SEC Division of Investment Management staff letter: Salomon Brothers Inc

SIMPSON THACHER & BARTLETT
A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORArIONS

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FEDERA EXPRESS April 25, 1995

Re: Salomon Brothers Inc
Statutory Sections Discussed: Investment Company Act Sections 2(a)(3). 2(a)(20)ff). l7(a) and l7(e)

Jack W. Murphy

Chief Counsel

Division of Investment Management

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Murphy:
Salomon Brothers Inc and its affiliates ("Salomon") propose to engage in principal and agency transactions with or on behalf of certain present and futue investment companies registered under the Investment Company Act of 1940, as amended (the "1940 Act") (or portfolios thereof, in the case of a series registered investment company). The issue presented is whether Salomon would be permitted to engage in such transactions when Salomon Brothers Asset Management Inc ("SBAM Inc"), Salomon Brothers Asset Management Limited ("SBAM Limited") or any of their investment advisory affiliates (together with SBAM Inc and SBAM Limited, a "Salomon Adviser") is a second-tier affliate (as defined below) of the investment company (or portfolio thereof) solely by reason of the sub-advisory relationships described below. This letter is to request your confirmation that the staff of the Securities and Exchange Commission (the "Stafr'), based on the facts, circumstances and representations described herein, wil not recommend enforcement action against Salomon should it engage in the proposed transactions.

SIMPSON THACHER & BARTLETT
Chief Counsel
Division of Investment
Management -2- April 25, 1995

1. Facts

A. Salomon

Salomon Brothers Inc is a registered broker-dealer. Together with its broker￾dealer, bank and other affiliates, Salomon Brothers Inc conducts a global investment banking business, including providing analysis, market-making and brokerage services primarily to institutional investors. Salomon Brothers Inc, together with its affliates, is a piajor dealer in governent securities in New York, London, Frankfu and Tokyo and belongs to major international securities, financial futures and options exchanges and other organized markets. Salomon Brothers Inc and its affiiates are also major participants in the over-the-counter markets. SBAM Inc and SBAM Limited, together with their affliates in Tokyo and Frankfurt, provide a range of fixed-income and equity investment advisory services to various individuals and institutional clients throughout the world, and serve as investment adviser to various registered investment companies. As of December 31, 1994, SBAM Inc and SBAM Limited together had in excess of $12 bilion of assets under management. SBAM Inc and SBAM Limited are each registered as investment advisers under the Investment Advisers Act of 1940, as amended. Salomon Brothers Inc, SBAM Inc and SBAM Limited are each wholly owned subsidiaries of Salomon Brothers Holding Company Inc, which is wholly owned by Salomon Inc. B. Sub-Advisory Relationships

1. Introduction

As described more fully below, SBAM Inc and/or SBAM Limited curently serve as sub-advisers to certain portfolios of Hercules Fund Inc., New England Zenith Fund, Nort American Funds, NASL Series Trust, WN Series Trustl! and JN Series Trust (collectively, the "Funds"). Each of the Funds is registered under the 1940 Act as an open-end management investment company.£! In general, the Funds have one or more sponsoring investment advisers that sub-contract the day-to-day management of l! It is expected that WNL Series Trut wil commence investment operations on or after May 1, 1995.

2! Certain Funds (or portfolios thereof) may be eligible investments for certain variable annuity products.

SIMPSON THACHER & BARTLETT
Chief Counsel
Division of Investment
Management -3- April 25, 1995 some or all of the portfolio's investments to various sub-advisers, including SBAM Inc and/or SBAM Limited. A sub-adviser to a portfolio is responsible for all investment decisions regarding the purchase, sale and holding of the portfolio's securties. A sub￾adviser also has full discretion as to the selection of brokers and dealers with which the portfolios execute securties transactions. The Fund and the sponsoring investment adviser generally retain a right of supervision over the sub-adviser's activities with respect to the portfolios.

