SEC Division of Investment Management staff letter: American International Group, Inc.

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Ref. No. 97-355-CC
American International
REPONSE OF TH OFFCE OF CHI COUNSEL Group, Inc.
DIVSION OF INTM MAAGEl File No. 132-3
By letter dated July 18, 1997, you seek assurace that the sta wil not recommend enforcei:ellt action to the Commission under Section 9(a)(2) or (3) of the Investment ComparY~Åc~''ø'1940 (the "Investment Company Act") if any afilted person of AIG Tradig Corporition ("Tradig") provides investment advisory or distribution services to registered investment companes afer the entr of a stipulation and order by the United States Distrct Court for the Southern Distrct of New York, as more fully described in your letter. Facts You state that American International Group, Inc. ("AIG") is amon.g the nation's of commercial and industral insurace coverages. AIG Tradig Group Inc. ("Tradig Group") is 80% owned by AIG, and 20% owned by cert employees of lagest underwriters

Tradig Group. Trading is a wholly owned subsidiar of Tradig Group. Tradig is not registered (or required to be registered) in any capacity with the Commission or the Commodity Futures Tradig Commission (the "CFTC"). The AIG group of companes also includes registered investment advisers and a registered broker-deaer that serves as an investment company distrbutor. 1 On July 18, 1997, the U.S. Deparment of Justice (the "DOJ") filed with the United States Distrct Court for the Southern Distrct of New York a stipulation and proposed order (collectively, the "Order") that would sette a civil antitrst action brought by the DOJ agaist a number of companes, includig Tradig. 2 You state that the Order concludes the 1 AIG Capita Management Corp. is an indiect wholly owned subsidiar of AIG that serves as an investment adviser to registered investment companes. AIG Global Investment Corp. is an indiect wholly owned subsidi of AIG that serves as subadviser to registered investment companes. AIG Internationa Asset Management Inc. is an indiect subsidi of

AIG and is a registered investment adviser. AIG Equity Sales Corp. is a wholly owned subsidi of AIG that serves as distributor, placement agent, and pricipal underwriter of registered investment companes and separte accounts. These four entities and Tradig are al under the control of AIG, and thus are "afilated persons" withi the meag of Section 2(a)(3)(C) of the Investment Company Act. 2 Tradig is the only AIG afilate that is a par to the Order. A copy of the Order is attched to your letter. The Order requires the defendats to: (i) comply with Section 1 of

the Sherman Act; (n) maita antitrst complice progras; (il) file anual statements with the DOJ for five yeas concerng the maner of their complice with law; and (iv) permit the DOJ periodic access to their personnel and records regarding compliance with the (contiued. . .)

DOl's investigation of alegations that between July 1992 and May 1993, employees of Tradig and its U.K. subsidiar, AIG Tradig Ltd., violated the U.S. antitrst laws by enterig into an agreement with other tradig firms to reduce the price of commissions paid

to brokers for trasactions in specifed Brent (North Sea) oil spread contrcts3 and contrcts for dierences relating to Brent oil prices ("CFDS").4 The proposed Order provides that the pares have "agree to the entr of this stipulation and order without tral or adjudication of any issue of fact or law herein and without this stipulation and order constitutig any evidence agaist or an admission by any pary with respect to any such issue. " You represent that in its complat, the DOJ did not alege that any employee of AIG or any AIG afilate providig services to registere investment companes was involved in

the activities under investigation. You further represent that no such employee or AIG afilate was involved in those aleged activities. Analysis
Section 9(a)(2) of the Investment Company Act bars entities subject to cert court

injunctions from serving in cert specifed capacities with respect to registered investment

companes, includig serving as an investment adviser of any registered investment company 2(. . . contiued) Order. You state that under 15 U.S.C. § 16 (Supp. 1996), which specifes the procedure for the entr of consent judgments in actions brought by the DOJ under the U.S. antitrust laws, the district court may not enter the proposed Order unti at least 60 days following its publication in the Federa Register. Durig this 60-day waitig period, the court may consider comments submitted by the public and any responses by the DOJ. Before enterig the Order, the court must determe that entry of the Order is in the "public interest," as defined in 15 U.S.C. § 16(e). 3 You state that cagoes of Brent crude oil are bought and sold in the Brent market in privately negotiated trasactions. Brent spread contrcts involve trsactions in which there is a simultaeous purchase of a Brent contrct for a given month forward, and sale of a Brent contract for a diferent month forward. You represent that these trsactions are not effected on an exchange and occur pricipaly outside of the United States. 4 A "CFD" is defined in the Order as a commercia trsaction involving the purchase of an instrument the price of which is determined by the dierence between: (i) the published price of a cargo of Brent blend crude oil aleady loaded or avaible to be loaded on a specifed day; and (n) the published price of a cargo of Brent blend crude oil avaiable to be loaded on an unspecifed day of the first month forward. You represent that these trsactions are not effected on àn exchange and occur pricipaly outside of the United

