SEC Division of Investment Management staff letter: DFA Investment Trust Company

" .. '.'
:~ OCT I ì 1995

, !... -. .. '...':' ~. .,.'
Our Ref. No. 95-496-CC
The DFA Investment Trost
REPONSE OF TH OFFCE OF CHI COUNSEL Compay DIVSION OF INTM MAAGEM File No. 132-3 By letr date August 23, 1995, you reues ou assuce tht we would not remmend enforcment acon to the Comsion un seon 17(a) of the Invesent Company Act of 1940 ("Invesent ComplY Ac") or ni 17a-7 thereder 11 with

ret to the sae of portolio seti by'lh ta-exem gr tnst ("Group Trosts") '1/ to cert series of The DFA Invesent Trost Compay ("DFAIC"), a regire invesent company, in exchage for sha of thse series ("Series"), as
describe in your letr. . .....

Diensiona Fund Advirs, Inc. ("DFA") sees as th invesent adisr to th

Series, each of which is a masr fud in a masr fud-feer fund relationship. DFA al spnsors and advises the Group Trost, which ar divi into varous subtnst

("Subtnsts"). The Subtnsts hold asse of private and public employee benefit plas, You reresent tht DFA (as fiducia) believes tht it would be in the best interests of the employee benefit plas tht have investè in the Subtnsts, and DFAIC's Bo of Trostes believes it would be in the best interests of DFAIC's feeer funds and their sharholders, if cert Subtnsts sell their portolio seurities to those Series tht have the sae investment objectives and consistent policies, in exchage for shas of the "¥ corrspndig Series. The sae would ocur at the currnt net asse value of such shas, '- caculate as of the close of the New York Stok Exchage on the day of the trsation. ;'J You anticipate that the prose trsaction would very substtiy incre the siz of

each Series and should result in spreg the fied, and relatively fixed, costs of opration

over a lager asset base, thereby decreing such costs on a per shaholder basis. You also reresent tht, excet for the reuirment tht the trsaction be a purchas iI',.:;.. or sae for no consideration other than cash, it would comply with the reuirments of role i 7a-7 under the Investment Company Act. Speifcay, you st that (i) seurities purchas and shas issued would be valued in acrdce with DFAIC's stda valuation methods use to caculate net asset value, as describe in its registtion statement, -1 . , ,..'). 11 Section 17(a) generay prohibits af persns of a regire invesent compay .j ~... "., ~.. from sellg seurities to, or purchaing seurities frm, the registre compay. Rule 17a-7 conditionay exempts from the prohibitions of seon 17(a) cert

purchas and saes of seurities beeen afte regire investent compas, and between regitere invesent compaes and other af persns when the ..;:J,'. . A'j aftion ars solely by ren of having a common investient advir, common

ditors and/or common offcers.
I
-f 21 The Group Trosts have not registere under the Investment Company Act in relice '"'~':." on setion 3(c)(1) of that Act. Telephone converstion with Lisa Duda, Strdley ,.~ Ronon Stevens & Young, on September 26, 1995.

and would be consistent with the reuirments of role 17a-7(b) 3./; (n) a Subtnst wil sell its portolio seurities to the Series tht ha the sae investment objectives and consistent

investent policies, as reuir by role 17a-7(c); (il) the prose trsacton wil not involve the payment of any brokerae comion, fee (otr th custmar trsfer fee),

or other remuneratio~, in accrdce with rue 17a-7(d); and (iv) eah Series wil comply with parhs (e) and (f) of role 17a-7 in connecon with the prose trsactons. In

addtion, you reresent th, othr th DF A in its cait as invesent advir, no pen

who is an afil persn of DFAI, or an af persn of an af persn of DFAIC, with the meag of seon 2(a)(3) of the Invesent Compay Ac, ha any beneficia mtere in the Subtst of th Gr Tn pa in the prose trsaon. Without necssay aging with your lega anysi, we would not remmend enorcment acon to th Common UD leon 17(a) or ni 17a-7 threndr if th Series and Subtnsts engae in the trsactons deribe in your ler. Beuse th position