The Fund's sub-advisory arrangements with SBAM Inc and/or SBAM Limited are generally terminable by the Fund, the holders of a majority of the securties in a portfolio, the sponsoring investment adviser or SBAM Inc or SBAM Limited, as the case may be, subject only to a notice requirement. In the future, sub-advisory relationships with a Salomon Adviser may be terminable on similar or different bases. The offcers and "interested" directors for the Funds are generally offcers or employees of the sponsoring investment adviser and accordingly, no offcer, director or employee of Salomon Brothers Inc, SBAM Inc, SBAM Limited or any other Salomon Adviser serves as a director or officer of any Fund. In the future, an officer, director or employee-orau Salomon Adviser may serve as assistant secretar or assistant treasurer of a Fund if that service would facilitate execution of documents or would otherwise facilitate the day-to￾day management by the Salomon Adviser of a portfolio. Neither Salomon nor any Salomon Adviser is an affiiated person (as defined in the 1940 Act) of the sponsoring investment adviser or any other sub-adviser to any of the Funds.
2. The Existing Funds

Hercules Funds Inc. ("Hercules Fund") curently has nine portfolios.
Hercules International Management L.L.C. serves as investment adviser for each portfolio. SBAM Limited is a sub-adviser to the two portfolios, the Hercules World Bond Fund and the Hercules Global Short-Term Fund. In addition, SBAM Inc provides certain advisory services to SBAM Limited for the benefit of the Hercules World Bond Fund and the Hercules Global Short-Term Fund and serves as sub-adviser to three other portfolios, the Hercules Money Market U.S. Dollar Fund, the Hercules Emerging Markets Debt Fund and the Hercules Emerging Markets Debt U.S. Dollar Fund. New England Zenith Fund ("New England Fund") curently has fifteen portfolios. New England Fund has various investment advisers and sub-advisers. TNE Advisers Inc. acts as investment adviser and SBAM Inc acts as sub-adviser to two portfolios, the Salomon Brothers U.S. Governent Series and the Salomon Brothers Strategic Bond Opportunities Series. In addition, SBAM Limited provides certain advisory services to SBAM Inc relating to curency transactions and investments in non

SIMPSON THACHER & BARTLETT

Chief Counsel
Division of Investment
Management -4- April 25, 1995 dollar denominated securties for the benefit of the Salomon Brothers Strategic Bond Opportnities Series. North American Funds ("NAF"~ curently has ten portfolios. NASL Financial Services, Inc. ("NASL Financial") serves as investment adviser to each portfolio. SBAM Inc serves as sub-adviser to three portfolios, the U.S. Governent Securties Fund, the Strategic Income Fund and the National Municipal Bond Fund. In addition, SBAM Limited provides certain advisory services to SBAM Inc relating to currency transactions and investments in non-dollar denominated debt securities for the benefit of the Strategic Income Fund. NASL Series Trust ("Series Trustiif currently has thireen portfolios. NASL Financial serves as investment adviser for each portfolio. SBAM Inc serves as sub-adviser to two portfoliòs, the U.S. Governent Securties Fund and the Strategic Income Fund. In addition, SBAM Limited provides certain advisory services to SBAM Inc relating to currency transactions and investments in non-dollar denominated debt securities for the benefit of the Strategic Income Fund. WN Series Trust currently has eight portfolios. WN Investment Advisory Services, Inc. serves as investment adviser for each portfolio. SBAM Inc serves as sub￾adviser to the Salomon Brothers U.S. Governent Securities Portfolio. JN Series Trust curently has thirteen portfolios. Jackson National Financial Services, Inc. serves as investment adviser for each portfolio. SBAM Inc serves as sub-adviser to two portfolios, the Salomon Brothers/JN Global Bond Series and the Salomon Brothers/JN U.S. Governent & Quality Bond Series. In addition, SBAM Limited provides certain advisory services to SBAM Inc relating to curency transactions and investments in non-dollar denominated debt securities for the benefit of the Salomon Brothers/JN Global Bond Series. l! The Commission granted exemptive relief under Section 17(b) of the 1940 Act to pennt portolios of NAP and Series Trust (defined below) to engage in principal transactions with securties dealers that might have been deemed to be second-tier or third-tier affliated persons of those portfolios solely because of sub-advisory relationships with one or more of the Funds' other portfolios. See North American Security Trust. et al., Investment Company Act Release No. 18860 (July 22, 1992) (notice) and Investment Company Act Release No. 18899 (August 18, 1992) (order). ~ See footnote 2 above.