States.
2

or as pricipal underwriter for cert registered investment companes.5 Section 9(a)(3), in

relevant par, provides that a company is prohibited from actig in any of the capacities specifed in Section 9(a) if an afilated person of the company is covered by Section 9(a)(2).6 You maita that Section 9(a)(2) does not apply to the Order, and that, therefore,
Section 9(a)(3) does not apply to any of Trading's afilates that provide investment advisory

5 Section 9

(a) (2) of the Investment Company Act provides that:
(a) It shal be unlawful for any of the following persons to serve or act in

the capacity of employee, officer, diector, member of an advisory board, investment adviser, or depositor of any registered investment company, or pricipal underwriter for any registered open-end company, registered unit investment trust, or registered face amount certcate company. (2) any person who, by reason of any misconduct, is permanently

or temporay enjoined by order, judgment, or decree of any court of competent jurisdiction from actig as an underwriter, broker, deaer,

investment adviser, municipal securities deaer, governent securities broker, governent securities dealer, trasfer agent, or entity or person required to be registered under the Commodity Exchange Act, or as an afilted person, salesman, or employee of any investment company,

ban, insurace company, or entity or person required to be registered under the Commodity Exchange Act, or from engagig in or contiuing

any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security. 6 Section 9(a)(3) of the Investment Company Act provides that:

(a) It shal be unlawful for any of the following persons to serve or act in

the capacity of employee, offcer, dirtor, member of an advisory board,

investment adviser, or depositor of any registered investment company, or pricipal underwriter for any registered open-end company, registered unit investment trust, or registered face amount certcate company. a company any afilated person of which is ineligible, by reason of pargrph (1) or (2), to serve or act in the foregoing capacities. (3) 3

8 or distrbution services to registered investment companes.7 You argue that the text and legislative history of Section 9 (a) (2) support the view that the provision applies only to conduct relatig to the purchase or sale of securities and fInancial fraud subject to the securities or commodities laws, as opposed to aleged misconduct under the antitrst laws.

You assert that the applicabilty of Section 9(a)(2) depends on whether the Order enjoins Tradig: (i) from "actig as" any of the first group of entities specifed in Section 9(a)(2) (the "First Group"); (n) from "actig as" an afilated person, salesman, or employee of any of the second group of entities specifed in Section 9(a)(2) (the "Second Group"); (il) from engagig in or contiuing any conduct "in connection with any such activity"; or (iv) from engagig in or contiuing any conduct in connection with the purchase or sale of a "security. " You maita that the Order does not enjoin Tradig from engagig in conduct in any of the four possible circumstaces specifed in Section 9(a)(2). You state that the Order does not enjoin Tradig .from "actig as" any entity in the First Group, or as an afilated person, salesman, or employee of any entity in the Second Group. You also maita that the Order does not enjoin Trading from engagig in conduct "in connection with any such activity." You assert that, by its terms, the phrse "in connection with" requires a lige between the conduct afected by the Order and the activities of an entity in the Firt Group or an afated person, salesman, or employee of an entity in the Second Group. Although Tradig is an afilated person of an entity in the Second Group (Le., an insurace company), you state that the necessar lige required between the Order and Tradig's activities as such an afilated person is not present. The Order does not apply to al of Trading's activities, but only to activities in connection with trsactions in Brent spread contrcts and related CFDs. In addition, the Order expressly permts Tradig to engage in any lawful activity relatig to Brent oil spread contrcts and related CFDs.9 You further note that entities in the First Group or afilted persons, salesmen, or employees of entities 7 You assume, for purposes of your request, but do not concede, that the Order operates to "enjoin" Tradig, as that term is used in Section 9(a)(2), from engagig in cert activities. 8 You state that Section 9(a)(2) was intended to disqualy persons "enjoined by a court in connection with a security or fInancia fraud." H.R. Rep. No. 2639, 76th Cong., 3d Sess. at 14 (1940); S. Rep. 1775, 76th Cong., 3d Sess. at 14 (1940). 9 Specifcaly, the Order permts Trading to: (i) negotite with other counterpares the terms of such contrcts; (n) negotiate commissions with brokers; (il) pay brokerage commissions required or authoried by any U.S. governent agency or self-regulatory organation; and (iv) pay brokerage commissions to foreign brokers and, unless the DOJ

