entering into certain

transactions with Zurich or its affiliates; or changing the

company's charter or by-laws in ways adverse to the rights of

the non-Zurich shareholders of Scudder Kemper. These

protective provisions will remain in place for the next five

years absent the ownership level of non-Zurich shareholders

falling below l00 or an initial public offering of Scudder

Kemper.

In addition to these provisions in the Scudder Kemper

governance arrangements, Allied Zurich has agreed, in

connection with the proposed Transaction, that, in the event

the designation of any members to the Board of Directors or

the Executive Committee of Scudder Kemper is submitted to

Zurich Financial Services for approval, Allied Zurich will

abstain from voting on the designation of such persons.

There are no changes to the Scudder Kemper Board of Directors

or Executive Committee being made as a consequence of the

Transaction, although in the foreseeable future it is

possible that a person currently associated with the B.A.T

financial services businesses may join the Board if a vacancy

arises.

It is also worthy of note that Scudder Kemper's Chief

Executive Officer, Edmond D. Villani, is, and after the

closing of the Transaction is expected to continue to be, a

member of Zurich's Corporate Executive Board with

responsibility for asset management, and that Mr. Villani,

following the closing of the Transaction, is expected to be a

member of Zurich Financial Services' Group Management Board

with responsibility for asset management.

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 13

Based on the foregoing, we have advised Zurich and Debevoise

& Plimpton has advised Scudder Kemper that, subject to the

receipt of the interpretive advice requested hereby, the

Transaction should not result in a change of actual control

or management of Scudder Kemper within the meaning of Rule

202(a)(1)-1 of the Advisers Act and therefore there should be

no "assignment" of the Advisory Client Agreements requiring

advisory client consent.

REQUESTED INTERPRETATION

Section 205(a)(2) of the Advisers Act generally makes it

unlawful for an investment adviser, unless exempt from

registration, to enter into or perform any investment

advisory contract unless the contract provides, in substance,

that no assignment of such contract shall be made by the

investment adviser without the consent of the client.

Section 202(a)(1) of the Advisers Act states that an

"assignment" will be deemed to occur upon "any direct or

indirect transfer

of a controlling block of the

assignor's outstanding voting securities by a security holder

of the assignor

."

Section 202(a)(12) of the Advisers Act defines "control" as

follows:

"Control" means the power to.~xercise a

controlling influence over the management

or policies of a company, unless such power

is solely the result of an official

position with such company.

Although the phrase "power to exercise a controlling

influence over the management or policies of a company" does

not provide an objective standard for determining whether

control actually exists in a particular situation, Section

2(a)(9) of the 1940 Act does contain a numerical standard for

presumptively determining whether control exists. Under that

Section, the benefi~2i.al owner of 25 percent or less of the

"voting securities"

of a company presumptively does not

control the company; and correspondingly, the beneficial

owner of more than 25% of the outstanding voting securities

of a company presumptively does control the company, unless

the presumption is rebutted to the satisfaction of the

12

The term "voting securities" is defined in Section 2(a)(42) of the

1940 Act to mean: "any security presently entitling the owner or

holder thereof to vote for the election of directors of a company."

0489359.05

Douglas J. Scheidt, Esq.

August 26, 1998

Page 14

•

_.~

Commission. The Advisers Act has no similar presumption.

However, as noted above, Rule 202(a)(1)-1 provides that "[a]

transaction which does not result in a change of actual

control or management of an investment adviser is not an

assignment for purposes of Section 205(2) of the [Advisers]

Act."

Given the Commission's prior statements in both the proposing

and adopting release for Rule 2a-6 under the 1940 A~~t, the

analog of Rule 202(a)(1)-1, that Rule 2a-6 should be

construed narrowly in light of the investor protection

concerns the rule was ir`rtended to address, we seek the

Staff's assurances that Rule 202(a)(1)-1 is available, not

only in the more common types of transactions cited in the

proposing release for Rule 2a-6 that were the sub~ect of noaction letters prior to the adoption of that rule

but in

the context of any transaction in which in fact there is no

change of actual control or management, regardless of whethe

r

a presumptive control person under Section 2(a)(9) of the

1940 Act is introduced. To conclude otherwise would largel

y

eviscerate the relief otherwise afforded by Rule 202(a)(1) -1,

and is a rea~7.~ing not supported by the plain language of

the

rule itself.

13

See note 3 to Release 10809, citing staff responses to

inquiries by

FMR Corp. (Dec. 16, 1977) [merger into newly-formed

subsidiary to

effect change in state of incorporation]; Equitable of

Iowa

Variable Annuity Account A (Nov.25, 1977) [formation

of a holding

company]; Securities Management and Research, Inc.

(Dec. 30, 1976)

[capital contribution to subsidiary]; ITT Variable Annuity

Insurance Company-Separate Account (Jan. 24, 1972),

[1971-1972

Transfer Binder] Fed. Sec. L. Rep. (CCH) c~ 78,683 [transf

er of

stock between subsidiaries].

14

While Zurich and Scudder Kemper as a precautionary matter

have

applied to the Commission for an exemptive order permitt

ing Scudder

Kemper to continue to serve as investment adviser to the

registered

investment companies currently advised by Scudder Kemper

for up to

150 days following the consummation of the transaction

(see Note 2

infra), and thus it may not be necessary to rely on

Rule 2a-6 under

the 1940 Act, we believe that, since that rule and

Rule 202(a)(1)

are virtually identical in all substantive respects,

the same

interpretation being requested under the Advisers

Act is warranted

under the 1940 Act as well, and we request that the

Staff confirm

that it concurs in this conclusion as well.

0489359.05

..

Douglas J. Scheidt, Esq.

August 26, 1998

Page 15

Should you have any questions or comments concerning this

letter, please contact the undersigned at (212) 728-8265.

Very truly yours,

~ ~~~>~

Daniel Schloendorn

r

Enclosures

cc:

Dr. Kaspar Hotz

\

Kathryn L. Quirk, Esq.

Meredith M. Brown, Esq.

0489359.05