SIMPSON THACHER & BARTLETT
Chief Counsel
Division of Investment
Management -5- April 25, 1995
Salomon Advisers may serve as sub-advisers to other registered investment companies (or portfolios thereof) in the futue which are expected to be strctued in a manner similar to that described above for the Funds.
II. Legal Issues and Relief Sought

Section 17(a) of the 1940 Act, among other things, prohibits an affliated

person of a registered investment company, or any affiiated person of such a person,

acting as principal, from sellng to or purchasing from such registered company any

security or other propert and from borrowing money or other propert from such

investment company.1

of an affiliated person of a

registered investment company, or any affliated person of such person, to engage in

brokerage and other agency transactions in connection with the purchase or sale of any

Section 17(e) of the 1940 Act limits the ability

propert from or to such registered investment company.§'

2 Section 17(a) of the 1940 Act reads as follows:

It shall be unlawful for any affliated person or promoter of or principal underwriter for a registered investment company (other than a company of the character described in section 12(d)(3)(A) and (B)), or any affiiated person or such a person, promotcr, or principal underwter, acting as principal (1) knowingly to sell any security or other property to such registered company or to any company controlled by such registered company, unless such sale involves solely (A) securities of which the buyer is the issuer, (B) securities of which the seller is the issuer and which are part of a gcneral offering to the holders of a class of its securties, or (C) securties deposited with the trustee of a unit investment trust or periodic payment plan by the depositor thereof. (2) knowingly to purchase from such registered company, or from any company controlled by such registered company, any security or other propert (except securities of which the seller is the issuer); or (3) to borrow money or other propert from such registered company or from any company controlled by such registered company (unless the borrower is controlled by the lender) except as permtted in section 21 (b). §! Section 17(e) of the 1940 Act reads as follows:
(e) It shall be unlawful for an affiiated person of a registered investment company, or any affliated person of such person (continued...)

SIMPSON THACHER & BARTLETT
Chief Counsel
Division of Investment
Management -6- April 25, 1995
Section 2(a)(3) of the Act, in relevant part, defines "affliated person" of

another person as:

(A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 percentum or more of the outstanding voting securties of such other person; (B) any person 5 percentu or more of whose outstanding voting securties are directly or indirectly owned by, controlled, or held with power to vote, by such person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any offcer, director, parer, copartner, or employee of such other person; (D) any offcer, director, partner, copartner, or employee of such other person; (E) if such person is an investment company, any investment adviser thereof. . . . We request the Staffs concurrence that, for puroses of determining the affliated persons, and the affliated persons of such persons, to whom the prohibitions and limitations of Section 17 apply, each portfolio of a registered series investment company wil be treated as if it were a separate registered investment company. This would be consistent with other similar positions the Staff has taken with respect to other provisions of the Act. See e.g. North American Security Trust and NASL Series Trust,

(February 2, 1993), Investment Company Act Release No. 16431 (June 13, 1988) (amending Rule 17d-3) and Investment Company Act Release No. 11676 (March 10,

1981) (adopting Rule 17a-7). For purposes of the discussion in this letter, we wil

assume that each portfolio will be treated as if it were a separate registered investment

company.