is ba on the fact and rerentaons in you ler, dieret fa and ,reretaons

might lead to a dierent result. Ths rens only expreses the Division's position on

enforcement action and does not purprt to express any legal conclusions on the quesons presented. Having state our views on severa ocions with ret to the abilty of a registere investment company, in the context of a rergni7aton, to issue shas as consideration for .;

the purcha of portolio seurities frm persns af with the company by ren of having a common investment adviser, ~I we wil no longer respnd to reuests for no-

action relief in ths ar unless they present novel or unusua issues. 5.1 ~~'ti~ Senior Counsel 'J/ :You also reresent tht if it is not possible to derme a price for a parcula

seurity using the methodology set fort in role 17a-7(b), tht seurity wil remai in

the Subtnst.
M E.g., Fedra Investors (pub. avai. Apr. 21, 1994) (regire invesent compay advised by a ba th was al a fiducia of a common tnst fund); The Fir

Nationa Ba of Chicao (pub. avai. Sep. 22, 199) (tnste, fiducia or agent ,..~ ,g; cause cert accunts to purcha frm, an sell seurities to, cert af

regitere investent compaes); Coullor Caita Apreiaon Fund (pub. avai.

June 22, 1987) (no acon relif de where th possibilty of overrhig exi).

As these letrs ilustrte, we have permtt the rue to be aplied when the af .:,' . -.:1 persn serves in a role with re to the cote to the .tron th is .f. substatiy sim to tht of an invesent advir. -~: :1 5./ The stas analysis in these letrs would al aply to a sim trsaction beeen ,~ two registere investment companes if the trsaon met al the reuir conditions.

Andrew B. "ount Kevin R. 8l1'lf" Niclinla.. Bt"l'IiÎti Jameii D. Morris Thoma. B. Harper~ HI David F. Scranton Keith H. Dulil Bunna M. J)f'v"r S. Lisa A. Iluna Gordon Elkins Lee A. ROKngard Bruct" G. lA!tn "T. Doul:llil' lluJdrl"n STLE Daniel S. Kni,dtt Harry J. J. O~Nl:iI Brian P. Kind..liin Aiiii M. Juhn...ii G~orJ:e S. Furtl,'. Jr. JMltt" I..ndell Fnstl"r Brian S. "aq~" ~lariullU' .lnlinsiiin Frl"fl C. Alòrid¡re. Jr. "'iIialn S. Pilin,:. III Jamr.ii E. (l~l'ill. III Ileuq' G. HIIl,t"r Stephen R. Harri" Crail' n, nlud.iiaii MidHU"1 J. \liln RONON Herbert G. Kt"ene, Jr. Todd C. VaneU Alan R. Gt"CJi'ii.h Stl'i~hl'n It ,"ulull SfVES Mark H. PI.I'l'r Arnold S, Block John C. lIunk Mllrc A, Pull C, CI.rk-Y~Il. Jr, Edwin R. Bovnton David M. ApliiituliC'j) Farrah Lni \alkt'r John ¡.: 'õo~rty~ Jr. Lind. Aiin Galante Daniel T. "'ilf"h l\Mry F. ,~IHIt"I'Mlii tXOUNG M. Alic'ia J)u,i., Steiihf'1t \l. Kline Dean M. Schwart7. n.vid E. FI'('I7. David S. Hopt' Stephen C. B.ker Tim D. Nurrii- l1ariunnfO Giiul John P. 0.0... David C. Franceski. Jr. Tinioth,. J. Ciimphrll ',",'mh' G. ~\lan Attorneys At Law And~ L. nf'nnii Sandra A. Girifal("o Chrii:toph"r E. .lIl1n1Înt.. '"ïlli~m E. )I'-hun..,'. Jr. David R. Laudre). Jame. t: Podheiicr Thum8ti G. Harri,. Naiiq' i'inor" ~larF~Ii, Lane Ta,.lor. Jr. Gary R Scharmeu Rohr.ri 1-: H"dit JUlccrh J. :("Hal.. Thoma. 'J. Rrneh.n~ Jr. Zachary P. Alex.ander John F. Licari Katheriii(" H. Auti,.ri 2600 One Commerce Square Willam R. Sapo John J, Murphy, III Cynthia G. McKever Danit'lIe B...ks."iliam. "iliam G. Srarborollb Audre C, T.lley "'iliam P. Zintmerman Su..n C. ßf'C'krrt Philadelphia, Pennsylvania 19103-7098 J.me. M, Papod.. III Jeffre A, Lui.ky Ann Marie Janue Michael P. Buiin..r Jamee R. Be... Ann Cuddy Rod. 'Franci. X. Mannini; Cathleen M. Slnkl"r (215) 564-8000 Ch..i.. E, Coniff, Jr, Samuel J, Arna, Jr, Jennifer L. Reynoldi J.y C, Volk ' Stnen M. ~iHnnein Joph V, Del R.. P8uline C. Scalvino Eric R. Buot.ma John J. Hunter D..id M. Lokwo Raymond S. "ierrisze'l'"k¡ Vincl"nt Caro.l"la. Jr. Wiliam J. Barker~ Jr. Grelory J, Now.k Dorot hy M. A II ilUIl Mark A. H"Nh",' David E. Br.,.l"rl Steven A. Seolari Amy H. Cuh,,11 Mir.hal"1 II. (lHa'rf' Fax: (215) 564-8120 ~ial,'rrn. 1)"1l1~yl"aniø Chl"rry Hil. :,.w Jt"nu'~' Affili.t..d OffiC"f'. 'inf'land. Nr.. Jrriil"~':
GruC"C'o. ii,.ppt'r. Gio,'inaui. O~Santu & ....rll.ll~. 1'..". 1940 Act/Section 17 (a) 1940 Act/Rule 17a-7