objects afer notice, to U. S. brokers required or authoried by any foreign governent agency or self-regulatory organtion. 4

in the Second Group do not customary purchase and sell 15-day Brent oil spread contrcts

or related CFDs.10
Finaly, you maita that the Order does not enjoin Tradig from engagig in

conduct in connection with the purchase or sale of any security. It is your opinon that the

Brent oil spread contracts and related CFDs covered by the Order are not "securities" under the federa securities laws. Based on the facts and representations in your letter and the proposed Order, and on your opinon that the Brent oil spread contracts and related CFDs covered by the Order are not "securities" under the federa securities laws, we would not recommend that the Commission commence enforcement action under Section 9(a)(2) or (3) of the Investment Company Act if any afilated person of Tradig provides investment advisory or distrbution services to registered investment companes afer the entry of the Order. 11 Because ths response is based on the facts and representations in your letter and the proposed Order, and on your opinon, you should note that dierent facts or representations may require a diferent conclusion.1z

CdwCU d. ~
Edward J. Rubenstein ~
Senior Counsel
10 You represent that Tradig is not required to be registered under the Commodity Exchange Act ("CEA") in order to engage outside the United States in the trdig of 15-day Brent oil spread contracts or related CFDs, because such trsactions are excluded from the jurisdiction of the CEA. 11 We assume for purposes of this response, but express no conclusion, that the Brent oil spread contrcts and related CFDs ar not securities. lZ You also assert that the Order is not issued "by reason of any misconduct." Because we conclude, for the reasons discussed above, that Sections 9(a)(2) and (3) are inapplicable to the Order, it is not necessar to reach this issue. 5

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July 18, 1997
By Hand
Douglas J. Scheidt, Esq.,

Associate Director and Chief Counsel,

Division of Investment Management,

Securities and Exchange Commission,

450 Fifth Street, N. W. ,

Washington, D. C. 20549. ~~ /~~~.
_,:.:í . Re: American International Group. Inc.
Dear Mr. Scheidt:
We write on behalf of American International

Group, Inc. ("AIG") regarding the inapplicability of

Sections 9 (a) (2) and (3) of the Investment Company Act of

1940, as amended (the "1940 Act"), to a stipulation and

order (the "Order"), filed today with the United States

District Court for the Southern District of New York,

settling a civil antitrust action brought by the U. S.

Department of Justice (the. "DOJ") against a number of companies, including AIG i S indirect subsidiary, AIG Trading

Corporation ("Trading"). We have concluded that the Order

should not be a disqualifying event under Sections 9 (a) (2) or (3) for any affiliated person of Trading that now or in

the future provides investment advisory or distribution

services to registered investment companies. Nevertheless,

in view of the serious consequences that could result if

Sect ions 9 (a) (2) or (3) were deemed to apply, we seek the SEC staff i s concurrence in our conclusion. Specifically, we request the SEC staff i s interpretative advice that, based on the facts outlined

below, the Order is not a disqualifying event under Sections 9 (a) (2) or (3) for affiliated persons of Trading that now or in the future provide investment advisory or distribution

services to registered investment companies. In the

alternative, we respectfully request that the SEC staff take

Douglas J. Scheidt, Esq. -2 the position that it would not recommend that the SEC take

any enforcement action if any affiliated person of Trading,

now or in the future, provides investment advisory or

distribution services to registered investment companies

after the Order becomes effective without obtaining

exemptive relief under Section 9 (c) of the 1940 Act.