The Staff has indicated that each portfolio in a Fund may be deemed to be under common control with, and therefore an affliated person of, each other portfolio in §! (...continued) (1) acting as agent, to accept from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any propert to or for such registered company or any controlled company thereof, except in the course of such person's business as an underwter or broker; or (2) acting as broker, in connection with the sale of securities to or by such registered company or any controlled company thereof, or to receive from any source a commission, fee or other remuneration for effecting such transaction which exceeds (A) the usual and customa broker's commssion if the sale is effected on a securities exchange, or (b) 2 percentum of the sales price if the sale is effected in connection with a secondary distribution of such securties, or (C) 1 percentum of the purchase or sale price of such securities if the sale is otherwise effcctcd uness the Commssion shall, by rules and regulations or order in the public interest and consistcnt with the protection of investors, permit a larger commission.

SIMPSON THACHER & BARTLETT

Chief Counsel
Division of Investment
Management -7- April 25, 1995

• that Fund because the Funds' offcers and directors oversee the management and policies
  of the portfolios, and each sponsoring investment adviser serves as investment adviser to several or all portfolios in that Fund. Similarly, each portfolio in a Fund may be deemed to be under common control with, and therefore an affliated person of, other registered investment companies having the same sponsoring investment adviser and/or the same or overlapping officers and directors.1 See, e.g., Dresdner Bank, (Oct. 17, 1990) SEC No￾Chase Frontier Fund of Boston, Inc., Chase Capital Fund of Boston, Inc., Investment Company Act Release No. 6718 (Sept. 3, 1971); In the Matter of Incorporated Investors, Incorporated Income Fund, Investment Company Act Release No. 2330 (Mar. 29, 1956). Under clause (E) of the Section 2(a)(3) definition of "affiiated person" each sub-adviser of a Fund is an affiiated person of the portfolio or portfolios it advises. Act, LEXIS 1180; In the Matter of

Each sub-adviser of a Fund could, therefore, be deemed to be an affliated person of an affiliated person ("second-tier affiiate") of that Fund's portfolios that it does not manage or of other investment companics which are deemed to be under common control with the portfolio for which it serves as sub-adviser. Each such sub-adviser, as an affiliated person of each portfolio it manages and as a second-tier affiliate of each other portfolio and investment company deemed to be under common control, is prohibited by Section l7(a) of the 1940 Act from engaging in principal transactions with such portfolios and investment companies and is limited by Section 17(e) of the 1940 Act in its ability to engage in brokerage and other agency transactions on behalf of such portfolios and investment companies. In addition, affliated persons of each such sub￾adviser are also prohibited or limited, as the case may be, from engaging in any such transaction for the portfolios managed by that sub-adviser. The issue raised is whether Salomon and its affliated investment advisers should be treated as a single entity for puroses of the affiiated person definition. This treatment would prevent Salomon from engaging in the proposed transactions described in this letter. The Staff has in certain instances treated a parent company and its wholly￾owned subsidiary as a single entity. See Release No. IC-13920 (May 2, 1984), Southwestern Investors, Inc. (available June 13, 1971) and Viking Growth Fund, Inc. (available March 8, 1971). For the reasons set forth below, we do not believe Salomon should be "collapsed" with its affiliated investment advisers. We request confiation that the Staff wil not recommend enforcement action against Salomon should it engage 7! While we do not concede that the portolios are under common control with other portolios or investment companies as described above, we wil assume, solely for the purposes of this request, the existence of such control relationship and consequent affiiation.

