February 14, 2001

Via U.S. Mail and Electronic Filing

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W., Mailstop 6-9
Washington, D.C. 20549

Re: Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Release No. IC-24775; File No. S7-20-00

Dear Mr. Katz:

The Investment Counsel Association of America appreciates the opportunity to submit comments related to the Commission's proposed revisions to Rule 10f-3 under the Investment Company Act of 1940.1 Rule 10f-3 provides relief under certain circumstances from the Investment Company Act's prohibition on mutual fund purchases of securities during an offering if the fund has certain affiliated relationships with a participating principal underwriter. The Commission's proposed amendments to Rule 10f-3 would expand the exemption provided by the rule to permit a fund to purchase government securities in a syndicated offering. The proposal also would modify the rule's percentage limit on purchases to cover not only purchases by a fund but also other accounts advised by the fund's investment adviser.

We take this opportunity to comment on the effect of Rule 10f-3 and the proposed amendments on independent subadvisers to mutual funds, in support of the arguments made by the Investment Company Institute in Section D of its comment letter dated February 14, 2001, titled Transactions Involving Subadvisers.

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 that 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, under the current proposal, for separate non-fund accounts it advises. The following hypothetical exemplifies the broad reach of Rule 10f-3. Assume that independent Subadviser A, unaffiliated with any underwriter, has a contract to manage all or a part of the assets of Mutual Fund A. Mutual Fund A is part of a fund complex that includes Mutual Fund B, which is advised in whole or in part by Subadviser B, an investment adviser that is affiliated directly or indirectly with an underwriter. Because of Subadviser B's affiliation, Subadviser A would have to concern itself with whether it may purchase securities in any underwriting - and if so, in what quantity - on behalf of (1) Mutual Fund A, (2) its other fund clients, Mutual Funds C, D, and E, which are not part of the Mutual Fund A and B fund complex, and (3) 300 institutional and high net worth clients that have hired Subadviser A to manage their assets on a discretionary basis. Similar concerns are presented where Subadviser A manages a portion of the assets of Mutual Fund A, while Subadviser B manages a wholly separate portion of Mutual Fund A assets (multi-manager arrangement).

These results do not appear to be consistent with the purpose of Section 10(f) and Rule 10f-3. Section 10(f) is intended to prevent "funds and their investors from the `dumping' of unmarketable securities on a fund in order to benefit the fund's affiliated underwriter."3 The fear is that a fund adviser affiliated with an underwriter will have a financial interest in promoting the offerings in which its affiliated underwriter participates, including unmarketable offerings. We understand that concern. However, the assets of investment companies are increasingly managed by a wide variety of subadvisers. In many cases, a subadviser to a fund has only an independent contractual relationship to manage all or a portion of the fund's assets; the affiliation is purely technical. That subadviser is not part of the interconnected web of control relationships that would raise questions of pecuniary interest or, in this case, any enterprise interest in "dumping" securities that this rule is intended to address. The independent subadviser is vested with sole discretion to purchase and sell securities for the assets it is contractually obligated to manage.

The financial services industry is undergoing dramatic consolidation, resulting in increasing control affiliations. The Commission's proposed amendments to Rule 10f-3 present an excellent opportunity to eliminate the additional complicating factor of technical, contractual, non-control affiliations. A codified clarification by the Commission regarding subadvisers would be beneficial both to advisers and to the Commission. Although prior Commission no-action and exemptive relief may permit certain transactions by subadvisers under the scenarios discussed above,4 subadvisers are nevertheless subject to the uncertainties, burdens, and costs of the application or no-action process. Further, the Commission must bear the time and burden of responding to numerous subadviser requests for relief.

For these reasons, we support Section D of the ICI's comment letter titled "Transactions Involving Subadvisers" and we urge the Commission to take this opportunity to clarify the application of Section 10(f) and Rule 10f-3 to independent subadvisers. Thank you for considering our comments on this important issue. Please do not hesitate to contact the undersigned if we may provide any additional information.


General Counsel


1 The ICAA is a national not-for-profit association that consists exclusively of federally registered investment adviser firms. Founded in 1937, our current membership is comprised of more than 280 firms that collectively manage approximately $3 trillion in assets for a wide variety of institutional and individual clients.
2 Investment Company Act, Section 2(a)(20).
3 Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Release No. IC-24775 (Nov. 29, 2000).
4 E.g., North American Security Trust and NASL Series Trust (pub. avail. Feb. 2, 1993); Frank Russell Investment Company, SEC Rel. No. IC-24847 (Jan. 30, 2001); Salomon Brothers Inc. (pub. avail. May 26, 1995).