July 19, 2002

Via U.S. Mail and Electronic Filing

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Transactions of Investment Companies with Portfolio and Subadvisory Affiliates, Release No. IC-25557, File No. S7-13-02

Dear Mr. Katz:

The Investment Counsel Association of America1 appreciates the opportunity to submit comments on the Commission's proposed rule and rule amendments related to the governing of transactions of investment companies ("funds") with portfolio and subadvisory affiliates. The proposal would expand the current exemptions for funds to engage in transactions with portfolio affiliates, as well as permit funds to engage in certain transactions with subadvisers of affiliated funds. We support the Commission's proposal to alleviate the impact of the affiliated transaction rules on independent subadvisers to mutual funds.

Specifically, we commend the Commission for addressing the effect of Rule 10f-3 on independent fund advisers. Section 10(f) prohibits a fund from purchasing a security in an offering where a principal underwriter of the offering is also an investment adviser of the fund or an affiliate of that adviser. For these purposes, the definition of "investment adviser" includes any subadviser to the fund.2 Thus, a subadviser to a fund where the fund's adviser is affiliated directly or indirectly with an underwriter may be limited in its ability to purchase securities for that fund, for other non-related funds it advises, and for separate non-fund accounts it advises. In addition, other non-affiliated subadvisers may be prohibited from purchasing a security from this principal underwriter, due to its affiliation with another subadviser to the fund. This limitation exists even though the subadviser who has sole discretion to purchase and sell securities for the assets it is contractually obligated to manage is not part of the interconnected web of control relationships with the underwriter. As we have previously explained,3 this result is not consistent with the intent of Section 10(f) to prevent "funds and their investors from `dumping' unmarketable securities on a fund in order to benefit the fund's affiliated underwriter."4

The Commission has addressed this concern in its proposed amendments to Rule 10f-3, by proposing to deem each of the series of a series company and the "managed portions" of a fund portfolio to be separate registered investment companies for purposes of Section 10(f) and Rule 10f-3. The intent of the proposed amendments is to "exempt funds from the prohibition in section 10(f) when that prohibition is triggered by the participation in an underwriting or selling syndicate of a person who is not in a position to influence the fund's investment decisions.5 The Commission's proposal represents an appropriate and common-sense approach to addressing some of the undue effects of Rule 10f-3 on subadvisers. The proposed amendments would significantly reduce the uncertainties, burdens, and costs of the application and no-action process currently faced by subadvisers.

Thank you for considering our comments on this important issue. Please do not hesitate to contact me if we may provide any additional information.

Sincerely,

/s/

Karen L. Barr
General Counsel

cc: Harvey L. Pitt, Chairman
Isaac C. Hunt, Jr., Commissioner
Cynthia A. Glassman, Commissioner
Paul F. Roye, Director, Division of Investment Management

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1 The ICAA is a not-for-profit association that consists exclusively of federally registered investment adviser firms. Founded in 1937, our current membership is comprised of approximately 300 firms that collectively manage in excess of $3 trillion in assets for a wide variety of institutional and individual clients. For additional information, please visit www.icaa.org.
2 Investment Company Act, Section 2(a)(20).
3 ICAA comment letter dated February 14, 2001 regarding Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Release No. IC-24775 (Nov. 29, 2000) ("Prior 10f-3 Release").
4 See Prior 10f-3 Release at 2.
5 Proposed Rule: Transactions of Investment Companies With Portfolio and Subadvisory Affiliates, Release No. IC-25557, n. 65 (April 30, 2002).