SIMPSON THACHER & BARTLETT
Chief Counsel
Division of Investment

Management -8- April 25, 1995

in principal and agency transactions with or on behalf of certain present and futue

registered investment companies (or portfolios thereof, in the case of a series registered

investment company) of which a Salomon Adviser is a second-tier affliate solely by

reason of a sub-advisory relationship between a Salomon Adviser and (i) other portfolios

of the same series registered investment company or (ii) another registered investment

company (or portfolio thereof) that may be deemed to be under common control with the

investment company or portfolio with which Salomon would engage in principal or

agency transactions (the "Proposed Transactions")p

Absent exemptive relief, Salomon wil not engage in principal transactions with any registered investment company (or portfolio thereof) for which any Salomon Adviser serves as adviser or sub-adviser and wil engage in agency transactions with such investment companies (or portfolios thereof) only to the extent permitted by Section 17(e) of the 1940 Act and Rule 17e-l thereunder.
III. Legal Analvsis and Conclusions

Sections 17(a) and l7(e) apply to certain transactions between a registered investment company and (i) affliated persons of the investment company, and (ii) second-tier affliates of the investment company. The statutory language of Section 17(a) places no restrctions on transactions engaged in by affiliated persons of affiiated persons of affiiated persons ("third-tier affliates") of the investment company. The Salomon Advisers are affiiated persons of the portfolios they manage solely by reason of being a sub-adviser to the portfolios. It is our opinion that the Salomon Advisers do not control any of the portfolios of the Funds for which they act as sub-advisers. Our opinion is based upon, among other things, the fact that (i) neither Salomon Brothers Inc nor any Salomon Adviser has sponsored or organized the Funds, (ii) neither Salomon Brothers Inc nor any Salomon Adviser owns any shares issued by any Fund, (iii) the sub-advisory arrangements are generally terminable by the Fund and the shareholders, subject only to a notice requirement, (iv) no officer, director or employee of Salomon Brothers Inc, SBAM §! Portfolios of series registered investment companies may purchase securties durig the existence of an

underwriting or selling syndicate where a principal underwriter in the offering is a sub-adviser, or an affliated person of a sub-adviser, to another portfolio of the Fund so long as the pricipal underwter is not (i) a sub-adviser of the purchasing portolio or (ii) an affliated person of the purchasing portolio's sub-adviser, the sponsoring investment adviser or any offcer, director, trstee or employee of the Fund, in reliance on the no-action relief granted in North American Security Trust and NASL Series Trust, (February 2, 1993,) SEC No-Act. LEXIS 195. Accordingly, we are not askig the Staff for no-action relief under Section 10(f) of the 1940 Act.

SIMPSON THACHER & BARTLETT
Chief Counsel
Division of Investment
Management -9- April 25, 1995
Inc or SBAM Limited or any other Salomon Adviser serves as an executive offcer or director of any Fund and (v) neither Salomon nor any Salomon Adviser is an affiliated person of the sponsoring investment adviser to a Fund. Salomon is therefore neither an affiliated person nor a second-tier affiiate of the Fund portfolios that are not advised by a Salomon Adviser, or of any other investment companies that could be deemed to be under common control with portfolios advised by a Salomon Adviser. Accordingly, under a literal reading of Sections l7(a) and 17(e), we do not believe that Salomon is prohibited from engaging in the Proposed Transactions. There are also policy reasons why the Staff should not extend the Section 17 prohibitions and limitations to third-tier affiliates by collapsing Salomon into the Salomon Advisers. The policy underlying Section 17 is to prevent self-dealing opportnities available when affiliates can direct a fund (or portfolio thereof) to engage in transactions. As the Commission stated in a recent release, "Section 17 was intended to protect investment company shareholders from loss in the value of their shares as a result of self￾dealing by investment companies' insiders." Investment Company Act Release No. 17534 (June 15, 1990) (citation omitted). In each Proposed Transaction, thèUädVisel'or

sub-adviser causing a portfolio to transact with Salomon would be unrelated to Salomon, and Salomon would not be in a position to cause the portfolio to trade with it. As a rèsult, each Proposed Transaction would be the product of ars-length bargaining and

would not raise the possibility of self-dealing that underlies Section 17. Given that the Proposed Transactions do not raise self-dealing concerns, it would be contrary to the interests of the Funds' shareholders to prohibit them. By permitting the Proposed Transactions, the Staff would enlarge the universe of securties dealers with which the Funds' portfolios may transact, making it easier for the portfolios to achieve best price and execution. Prohibiting the Proposed Transactions would narrow this universe and potentially impair the ability to achieve best price and execution, resulting in potential harm to shareholders. Recognizing the lack of policy concern underlying, and potential har in

