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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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: 'AN
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i 0 1997 ':,

Our Ref. No. 96-237-CC
REPONSE OF THE OFFICE OF CllEF COUNSEL,

DIVISION OF INVESlMT MANAGEMEN

Lad Freres Asset
Management
File No. 801-65681

By letter dated Januar 10, 1997, you request assurace that we would not
recommend enforcement action to the Commission under Section 12(d)(1)(F) of the
Investment Company Act of 1940 (the "Investment Company Act") if the Emerging World
Funds Portfolio, a newly formed series of The Laard Funds, Inc. (the "Laard Funds") and
the TIFF Emerging Markets Fund (together with the Emerging World Funds Portfolio, the
"Portfolios"), a series of the TIFF Investment Progra, Inc. ("TIP"), do not aggregate, for
purposes of Section 12(d)(1)(F), their purchases of the stock of offshore investment
companies not registered in the United States ("Foreign Funds") with the stock of Foreign
Funds owned or acquired by cert private accounts (the "Prvate Accounts") managed by

Laard Freres Asset Management ("LFAM"), a registered investment adviser.

The Lad Funds and TIP are investment companès registered under the Investment
Company Act. The Portolios are managed by LF AM and intend to invest priarly in the
securities of Foreign Funds in reliance on Section 12(d)(1)(F) of the Investment Company
1 The Private Accounts have investment objectives similar to those of the Emerging

Act.

W orId Funds Portfolio and currently invest in Foreign Funds. You state that, at present, the
Private Accounts collectively own in excess of 3 % of the outstading stock of a number of

Foreign Funds. You maitain that if the Portfolios and the Prvate Accounts are deemed to
be affùiated persons by vire of having a common investment adviser,2 the Portfolios'

Section 12(d)(1)(A) liits the abilty of a registered investment company to

acquire the securities of other investment companies (whether registered or
unregistered). Section 12(d)(1)(F) provides an exception from the liitations

of Section 12(d)(1)(A) with respect to securities purchased or otherwise
acquired by a registered investment company, provided that, among other
al its afilated persons own
no more than 3 % of the tota outstading stock of the acquired investment

thigs, (i) the registered investment

company and

company; and (ii) the registered investment company does not offer or sell its
shares to the public at a public offerig price that includes a sales load of more
than 1-1/2 % . No acquired investment company is obligated to redeem the

securities held by a registered investment company relying Section 12(d)(l)(F)
in an amount exceeing 1 % of its outstading. securities durig any period of
less than thiry days.
2

The definition of "affilated person" set forth in Section 2(a)(3) of the
Investment Company Act includes any person under common control with
another person. Section 2(a)(9) defines control as "the power to exercise a
(continued. . .)

2

abilty to invest in some or al of the Foreign Funds. whose securities are held by the Prvate

Accounts would be liited or prohibited. You seek liited relief from Section 12(d)(1)(F)
so that the stock of Foreign Funds held by- the Prvate Accounts nee not be aggregated with

the stock of Foreign Funds held by the Portolios for purposes of the 3 % liitation imposed
by Section l2(d)(1)(F)(i).3
Analysis

You state that Congress adopted the 3 % restriction of Section 12(d)(1)(F)(i) to address
the concern that the top-tier fund in a fund-of-funds structure may have the abilty to exercise
control over the acquired fund, to the detrient of the acquired fund's other shareholders.4

By requirg the aggregation of the holdings of a top-tier fund with those of its afilated
persons, Section 12(d)(1)(F)(i) liits the abilty of a person to acquire a controllg interest

3

We note that you represent that LFAM wil treat al Prvate Accounts in which
LFAM or any entity that controls LFAM, is controlled by LFAM or is under
common control with LF AM has a proprieta investment interest, other than
as a general parner whose interest is only to the extent necessar to enable the
Private Account to qualy as a parnership for Federa ta purposes, as an

affilated person of the Portfolios for purposes of Section 12(d)(1)(F)(i).
4

See S. Rep. No. 184, 91st Cong., 1st Sess. 29-31 (1969); H.Rep. No. 1382,

91st, Cong, 2d Sess. 10-11, 23-24 (1970); see also Securities and Exchange
Commission, Public Policy Implications of the Investment Company Growth
(1966) at 315 (providing recommendations to Congress for amending Section
12(d)(1) of the Investment Company Act).

3

in an acquired fund by purchasing the acquired fund's securities through severa affilated

top-tier funds.