August 23, ,.19,95--- .¡ -",~-;",.,.~;,,,':.,~ Office of Chief Counsel _ ,~:1 \CrA Division of Investment Management ;euk ;~~t ief. L -- - T Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549
:'l.~ n.,' 1 !.(" '''¡ i,¡'" 10-1-1 _ ac.. ¿ 1:'-"'" :.:'.' :,C,_ .~ ..~~,~;~.....~... ...; '.," ,__~....... ,~'-i'. ,l.. ..~"..., Ladies and Gentlemen:

We respectfully request that the Staff of the Division of

Investment Management (IIStaffll) confirm that it will not

recommend enforcement action to the Securities and Exchange

Commission (IISECII) under Section 17 (a) of the Investment Company

Act of 1940 (111940 Actll) with respect to the sale of securities

by three tax-exempt group trusts to The DFA Investment Trust

Company (IIDFAITCII) in exchange for shares of certain series of

DFAITC.
I. BACKGROUND

A. Dimensional Fund Advisors Inc.

Dimensional Fund Advisors Inc. (IIDFA"), a registered

investment advisor under the Investment Advisers Act of 1940,

serves as investment advisor of several registered investment

companies, collective investment vehicles and other institutional

clients, including all series of DFAITC.

B. Group Trusts

DFA sponsors three tax-exempt group trusts

(individually, a IIGroup Trust" and collectively, the IIGroup

Office of Chief Counsel

Division of Investment Management

Trusts") and has full investment authority under such trusts.

The Group Trusts are divided into various subtrusts

(individually, a "Subtrust" and collectively, the "Subtrusts"),

each of which has its own investment objective and policies.