prohibiting, transactions such as the Proposed Transactions, the Commission has in the past granted broad exemptive relief under Section 17(b) of the 1940 Act, to permit entities, that would be deemed second-tier affiiates solely because of a sub-advisory relationship with other portfolios of a registered investment company, to engage in transactions that would otherwise be prohibited by Section 17(a) of the Act. In State Street Bank and Trust Company, File No. 81-8310, Investment Company Act Release No. 19784 (October 13, 1993) (notice) and Investment Company Act Release No. 19844 (November 9, 1993) (order), the Commission granted an exemption from Section 17(a) of the 1940 Act to permit State Street Bank and Trust Company ("State Street") to engage

SIMPSON THACHER & BARTLETT

Chief Counsel

Division of Investment

Management -10 April 25, 1995

in principal transactions with (i) any series of an investment company of which State Street is a second-tier affiiate solely because of an investment advisory relationship with another series of that investment company and (ii) any investment company of which State Street is a second-tier affliate solely because of an investment advisory relationship with another investment company under common control with that investment company. The Commission granted the exemption to State Street without imposing any conditions on the exempt transactions. See also Goldman, Sachs & Co., File No. 812-8544, Investment Company Act Release No. 19709 (September 14, 1993) (notice) and Investment Company Act Release No. 19786 (October 13, 1993) (order), The One Group and Goldman, Sachs & Co., File No. 812-8262, Investment Company Act Release No. 19410 (April 15, 1993) (notice) and Investment Company Act Release No. 19470 (May 11, 1993) (order), North American Security Trust, et al., Investment Company Act Release No. 18860 (July 22, 1992) (notice) and Investment Company Act Release No. 18899 (August 18, 1992) (order) and SunAmerica Series Trust, et al., File No. 812-8238, Investment Company Act Release No. 19513 (June 4, 1993) (notice) and Investment Company Act Release No. 19551 (July 1, 1993) (order). Like the transactions that were granted this past exemptive relief, the Proposed Transactions do not raise the policy concerns underlying Section 17. The Proposed Transactions should accordingly be permitted. Conclusions Based on the facts, circumstances and representations described above, Salomon requests confirmation that the Staff wil not recommend enforcement action against Salomon should it engage in the Proposed Transactions. In that connection, Salomon also requests the Staffs concurence that, for puroses of determining the affiliated persons, and the affliated persons of such persons, to whom the prohibitions and limitations of Section 17 apply, each portfolio of a registered series investment company wil be treated as if it were a separate registered investment company. For the convenience of the Staff, nine copies of this letter are enclosed. Please advise Gary S. Schpero of this firm (212-455-3665) of your determination in this matter. Also, please call Mr. Schpero collect with any questions you may have. Very truly yours, ~~cV~.lt SIMPSON THACHER & BARTLETT

MAY 2 6 1995

IPUBtlt1

--- J Our Ref. No. 95-112-CC
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Salomon Brothers Inc.
DIVISION OF INVESTMENT MAAGEMENT File No. 132-3 Your letter dated April 25, 1995 requests our assurance that

we would not recommend that the Commission take any enforcement

action under Sections 17 (a) or 17 (e) of the Investment Company

Act of 1940 (111940 Act II) if certain registered investment

companies or portfolios thereof engage in principal and agency

transactions with Salomon Brothers Inc (IISalomonll), a registered broker - dealer ~ as described in your letter.