You mainta that when the acquired fund is a Foreign Fund, however, aggregation of
a top-tier fund's holdings with those of an afilated unregistered fund or other private
account does not serve the purpose of the 3 % restriction. Aggregation in this context merely
frustrates the abilty of both funds to achieve fully their objectives.
Because Section 12(d) of the Investment Company Act does not prohibit an
unregistered investment company or other unregulated entity from acquirg more than 3 % of
the stock of another unregistered investment company, the Prvate Accounts currently are not
limited in the amount of securities of Foreign Funds that they may acquire.

5 Requirg the

aggregation of the Prvate Accounts' stock holdigs of a Foreign Fund with those of the
Portfolios for purposes of the 3 % restriction wil not, therefore, prevent the Prvate Accounts

from acquirg a controllg interest in the Foreign Fund. Rather, you state that as a
practical matter, such aggregation wil simply prevent the Portolios from acquirg any
interest in the Foreign Fund. Similarly, permitting the Portolios to acquire a 3 % interest in a
Foreign Fund over and above the interest held by the Prvate Accounts wil have no effect on
the abilty of the Private Accounts to acquire a controllg interest in the Foreign Fund,
because, as noted above, the Private Accounts may aleady do so.
\
) ,

We would not recommend that the Commission tae any enforcement action under
Section l2(d)(1) if LFAM excludes the stock of the Foreign Funds held by the Private
Accounts when calculating compliance by the Portfolios with the 3 % liitation imposed by
Section 12(d)(I)(F)(i). Our position is based on the facts and representations in your letter,
in particular your representations that (1) the Foreign Funds are offshore funds that are not
required to register with the Commission under the Investment Company Act; and (2) the
stock of the Foreign Funds held by the Portolios and Prvate Accounts in which LFAM or
any entity that controls LFAM, is controlled by LFAM or is under common control with
LFAM has a proprieta interest, other than as a genera parner whose interest is only to the
extent necessar to enable the Private Account to qualy as a parnership for Federa ta

purposes, wil be aggregated for purposes of the 3 % liitation imposed by Section
l2(d)(1)(F).6 Different facts or representations may require a dierent conclusion. Further,

The language and legislative history of Section 12(d)(I)(F) indicate that

Congress was priary concerned with the effect of the pyraiding of control
in a fund-of-funds arngement on underlying registered investment companies.

Id.
6

We note that if the Private Accounts were managed in a maner that would
require them to be registered under the Investment Company Act, the stock of
the Foreign Funds held by the Prvate Accounts would be subject to
(continued. . .)

4

this response expresses the Division's position on enforcement action only, and does not
purport to express any legal conclusions on the questions presented. 7

Yh;Ll.'f S. 6iUJ-ofic
Phillip S. Gilespie
Senior Counsel

6(.. .

/U

continued)

aggregation under Section 12(d)(I)(F). See In Re Clark Laen Skaa
Investment Fir. et al., Investment Advisers Act Release No. 1501 (June 16,

1995) (finding investment progra holding clients' assets ìn an omnibus
account and investing assets in an identical maner to be an unregistered
investment company); Investment Company Act Release No. 21260 (July 27,
1995) (reproposing Rule 3a-4).
7

We recognie that under Section 12(d)(1)(F), a Foreign Fund is not obligated

to redeem securities held by the Portfolios in an amount exceeing 1 %of its

outstading securities durig any period of less than thiy days, whie
redemptions by the Prvate Accounts are not similarly restricted. Section 206
of the Investment Advisers Act of 1940, however, obligates LFAM to exercise
its redemption rights on behal of al of its clients in a maner that does not

advantage one client at the expense of another. Accordingly, Section 206 may
restrict the abilty of LF AM to effect a redemption of Foreign Fund shares on
behal of the Prvate Accounts if doing so would har the interests of one of
the Portfolios. See,~, In Re Kemper Financial Services. Inc., Investment

Company Act Release No. 1387 (Oct. 20, 1993) (finding alocation of trades
and investment decisions between accounts untimely and inequitable); see also,
SEC v. Capital Gais Reseach Bureau, 375 U.S. 180 (1963) (holding that

Advisers Act Section 206 imposes a fiduciary duty on investment advisers).