The Group Trusts hold assets of private and public

employee benefit plans for which DFAserves as investment

advisor. The private employee benefit plans are governed by the

Employee Retirement Income Security Act of 1974, as amended

("ERISA") and the public employee benefit plans are sUbject to state and/ or local laws and regulations. Each plan negotiates a fee agreement with DFA under which it pays DFA a fee for its

services as investment manager. DFA receives no fee from the

Group Trusts, but serves as investment advisor to the Group

Trusts. The initial decision and authorization to participate in

a Subtrust of the Group Trust is made by an independent fiduciary

of each employee benef it plan. The beneficial interests in the

Group Trusts do not include voting rights.

C. The DFA Investment Trust Company

DFAITC is a Delaware business trust which is registered

as an open-end management investment company. DFAITC consists of

several series of shares ("Series"), each of which serves as a

master fund in a master fund-feeder fund relationship. For

certain Subtrusts of the Group Trusts, there are corresponding

Series of DFAITC with the same investment objectives and

consistent investment policies.

Current investors in each Series include, primarily,

DFA-administered publicly-held registered investment companies.

They, and the Group Trusts and Subtrusts, are "accredited .

investors" as such term is defined in Regulation D under the

Securities Act of 1933, as amended.

D. Master Fund-Feeder Fund Arranqement

As previously stated, each Series of DFAITC serves as a

master fund in a master fund-feeder fund arrangement. In such an arrangement, mul tiple institutional investors with identical

investment objectives ("feeder funds") pool their assets by

investing in a single master registered investment company having

the same investment objective, which directly acquires and

manages a portfolio of securities.

Off ice of Chief Counsel

Di vision of Investment Management

II. THE PROPOSED TRASACTION

DFA believes it would be in the best interests of the

pension and profit sharing plans that have invested in the

SUbtrusts, and the Board of Trustees of DFAITC believe it would

be in the best interests of DFAITC's feeder funds and their

public stockholders, if those Subtrusts that have the same

investment objectives and consistent policies to certain

corresponding Series of DFAITC sell their portfolio securities to

such corresponding Series in return for shares of beneficial

interest of such Series, at the current net asset value of such

shares (the "Transaction"), calculated as of the close of the New

York Stock Exchange on the day of the Transaction. The

Transaction would very substantially increase the size of the

Series and should result in spreading the fixed, and relatively

fixed, costs of operation over a larger asset base, thereby

decreasing such costs on a per shareholder basis.

Except for the requirement that the transaction be a

purchase or sale for no consideration other than cash, the

Transaction would comply with the requirements of Rule 17a-7 and

would be subj ect to the procedures adopted by the Board of

Trustees of DFAITC to ensure compliance with the requirements of

the Rule. Securities purchased and shares issued in the

Transaction would be valued in accordance with DFAITC's standard

valuation methods used to calculate net asset value, as stated in

its registration statement and, in particular, would be

consistent with the requirements of Rule 17a-7 (b). Because the

securi ties held by a Subtrust and the corresponding Series of DFAITC are largely the same, there will be no disruption of

portfolio management and valuation of the securities transferred

will accurately reflect their value to the buyer and seller.. To

the extent that it is not possible to determine a price for a

particular security using the methodology set forth in Rule

17a-7 (b), such security will remain in the Subtrust. The

Transaction would not involve payment of any brokerage

commission, fee (other than customary transfer fees), or other

remuneration. Other than DFA in its capacity as investment

advisor, no person who is an affiliated person of DFAITC, or an

affiliated person of an affiliated person of DFAITC, within the

meaning of section 2 (a) (3) of the 1940 Act, has any beneficial interest in the Group Trusts.

In addition to this no-action request, DFA has submitted to

the Department of Labor ("DOL"), Division of Fiduciary

Interpretation and Regulation, a prohibited transaction exemption

application pursuant to section 408 (a) of ERISA. The Transaction

will not be effected unless and until such exemption is granted

Office of Chief Counsel

Division of Investment Management

by the DOL. As a condition to any exemptive relief granted by the DOL, a second fiduciary who is independent of, and unrelated

to, DFA will be provided with advance written notice of the sale

of the assets of the Subtrusts, full written disclosure of

information concerning DFAITC and certain additional financial

information. On the basis of the foregoing information, the

second fiduciary would then authorize in writing the transfer of

the participating plan's Subtrust assets to DFAITC in exchange

for shares of the corresponding Series priced at net asset value

of such shares.