Salomon is a wholly owned subsidiary of Salomon Brothers

Holding Company Inc (IISBHClI). SBHC also wholly owns Salomon

Brothers Asset Management Inc (IISBAM Incll) and Salomon Brothers Asset Management Limited (IISBAM Ltdll), which are registered

investment advisers, as well as a number of other investment

advisory entities (collectively, the IISalomon Advisers II). SBAM

Inc and/or SBAM Ltd currently serve as sub-advisers to certain

portfolios of six registered open-end series investment companies

(the "Funds"). 1./ Each Fund has one or more investment advisers,

and sub-advisers for other of its portfolios, none of which are

affiliated persons either of Salomon or the Salomon Advisers. ~/

The sub-adviser is responsible for all investment decisions on

behalf of a particular portfolio, and has full discretion over

which brokers and dealers execute the portfolio's securities transactions. . Salomon proposes to engage in principal and agency

transactions with portfolios of the Funds (and other investment

companies and portfolios thereof under common control with the

Funds) for which a Salomon Adviser does not serve as sub-adviser.

Salomon also proposes to engage in these transactions with other

registered investment companies or portfolios of which a Salomon

Adviser" becomes an affiliate in the future solely because it

serves as sub-adviser to another registered investment company or

portfolio that is under common control with such investment

company or portfolio. The above-described transactions are

referred to collectively below as the "Proposed Transactions. II

Section 17 (a) of the 1940 Act generally prohibits an

affiliated person of a registered investment company (a IIfirst￾1./ The Funds are the Hercules Fund Inc., New England Zenith

Fund, North American Funds, NASL Series Trust, WNL Series

Trust, and JNL Series Trust.

~/ Under Section 2 (a) (3) of the 1940 Act, an lIaffiliated person" of another person includes any person controlling, controlled by, or under common control with the other

person, and, if such person is an investment company, any

investment adviser thereof.

tier affiliate"), or an affiliated person of such person (a

"second-tier affiliate"), acting as principal, from selling to or

purchasing from the investment company any security or other

property. Section 17 (e) limits the ability of a first-tier or

second-tier affiliate of an investment company to engage in

brokerage and other agency transactions for the purchase or sale

of any property on behalf of the investment company.

You request our concurrence that each portfolio of a Fund

should be treated as a separately registered investment company

for purposes of Sections 17 (a) and 17 (e). You argue that this

treatment is consistent with Commission and staff positions under

other provisions of the 1940 Act. For example, Rule 17a-7 specifically exempts from the prohibitions of Section 17 (a) certain transactions between series of a single registered

investment company. Similarly, the staff, on a numer of

occasions, has treated individual portfolios of a single

~egistered investment company as separate investment companies

under other provisions of the 1940 Act that expressly apply to a

." registered investment company." J./ Under the facts presented, we agree that each portfolio should be treated as a separate

investment company for purposes of Section 17 (a) and Section

17(e) .
Because each portfolio of a series investment company has

the same board of directors and, generally, the same investment

adviser, you assume for purposes of this letter that the

portfolios of each investment company will be under common

control and therefore will be first-tier affiliates of each

other. ~/ The Salomon Advisers, therefore, would be second- tier

affiliates of portfolios of a Fund for which they do not act as

sub-adviser. You contend that neither Section 17 (a) nor Section 17 (e) should prohibit the Proposed Transactions because Salomon,

as an affiliate of the Salomon Advisers, is a third- tier

J./ ~, Scudder Investment Trust (pub. avail. Mar. 23, 1994)

(each series of an investment company could file its own

semi-annual report if the series have different fiscal

years) i North American Security Trust (pub. avail. Mar. 23,

1993) (each series treated as a separate registered

investment company for purposes of Section 10 (f) ) i PaineWebber Series Trust (pub. avail. Dec. 14, 1987)

(diversification standards of Section 5 (b) (1) applied to each series rather than on a company-wide basis). For an

overview of the treatment of series companies under the 1940

Act, see Fleming, Regulation of Series Companies under the

Investment Company Act of 1940, 44 Bus. Law. 1179 (1989).

~/ Section 2 (a) (9) of the 1940 Act, in relevant part, defines

"control" as the power to exercise a controlling influence

over the management or policies of a company.