Summary
With the filing of the Order, the DOJ has

concluded an investigation of allegations that Trading

violated the federal antitrust laws in connection with

brokerage commissions for certain transactions in Brent

(North Sea) oil spread contracts and contracts for

differences relating to Brent oil prices. These allegations

concern activities related to the trading of Brent qil

principally in the United Kingdom and do not involve

transactions in securities. Trading is not registered (or

required to be registered) with the SEC or the Commodity

Futures Trading Commission (the "CFTC11).

For the reasons stated below, we believe that the

Order should not be a disqualifying event for purposes of

Sections 9 (a) (2) or (3). Among other things, we believe

that the Order, which does not contain any findings of fact,

should not be considered an injunction 11entered by reason of

any misconduct. 11 The Order also does not relate to any

subject matter specifically enumerated within Section

9 (a) (2). No officer or employee of AlG, or of any AlG

subsidiary or other affiliate, involved in investment

company activities was involved in the activities subject to

the Order or any other activities of Trading (except to the

extent that members of AlG' s legal department and other

officers of AlG have been involved in matters pertaining to

the DOJ investigation). Further, we have not identified any instance in which a party has sought a Section 9 (c) exemption in circumstances not involving alleged violations of the U. S. securities or commodities laws or an entity registered in some capacity with the SEC or CFTC. Neither connection is present here. Factual Background

Today, the DOJ concluded its investigation of

whether, between July 1992 and May 1993, employees of

Trading and its United Kingdom subsidiary, AlG Trading Ltd.,

entered into an agreement with other defendant trading firms

to reduce the price of commissions paid to brokers, located

mainly abroad, for transactions in specified Brent (North

Douglas J. Scheidt, Esq. -3
Sea) oil spread contracts and contracts for differences

relating to Brent oil prices. * In its complaint, the DOJ

did not allege that any employee of AIG or any AIG affiliate

providing services to registered investment companies was

involved in the activities under investigation. AIG also

has confirmed to us that no such employee of AIG or any AIG

affiliate was involved in those alleged activities.

The Order resolving this matter will dismiss, with

prejudice, the DOJ i S complaint against all defendants, including Trading. It requires the defendants, inter alia:
(i) to comply with Section 1 of the Sherman Act; (ii) to

maintain antitrust compliance programs; (iii) to file annual

statements with the DOJ for five years concerning the manner

of their compliance with law; and Civ) to permit the DOJ

periodic access to their personnel and records regarding

compliance with the Order. A copy of the Order is'

enclosed.
Trading is a wholly-owned subsidiary of AIG

Trading Group Inc. ("Trading Group") i which is 80 percent owned by AIG and 20% owned by certain employees of Trading

Group. Trading is the only AIG affiliate that is a party to

the Order.

• Cargoes of Brent crude oil are bought and sold in the

Brent market in privately negotiated transactions.

Brent spread contacts involve transactions in which

there is a simultaneous purchase of a Brent contract

for a given month forward and sale of a Brent contract

for a different month forward. Contracts for

differences involve the making of payments based on the

difference between a current Brent oil price and the

price one month forward. These transactions are not

effected on an exchange and occur principally outside

of the United States.

Under 15 U.S.C. § 16 (Supp. 1996) i which specifies the

procedure for the entry of consent judgments in actions

brought by the DOJ under the federal antitrust laws,

the district court may not enter the proposed Order

until at least 60 days following its publication in the

Federal Register. During this 60-day waiting period,

the court may consider comments submitted by the public

and any responses by the DOJ thereto. Before entering

the Order i the court must determine that entry of the

Order is in the "public interest i" as defined in 15

U.S.C. § 16(e).

Douglas J. Scheidt, Esq. -4
AIG is the leading U. S. -based international insurance organization and among the nation i s largest underwriters of commercial and industrial coverages. As of

December 31, 1996, AIG had consolidated total assets of

approximately $149 billion.

Each of the following four entities within the AIG

group of companies is either an SEC-registered investment

adviser, or an SEC-registered broker-dealer that serves as

an investment company distributor:

1. AIG Capital Management Corp. - - an indirect
   wholly-owned subsidiary of AIG - - serves as the investment adviser to: AIG All Ages Funds, Inc. ("All Ages Funds") i

which is a registered series fund currently comprised of AIG

Children's World Fund-2005 and AIG Retiree Fund-2003; First

Global Equity Portfolio, a registered master fund in which

the All Ages Funds series invest a significant portion of

their assets ¡and AIG Money Market Fund, a separate series

of a registered investment company, the other series of

which are advised by firms not affiliated with AIG.

