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family without having to pay a fee, or "load". This process of
moving an investment from one fund to another fund within the
same family with no charge is called "an exchange privilege". In
addition, an investor with all his portfolio in a single family
of funds receives a report of his entire portfolio on a single
statement from a single adviser. Thus, having numerous funds
with different investment objectives is attractive to both
existing and future investors which, in turn, increases the
likelihood of additional assets invested in the fund family and,
because petitioner's fees are based in large part on the amount
of assets under management, ultimately more revenue for
petitioner from the other RIC's it manages as well.12
Most of the RIC's launched during the years in issue still
exist in their original form. As of 1995, they contained more
than $109 billion in investments and continue to be a source of
substantial management fees for petitioner. Petitioner expected
to realize, and indeed has realized, significant economic and
synergistic benefits from its long-term relationships with the
RIC's created during the years in issue.
The Court of Appeals for the First Circuit, to which this
case is appealable, has stated:
12In their briefs, the parties disagree about whether
petitioner's "customers" are the RIC's (respondent's position) or
the investors in the RIC's (petitioner's position). We think
there is some truth in both positions. However, we do not find
either perspective determinative of whether capitalization is
required.
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