III. LEGAL CONSIDERATIONS

A. section 17 (a) of the 1940 Act

section 17 (a) (1) of the 1940 Act, in relevant part,
prohibits an affiliated person, or an affiliated person of an affiliated person, of a registered investment company, acting as principal, to sell to or purchase from such investment company any security or other property. Pursuant to Section 2 (a) (3) (E) of the 1940 Act, DFA is an affiliated person of DFAITC by virtue of being the investment advisor to eac~ of its Series. Pursuant to Section 2 (a) (3) (C), the Group Trusts may be deemed to be affiliated persons of DFA because of the control DFA exercises over the Group Trusts and Subtrusts as investment manager. Thus, the Group Trusts and each Subtrust may be deemed to be affiliated persons of an affiliated person of DFAITC and, therefore, the Transaction might violate section 17 (a) . B. Rule 17a-7 under the 1940 Act

Rule 17 a -7 under the 1940 Act, in re levant part,

provides that a purchase or sale transaction between a registered

investment company or series thereof and a person which is an

affiliated person of such registered investment company (or an

affiliated person of such person) solely by reason of having a

common investment advisor is exempt from section 17 (a) of the

1940 Act, provided that certain conditions are met. DFA serves

as investment advisor to each Series of DFAITC and each subtrust

of the Group Trusts and any affiliation between the Group Trusts

and DFAITC exists solely because they share a common investment

advisor. Therefore, the requirement of Rule 17a-7 that the

affiliation exists by virtue of having a common investment

advisor is satisfied.

Subsection (a) of Rule 17a-7 requires that the purchase

or sale transaction be "for no consideration other than cash

payment against prompt delivery of a security for which market

Off ice of Chief Counsel

oi vision of Investment Management

quotations are readily available." The requirement of Rule 17a-7

that cash be the sole consideration for the Transaction would not

be satisfied. OFAITC woùld issue Series' shares to the Subtrusts

priced at the current net asset value of the shares. The

securities acquired by the Series would be valued in the

identical manner at the same time. However, as previously

indicated, Sections (b) through (f) of Rule 17a-7 will be

satisf ied by OFAITC and the Group Trusts.

As currently structured, the Transaction would benefit

the Group Trusts because they would permit the Subtrusts'

participating plans to achieve the substantial fixed cost savings ~

available through participation in the master fund-feeder fund

structure and, at the same time, lower the substantial

transaction costs involved in selling their assets and purchasing

master fund shares on the open market from the proceeds. No

brokerage costs or market maker's spread will be incurred and no

potentially adverse market consequences would result from the

Transaction. The savings generated by such in-kind purchases

would inure directly to the benef it of the Subtrusts whose assets

are being transferred and to their participants. OFAITC's feeder

funds and their pUblic shareholders will also benefit because the

Series' fixed and relatively fixed costs will be spread over a

much larger asset base.

c. Previous No-Action Letters

The Staff of the SEC has granted no-action relief in

reliance on Rule 17a-7 with respect to similar transactions where

cash was not the sole consideration. Such no-action relief

granted under Rule 17a-7 demonstrates that failure to comply

literally with the cash requirement of Rule 17a-7 (a) is not. fatal. In Federated Investors, SEC No-Action Letter, (pub.