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1940 Act; Section 12 (d) (1) (F)

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January 10, 1997

Office of Chief Counsel
Di vision of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:

On behalf of our client, Lazard Freres Asset Management
("LFAM"), we request confirmation that the Division would not
recommend enforcement action to the Commission if, under the
circumstances described herein, the Emerging World Funds
Portfolio (the "Emerging World Portfolio"), a newly-formed
series of The Lazard Funds, Inc. (the "Lazard Funds"), and the
TIFF Emerging Markets Fund (the "TIFF Portfolio" and, together
wi th the Emerging World Port fol io, the "Portfolios"), a ser ies

of TIFF Investment Program, Inc. ("TI P"), did not aggregate

their purchases of securities of off-shore funds not registered
in the United States (" Foreign Funds") with those by certain
ùnregulated accounts managed by LFAM for purposes of calculating
the 3% limitation (the "3% limitation") under Section

12 (d) (1) (F) of the Investment Company Act of 1940, as amended
(the "1940 Act") .

As more fully described below, the Portfolios, subj ect to
certain limitations, may purchase in the aggregate up to 3% of
the securities of other investment companies, registered or
unregistered. i LFAM's unregulated accounts may purchase,
wi thout limitation, securities of unregistered investment
companies. Because LFAM advises both the Portfolios and these
accounts an anomaly results--the otherwise permitted activities
For purposes of the reques ted relief only, LFAM agrees to
treat each Portfolio as an affiliated person of the other

for purposes of Section 12 (d) (1) (F) (i).

Washington, D,C, 20036-4652
1150 Seventeenth Street NW

Los Angeles. CA 90067-3086'

Miami. FL 33131-2385
200 South Biscayne Boulevard

Boston, MA 02110
100 Federal Street

H-1088 Budapest. Hungary

2029 Century Park East

202 452 9250

3105565800

305 358 9900

617 482 6800

361 266 9520

Rák6czi ut 1-3

9l QP 9~QP ~
Office of Chief Counsel
Di vision of Investment Management
Securi ties and Exchange Commission
Page 2

of both would be limited and, significantly, for thè Portfolios,
their ability to purchase in the aggregate 3% of the securities
of one or more Foreign Funds would be eroded.
The Portfolios and Unregulated Accounts.

Both the Lazard Funds and TIP are registered investment
companies under the 1940 Act. The Laza~d Funds have engaged
LFAM to act as each of its series' investment adviser. The TIFF
Portfolio has engaged LFAM to manage a portion of its assets. 2

The Emerging World Portfolio will invest primarily in securities
of Foreign Funds which in turn invest in securities of emerging
market issuers. As respects its assets advised by LFAM, the
TIFF Portfolio will invest primarily in securities of these
Foreign Funds. The securities of the Foreign Funds in which the
Portfolios will invest will be listed principally on recognized
international exchanges or traded in recognized international

markets.

For more than 10 years, LFAM has advised clients in the purchase
of the types of securities in which the Portfolios propose to
invest. These clients currently include institutional
investors, such as pension plans of maj or U. S. corporations and
state teachers' retirement plans, none of which are required to
register under the 1940 Act (collectively, "Unregulated
Accounts"), as well as private accounts with respect to which
LFAM does not have discretionary investment authority and
certain other series of the Lazard Funds. The Unregulated
Accounts have investment obj ecti ves substantially similar to the
Emerging World Portfolio's objective.

As of January 31, 1996, Unregulated Accounts had approximately
$625 million in aggregate net assets and invested in over 168
funds, including 24 registered in the United States. Each
Unregulated Account separately invests in approximately 60
funds. As of such date, with respect to 33 of the 168 funds,
the aggregate investment in each such fund by Unregulated
Accounts was over 3% of the total outstanding stock of the fund.
The Unregulated Accounts are not subj ect to the limitations on
investing in the securities of investment companies set forth in

Section 12 (d) (1) (F) of the 1940 Act.

2

LFAM believes that the issues discussed herein arise as to
the TIFF Portfolio only as respects the portion of its
assets LFAM advises and the discussion herein about the

TI FF Portfolio pertains only to LFAM' s acti vi ties on its

behalf.
015642S.01

~ Q; f7wJ Q; ~
Office of Chief Counsel
Division of Investment Management
Securi ties and Exchange Commission
Page 3