• 2

affiliate of these portfolios. Your argument is based on the

premises that (1) the Salomon Advisers do not control the

portfolios for which they act as sub-adviser; and (2) Salomon and

the Salomon Advisers should not be treated as a single entity for

purposes of Sections 17 (a) and 17 (e) .
In support of your argument, you state that it is your view

that a Salomon Adviser does not control the portfolios of the

Funds for which it acts as sub-adviser. á/ Your conclusion is

based upon, among other things, the following facts: (1) neither

Sàlomon nor any Salomon Adviser has sponsored or organized the

Funds; (2) neither Salomon nor any Salomon Adviser owns any

shares issued by any Fund; (3) the sub-advisory arrangements are

generally terminable by the Fund or its shareholders, subject

only to a notice requirement; (4) no officer, director or

employee of Salomon or a Salomon Adviser currently serves as an

executive officer or director of a Fund; ~/ and (5) neither

Salomon nor any Salomon Adviser is an affiliated person of any

Fund's investment adviser. 2/

Second, you argue that Salomon and the Salomon Advisers

should not be treated as a single entity for purposes of Section

17 (a) or 17 (e). You note that the staff has, in certain

instances, treated a parent company and its wholly-owned

subsidiary as a single entity. ~/ You maintain, however, that

á/ If a Salomon Adviser were deemed to control a portfolio for

which it acted as sub-adviser, Salomon and that portfolio

could be deemed to be under the common control of SBHe,

making Salomon a first-tier affiliate of that portfolio, and

a second- tier affiliate of the funds and portfolios that are

under common control with the first portfolio.

~/ You state that an officer, director or employee of a Salomon

Adviser in the future may serve as assistant secretary or

assistant treasurer of a Fund to facilitate the execution of

documents or the day-to-day management of a portfolio.

2/ Given the inherently factual nature of the inquiry, we

express no view whether any Salomon Adviser controls any

portfolio for which it acts as sub-adviser. See Fundtrust

(pub. avail. May.26, 1987). We note that, given its limited

role in the management of a Fund's operations, a sub-adviser

would be less likely to control a Fund than its adviser.

~/ In Viking Growth Fund Inc. (Mar. 8, 1971), the staff

declined to permit a director of the adviser's parent to

engage in a principal transaction with the fund. Without

analysis, the staff stated that the director was a direct

affiliate of the adviser, thus apparently collapsing the

adviser and its parent and treating the director as a

• 3

Salomon and any of the Salomon Advisers should not be treated as

a single entity. Section 2 (a) (3) specifically provides that

companies under common control, such as Salomon and the Salomon

Advisers, are first- tier affiliates of each other. Moreover, we

agree that, under the circumstances presented, there do not

appear to be any policy reasons that would require that Salomon

and the Salomon Advisers be treated as a single entity. Section

17 was intended to prevent insiders from using an investment

company to benefit themselves to the detriment of the company and

its shareholders. 2/ You represent that, because Salomon will

engage in the proposed Transactions with funds and portfolios

that are advised by persons not affiliated with Salomon or any

Salomon Adviser, Salomon will not be in a position to cause these

funds and portfolios to engage in the Proposed Transactions.

Accordingly, we would not recommend enforcement action under

Sections 17 (a) or 17 (e) of the 1940 Act if Salomon engages in the Proposed Transactions. This position is based upon the

representations made in your letter, particularly your view that

a Salomon Adviser does not control the portfolios of the Funds

for which it acts as sub-adviser. It should be noted that any

different facts or representations might require a different

conclusion.
() 'hl &
;¡~ í1t, ~~c f llAna M. Ca ynè i
Attorney second-tier affiliate of the fund. However, the staff could

have reached the same result on the basis that the adviser's

parent ultimately controlled the fund, rendering the

director a second-tier affiliate of the fund.

2/ See Investment Company Act ReI. No. 17534 (June 15, 1990).

• 4