2. AIG Global Investment Corp. - - an indirect
   wholly-owned subsidiary of AIG - - serves as the investment sub-adviser to All Ages Funds (both series), First Global

Equity Portfolio, and two other registered investment

companies that are advised by firms not affiliated with AIG.

3. AIG International Asset Management Inc.

( II Asset Management II) is registered as an investment adviser,

but does not serve as an investment adviser or investment

sub~adviser to any registered investment company. Asset

Management is 70 percent owned by AIG Trading Services Inc.,

which in turn is a wholly-owned subsidiary of Trading Group i

the other 30 percent of Asset Management is owned by AIG

Global Investment Group, Inc., which is wholly owned by AIG.

4. AIG Equity Sales Corp. - - a wholly-owned

subsidiary of AIG - - serves as distributor of All Ages

Funds, placement agent of First Global Equity Portfolio,

exclusive sub-dißtributor of AIG Money Market Fund, and

principal underwriter of several 1940 Act registered

separate accounts.

AIG controls each of these four entities, and,

therefore, each is an affiliated person of the other and of

Trading for purposes of the 1940 Act.

Douglas J. Scheidt, Esq. -5
Inapplicability of Sections 9 (a) (2) and (3) to the Proposed Order

Section 9 (a) (2) bars entities subject to certain

court injunctions from providing specified services to

registered investment companies, including serving as an

investment adviser or depositor of any registered investment

company or as principal underwriter for any registered open-

end investment company or registered unit investment trust.

See 15 U.S.C. § 80a-9 (ai (2). Under Section 9 (a) (3), any affiliated person of an entity covered by Section 9 (a) (2) is prohibited from acting in the capacities identified above.

We believe that Section 9 (a) (2) does not apply to the Order (and, therefore, that Section 9 (a) (3) does not apply to any of affiliated person of Trading that, now or in the future, provides investment advisory or distribution services to registered investment companies) for a number of reasons, including the following:
First, assuming arguendo for purposes of this request that the Order is an II injunction II (but without conceding that it is), we do not believe that the Order is, as required by Section 9 (a) (2), an injunction issued "by reason of any misconduct. II Al though the Order will dismiss with prejudice the DOJ's complaint alleging antitrust

violations, the Order does not, unlike the typical

settlement of actions brought by the SEC, contain findings

of fact involving misconduct. Rather, the Order provides

that parties have II agreed to the entry of this stipulation

and order without trial or adjudication of any issue of fact

or law herein and without this stipulation and order

constituting any evidence against or an admission by any

party with respect to any such issue." (Order, p. 1).

Second, the text and legislative history of

Section 9 (a) (2) support our view that this provision applies

only to conduct relating to the purchase or sale of

securities and financial fraud subject to the securities or

commodities laws, as opposed to alleged misconduct under the

antitrust laws. None of these elements is present here.

By its terms, Section 9 (a) (2) applies to orders enjoining a party from engaging in specified activities governed by the federal securities laws and the Commodity Exchange Act ("CEA"), specifically:
II (iJ from acting as an underwriter i broker, dealer, investment adviser i municipal securities

Douglas J. Scheidt, Esq. -6 dealer, government securities broker, government

securities dealer, transfer agent, or entity or

person required to be registered under the

Commodity Exchange Act, (ii) or as an affiliated

person, salesman, or employee of any investment

company, bank, insurance company, or entity or

person required to be registered under the

Commodity Exchange Act, or (iii) from engaging in

or continuing any conduct or practice in

connection with any such activity or (iv) in

connection with the purchase or sale of any security; " 15 U.S.C. § 80a-9 (a) (2) . Moreover, the legislative history of Section 9 (a) expressly indicates that subsection (2) was includéd in the

Act to disqualify persons "enj oined by a court in connection

with a security or financial fraud." H.R. REP. No. 76-2639,

at 14 ( 194 0); S. RE P . No. 76 - 1 7 7 5, at 14 ( 194 0) .
Even assuming the Order is a court inj unction

issued by reason of misconduct (but not conceding either

point), the applicability of Section 9 (a) (2) depends on whether the Order prohibits Trading: (i) from "act ing as" any of the first group of entities enumerated in Section

9(a) (2) (the "First Financial Group"); (ii) from "acting as"

an affiliated person, salesman, or employee of any of the

second group of enumerated entities (the "Second Financial

Group"); (iii) from engaging in or continuing any conduct

"in connection with any such activity"; or (iv) from

engaging in or continuing any conduct in connection with the

purchase or sale of a "security."