Section 12 (d) (1) (F) of the 1940 Act, among other things,
prohibi ts a registered investment company ("RIC") from
purchasing or otherwise acquiring securities of other investment
companies (whether or not registered) if immediately thereafter
more than 3% of the total outstanding stock of such issuer is
owned by such RIC and all affiliated persons of the RIC. If the
Portfolios and the Unregulated Accounts were deemed to be
affiliates because LFAM advises both, and the 3% limitation were
applied to both the Portfolios and the Unregulated Accounts,
then each Portfolio's ability to invest in some or all of the
Foreign Funds whose securities are held by the Unregulated
Accounts would be limited or prohibited. For the reasons set
forth herein,' we believe that such a restrictive interpretation
of the 3% limitation is not necessary to protect the interests
of the shareholders of either Portfolio. Accordingly, LFAM is
requesting limited relief for each Portfolio from
Section 12 (d) (1) (F) so that, as applied to holdings in the
Foreign Funds, the holdings of the Unregulated Accounts need not
be aggregated with each Portfolio's for purposes of the 3%

limitation.3

Section 12 (d) (1) Historical Perspective.

The present restrictions in Section 12 (d) (1) and the exception

from those restrictions afforded by Section 12 (d) (1) (F) were

enacted in 1970 as part of the Investment Company Amendments Act
of 1970. Those amendments resulted from recommendations made by
the Commission oin its 1966 Report, Public Policy Implications of
Investment Company Growth (the "Report"). Before these,

amendments, Section 12 (d) (1 ) prohibited a RIC from purchasing

more than 5% of the total outstanding voting stock of any other
investment company which concentrated its investments in a
particular industry or group of industries, or more than 3% of
the total outstanding voting securities of any other type of
investment company.

3

For purposes of the requested relief only, LFAM agrees to
treat Unregulated Accounts in which LFAM or any entity that
controls LFAM, is controlled by LFAM or is under common
control with LFAM has a proprietary investment interest,
other than as a general partner whose interest is only to
the extent necessary to enable the Unregulated Account to
qualify as a partnership for Federal tax purposes, as an
a£filiated person of the Portfolios for purposes of Section

12 (d) (1) (F) (i) .

0156425.01

~ Q¡ gj~ Q¡ ~
Office of Chief Counsel
Division of Investment Management
Securities and Exchange Commission
Page 4

The Report's discussion of Section 12 (d) (1) evidenced
principally a concern for protecting U. S. registered open-end
investment companies and their shareholders. It focused almost
exclusively on a number of unregistered, foreign-based fund
holding companies which invested without limitation in RICs.
The Report expressed concern that unregulated pyramiding of
investment companies would provide, for those in control at the
top of the pyramid, an element of power and domination over
funds further down the pyramid. Such a holding company iS
existence as a substantial mutual fund shareholder might subvert
the investment policies of the subsidiary RIC; for example, the
RIC would have to leave a high percentage of its assets in
liquid investments to meet the possibility of a substantial
redemption demand.

In addition, the threat of large scale redemptions would allow
fund holding companies to exercise undue influence over the RICs
in which they invested, at the expense of the mutual fund iS
other shareholders. 4 In the Commission's view:
An unregistered foreign based fund holding
company, free of any statutory limitation on the
percentage of the outstanding stock of mutual
funds which it may purchase for its portfolio,
can acquire very substantial or even controlling
interests in its portfolio funds.... The
managements of portfolio funds in such
circumstances must be continually aware that a
possible large redemption carries with it a loss
of advisory fees in approximate proportion to the

percentage of the fund redeemed.... Further, to

the extent that managements of the portfolio
funds derive income from brokerage transactions
for their funds, redemption and the corresponding
restriction in net assets would also decrease the
opportunity to realize such income in the

future.5

4

The Report at 315 (citing the 1940 Act: '''The national
public interest and the interest of investors are adversely
affected when investment companies are organized and

operated. . . in the interest of other investment

companies. . . rather than in the interest of all classes of
such companies', securities holders, or when control of
investment companies is unduly concentrated through

pyramiding or inequi table methods of control.''')
5

UJ 5642'1. 'Ji

Id.

~ QP 9lWo QP ~
Office of Chief Counsel
Di vision of Investment Management
Securi ties and Exchange Commission
Page 5

The Report also expressed the Commission i s concerns for the
layering of costs and the utility of the fund holding company
structure as an investment vehicle. The Report criticized the
utility of a fund holding company by characterizing its

diversification benefits as largely "illusory. ,,6

The Commission concluded that "( i) n view of the excessive costs

to investors. .; the lack of utility and useful investment'
purpose of the fund holding company as an investment vehicle;
and the very serious problems of control and influence over
registered investment companies, their portfolio companies and
the securities markets, which the redemption power in such
companies creates, appropriate statutory protection must be
provided. ,,7 The Commission recommended that the 1940 Act be
amended to prohibit altogether the creation of investment
company holding companies. 8 The 1967 Rroposed amendments to the
1940 Act followed this recommendation. 9 But, after considering
the Commission iS 1966 recommendations, Congress concluded in
1970 that it was possible to deal effectively with the abuses
discussed by the Commission in the Report and to allow the
creation and operation of domestic fund holding companies under

limi ted circumstances, which for purposes of our discussion are

embodied in Section 12 (d) (1) (F) .