avail. April 21, 1994), no-action relief was granted where

certain banks, which served as (1) investment advisors to

registered investment companies; and (2) fiduciaries with respect

to common trust funds and/ or commingled investment funds which

were not registered under the 1940 Act, proposed to have certain

investment companies purchase substantially all of the assets

held by certain of the common trusts, and then have the

investment companies issue their shares to the common trusts,

which shares would be distributed to the participating trust

accounts of the common trusts. No-action relief was conditioned

upon compliance with all of the requirements of Rule 17a-7 under

the 1940 Act, except for the requirement that the transaction be

a purchase or sale for cash and no affiliated person of the

Off ice of Chief Counsel

Division of Investment Management

participating investment company having any beneficial interest,

other than the bank in its fiduciary capacity, in the common

trusts. The facts and circumstances described in the Federated

no-action letter are similar to the facts and circumstances of

the Transaction described herein. Moreover, the no-action relief

requested herein would be subject to the same conditions as those

to which the parties in Federated were subject.

No action positions also have been granted on similar

facts in American Medical Association Retirement Plan, SEC No-

Action Letter, (pub. avail. Jan. 15, 1987); The First National

Bank of Chicago, SEC No-Action Letter, (pub. avail. Sept. 22,

1992); The First National Bank of chicago, SEC No-Action Letter,

(pub. avail. Feb. 5, 1986); and Lincoln National Investment

Management Company, SEC No-Action Letter, (pub. avail. April 25,

1976). As a condition of the relief granted in each of these no-

action letters was the requirement that no affiliated person of

the participating investment company would have any beneficial

interest in the account or fund selling securities to the

registered investment company. As stated above, no affiliated

person of DFAITC or any affiliate of such person, other than DFA i.n its capacity as investment advisor, has any interest in the Group Trusts.

The Transaction, as structured, is consistent with

previous no-action relief granted under Rule 17a-7.

Specifically, except for the requirement that the Transaction be

a purchase or sale for cash, each proposed transaction will

comply with all of the requirements of Rule 17a-7 under the 1940

Act. In this regard, (1) securities purchased or sold in the

Transaction will be valued in accordance with each Series'

standard methods used to calculate net asset value and, in

particular, will be consistent with the requirements of Rule 17a￾7 (b); (2) the Transaction is consistent with the investment

objective and policies of the Series; (3) the Transaction will

not involve payment of any brokerage commission, fee (other than

customary transfer fees), or other remuneration; and (4) each

Series of DFAITC will comply with paragraphs (e) and (f) of Rule

17a-7 in connection with the Transaction.

iv. CONCLUSION

The conditions of Rule 17a-7 were designed to safeguard the

interests of investment company shareholders. An SEC Release

indicates that the conditions were intended "to limit the

exemption to those situations where the Commission, upon the

basis of its experience, considers that there is no likelihood of

overreaching of the investment companies participating in the

Office of Chief Counsel

Di vision of Investment Management

transaction. .. Notice of Proposal to Adopt Rule 17a-7 to Provide

an Exemption from the Provisions of Section 17 (a) of the

Investment Company Act of 1940, Investment Company Act Release

No. 4604/ (1964-1966 Transfer Binder) Fed. Sec. L. Rep. (CCH)

!77,350 (May 20, 1966). By substantially complying with the

conditions of Rule 17a-7, the interests of the shareholders of

each Series of DFAITC are protected. Moreover, previous no-

action relief granted under Rule 17a-7 demonstrates that

compliance with the cash requirement of the Rule is not essential

for the protection of shareholders.

Accordingly, we respectfully request that the Staff advise

us that it will not recommend any enforcement action to the SEC

if DFAITC on behalf of its Series engages in the Transaction, as

described herein in reliance upon Rule 1 7a-7, subject to

compliance by each Series with all of the requirements of Rule

17a-7 except for its cash requirement. If the Staff intends to

issue a response that is adverse to this request, we respectfully

further request the opportunity to have a conference prior to the

issuance of such response. If you have any questions regarding

this request, please contact the undersigned at (215) 564-8143

or, in my absence, Stephen W. Kline, Esquire at (610) 640-5801.

Very truly yours,

Lisa A. Duda

linQ. ~
LAD/klb
136319,1