The Order clearly does not enjoin conduct in three

of the four possible circumstances specified in Section

9(a)(2), As to (i) and (ii), the Order does not enjoin

Trading from "acting as" any entity in the First Financial

Group or as an affiliated person, salesman, or employee of

any entity in the Second Financial Group. As to (iv) , it is

our opinion that the Brent oil spread contracts and related

contracts for differences covered by the Order are not

"securities" under the federal securities laws. *

• These short-term contracts are not bought and sold "to

raise money for the general use of a business enter￾prise," but rather are "exchanged to facilitate the

(continued. . .)

Douglas J. Scheidt, Esq. -7
Accordingly, the critical question is whether the Order could be deemed to enj oin conduct covered by clause (iii), .i.~., conduct "in connection with any such activity."

By its terms, the phrase "in connection with" requires a

linkage between the conduct affected by the Order and the

activities of an entity in the First Financial Group or an

affiliated person, salesman, or employee of an entity in the

Second Financial Group.

Although Trading is an affiliated person of an

entity in the Second Financial Group (~.g., an insurance

company), the requisite linkage required by clause (iii)

between the Order and Trading i s act i vi ties as such an affiliated person is not present here. The Order does not

apply to all of Trading's activities, but only to activities

in connection with transactions in "Brent spread contracts"

and "contracts for differences" relating to Brent ö!l

prices. (See Order, § III Applicability, p. 4). In fact,

the Order expressly permits Trading to engage in any lawful

activity relating to Brent oil spread contracts and related

contracts for differences, including negotiating with other

counterparties the terms of such contracts, negotiating

commissions with brokers, paying brokerage commissions

required or authorized by any U. S. government agency or

self -regulatory organization, or paying brokerage

commissions to foreign brokers and, unless the DOJ obj ects

after notice, to U. S. brokers required or authorized by any

foreign government agency or self-regulatory organization.

Moreover, the purchase and sale of IS-day Brent.

oil spread contracts or related contracts for differences is

not customarily conducted by entities in the First. Financial

Group or affiliated persons, salesmen, or employees of

entities in the Second Financial Group. Trading is not

required to be registered under the CEA in order to engage

outside the United States in the trading of IS-day Brent oil

spread contracts or related contracts for differences,

because such transactions are excluded from the jurisdiction

of the CEA. ~,~.g., Statutory Interpretation Concerning

Brent Oil Contracts, (1990-1992 Transfer Binder) Comm. Fut.

L. Rep. (CCH) ~ 24,925, at 37,364 (Sept. 25, 1990).

---

• ( . . . continued)
  purchase and sale of" a commodity, .i.~., crude oil.

Reves v. Ernst & Young, 494 U.S. 56, 66 (1990).

Douglas J. Scheidt, Esq. -8
For the reasons set forth above, we have concluded that Section 9 (a) (2) should not apply to the Order, and, therefore, that Section 9 (a) (3) would not apply to any AIG

subsidiaries or other affiliated persons of Trading

providing services, now or in the future, to registered investment companies. Nevertheless , given the serious consequences that could result if Sections 9 (a) (2) or (3) were deemed to apply, AIG and the potentially affected AIG

subsidiaries seek the SEC staff's interpretative advice

that, based on the facts stated herein, the Order is not a disqualifying event under Sections 9 (a) (2) or (3) for them or any other affiliated person of Trading. In the alternative, we respectfully request on their behalf that

the SEC staff take the position that it would not recommend

that the SEC take any enforcement action under Sections 9 (a) (2) or (3) if affiliated persons of Trading provide investment advisory or distribution services to registered

investment companies at any time after the Order becomes

effective without obtaining an exemption under Section 9 (c)

As required by Investment Company Act Release No.

6330, we are submitting this letter and the Order in triplicate.
If you have any questions about this matter,

please contact me at 212-558-3840.

Very truly yours,
~7~~
~::~. Bostelman

(Enclosure)