Discussion.
A RIC complying with the three conditions--the 3% limitation,
the 1-1/2% sales load limitation and the 1% redemption
limitation--of Section 12 (d) (1) (F) may pyramid investment

vehiclès and invest 100% of its assets in securities issued by

investment companies. The reason is that Section 12 (d) (1) (F)

6

Id. at 320.

7

Id. at 323.

8

Id. ("The Commission therefore recommends that section
12(d) (1) of the (1940) Act be amended so as to prevent the
creation and operation of fund holding companies." The
Commission, however, suggested that the prohibition should
not cover foreign-based unregistered unit trusts organized
by domestic investment companies in order to provide
foreign investors with a vehicle to invest in domestic
registered funds without the problem posed by U. S. estate
tax. Id. at n.43); see generally, id. at 311-324.

9

Hearings on S. 1659 Before the Sen. Comm. on Banking and
Currency, 90th Cong., 1st Sess. pt. 1 at 43 (1967)
(statement of SEC Chairman Manuel F. Cohen).

;)l',6425.01

91 Qç 9Lw rø ~
Office of Chief Counsel
Di vision of Investment Management
Securities and Exchange Commission
Page 6

substantially addresses the concerns that led to the 1970

amendments of Section 12(d) (1).
First, the exception from the provisions of Section 12 (d) (1)
provided by Section 12 (d) (1) (F) is available only to RICs,

thereby addressing the concern that unregistered funds could
acquire substantial or even controlling interests in domestic

mutual funds.

Second, the 1-1/2% sales 'load limitation addresses the concern
about layering of costs. Apart from the general language of
Section 36 (b), Congress did not deem it necessary to address
specifically the issue of layering advisory fees.

Third, the 1% redemption limitation addresses the concern of
substantial forced redemptions.
Significantly, although Congress deemed it appropriate to limit

(i) in Section 123 (d) (1) (A), a RIC' s purchase of both registered

and unregistered investment companies and (ii) in Section

12 (d) (1) (B), sales by a RIC to both registered and unregistered

investment companies, no provision of the 1940 Act limits in
this manner purchases by unregistered investment companies of

securi ties issued by unregistered investment companies. Thus,

the Unregulated Accounts currently are not restricted in their
purchases of the Foreign Funds.
Also, Congress has deemed permissible the investment by a RIC,
such as the Portfolio, of 100% of its assets in investment
companies of all manner10 and the control by a RIC of up to 3%
of any investment company i s voting securities. 11 However,
because LFAM advises both the Portfolios and the Unregulated

Accounts, the aggregation provisions of Section 12 (d) (1) (F) may
restrict both groups of entities and may frustrate their abili ty
to achieve fully their objectives by imposing the 3% limitation

on their combined act i vi ties.

To avoid this result, LFAM seeks confirmation that the Division
would not recommend enforcement action to the Commission if the
Portfolios did not aggregate their purchases of shares of
Foreign Funds with those by the Unregulated Accounts. In all
other respects, each Portfolio's purchases of the securities of
investment companies would continue to be subj ect to the
limitations set forth in Section 12 (d) (1) (F) of the 1940 Act.

10
11

'.-~ i C,i;-i 2 5.01

Section 12 (d) (1) (F) of the 1940 Act.
Section 12 (d) (1) (F) (i) of the 1940 Act.

fl Gç gi~ Gç ~
Office of Chief Counsel
Di vision of Investment Management
Securities and Exchange Commission
Page 7

Should members of the Staff require any additional information
or have any questions or comments regarding this letter, please
telephone Stuart H. Coleman at (212) 806-6049 or David Stephens
at (212) 806-6138.
Very truly yours,

, \ ' J'

. 0' n

0ttacJ¿ r ( , !AC¡(¿L ~ J-GÜrt~
STROOCK & STROOCK & LAVAN

01%425" 01

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