SEC Division of Investment Management staff letter: Lazard Freres Asset Management

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:"" '-. ,':' ,:'.~:~~r~.f"t7i.:.t=~~~:-~:£"t, .. v : 'AN i 0 1997 ':, Our Ref. No. 96-237-CC Lad Freres Asset REPONSE OF THE OFFICE OF CllEF COUNSEL, Management DIVISION OF INVESlMT MANAGEMEN 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 thigs, (i) the registered investment company and al its afilated persons own

no more than 3 % of the tota outstading stock of the acquired investment

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. 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

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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. . .)

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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 /U
Senior Counsel
6(.. . 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).
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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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 Los Angeles. CA 90067-3086' Miami. FL 33131-2385 Boston, MA 02110 H-1088 Budapest. Hungary 1150 Seventeenth Street NW 2029 Century Park East 200 South Biscayne Boulevard 100 Federal Street Rák6czi ut 1-3 202 452 9250 3105565800 305 358 9900 617 482 6800 361 266 9520

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Di vision of Investment Management

Securi ties and Exchange Commission

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.
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 2

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Division of Investment Management

Securi ties and Exchange Commission

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.

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) .
3
0156425.01

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Division of Investment Management

Securities and Exchange Commission

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 Id.
UJ 5642'1. 'Ji

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Di vision of Investment Management

Securi ties and Exchange Commission

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

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Di vision of Investment Management

Securities and Exchange Commission

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 Section 12 (d) (1) (F) of the 1940 Act.
11 Section 12 (d) (1) (F) (i) of the 1940 Act.
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Di vision of Investment Management

Securities and Exchange Commission

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'

0ttacJ¿ r ( , !AC¡(¿L ~ J-GÜrt~

STROOCK & STROOCK & LAVAN

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