[Federal Register: October 29, 2003 (Volume 68, Number 209)]
[Proposed Rules]
[Page 61719-61731]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc03-19]
[[Page 61719]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 210, et al.
Exemption From Shareholder Approval for Certain Subadvisory Contracts;
Proposed Rule
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 239, 240, 270 and 274
[Release Nos. 33-8312, 34-48683, IC-26230; File No. S7-20-03]
RIN 3235-AH80
Exemption From Shareholder Approval for Certain Subadvisory
Contracts
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing a new rule under the Investment Company Act of 1940 that
would, under certain conditions, permit an adviser to serve as a
subadviser to an investment company (``fund'') without approval by the
shareholders of the fund. The rule is designed to reduce burdens on
investment companies by eliminating the need to obtain from the
Commission exemptive orders that facilitate so-called ``manager of
managers'' arrangements, under which one or more subadvisers manage a
fund's assets subject to the supervision of an investment adviser whose
advisory contract has been approved by fund shareholders.
DATES: Comments must be received on or before January 8, 2004.
ADDRESSES: To help us process and review your comments more
efficiently, comments should be sent by one method only.
Comments in paper format should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549-0609. Comments in electronic
format may be submitted at the following e-mail address: rule-comments@sec.gov. All comment letters should refer to File No. S7-20-
03; if e-mail is used, this file number should be included on the
subject line. Comment letters will be available for public inspection
and copying in the Commission's Public Reference Room, 450 Fifth
Street, NW., Washington, DC 20549. Electronically submitted comment
letters will be posted on the Commission's Internet web site (http://www.sec.gov
).\1\
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\1\ We do not edit personal, identifying information, such as
names or e-mail addresses, from electronic submissions. Submit only
information you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Adam B. Glazer, Attorney, or C. Hunter
Jones, Assistant Director, Office of Regulatory Policy, (202) 942-0690,
Division of Investment Management, Securities and Exchange Commission,
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450 Fifth Street, NW., Washington DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Commission today is proposing for public
comment new rule 15a-5 [17 CFR 270.15a-5] under the Investment Company
Act of 1940 [15 U.S.C. 80a] (the ``Investment Company Act'' or
``Act''); amendments to rule 6-07 [17 CFR 210.6-07] of Regulation S-X
[17 CFR part 210] under the Investment Company Act and the Securities
Act of 1933 [15 U.S.C. 77a-aa] (the ``Securities Act''); amendments to
Form N-1A [17 CFR 274.11A] under the Investment Company Act and the
Securities Act; and amendments to Schedule 14A [17 CFR 240.14a-101]
under the Securities Exchange Act of 1934 [15 U.S.C. 78a-mm] (the
``Exchange Act'').
Table of Contents
Executive Summary
I. Background
II. Discussion
A. Conditions of the Proposed Rule
1. Terms of the Subadvisory Contacts; Subadvisory Fees
2. Obligation to Supervise
3. Arm's Length Relationship Between Principal Adviser and
Subadvisers
4. Board Oversight
5. Expectation of Investors
6. Number of Subadvisers
B. Rescission of Previously Issued Exemptive Orders
III. General Request for Comment
IV. Cost-Benefit Analysis
V. Consideration of Promotion of Efficiency, Competition, and
Capital Formation
VI. Paperwork Reduction Act
VII. Summary of Initial Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Proposed Rules and Form Amendments
Executive Summary
The Commission is proposing new rule 15a-5 under the Investment
Company Act. The rule would permit manager of managers funds to operate
without obtaining shareholder approval when the fund's principal
investment adviser hires a new subadviser or replaces an existing
subadviser. The rule would eliminate the need for a fund to obtain an
exemptive order permitting these arrangements. A fund that relied on
the proposed rule would be required to inform investors of the identity
of the current subadviser(s) managing their portfolio and the ability
of the fund to add or replace the subadviser(s) without shareholder
approval. The rule also would require that the fund's investment
adviser supervise and oversee the fund's subadvisers, and that the
hiring of a new or different subadviser not increase the fees charged
to the fund.
I. Background
A growing number of investment companies (``funds'') \2\ are now
offered whose investment advisers do not directly manage a portfolio of
securities. Instead, the advisers supervise one or more subadvisers,\3\
which are themselves responsible for the day-to-day management of the
funds' portfolios. In these ``manager of managers'' funds, the
investment adviser seeks to achieve the funds' investment objectives by
hiring, supervising and, when appropriate, discharging subadvisers,
each of which is responsible for the management of a portion of a
fund's portfolio.\4\ In many cases, these funds also authorize the
adviser to allocate and reallocate fund assets among subadvisers.
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\2\ In this Release and proposed rule 15a-5, we use the term
``fund'' to mean a registered open-end management investment company
or a separate series of such a company. A series company (or series
fund) is a registered open-end investment company which, in
accordance with the provisions of section 18(f)(2) of the Act [15
U.S.C. 80a-18(f)(2)], issues two or more classes or series of
preferred or special stock each of which is preferred over all other
classes or series in respect of assets specifically allocated to
that class or series. See 17 CFR 270.18f-2(a).
\3\ In this Release and proposed rule 15a-5, we use the term
``subadviser'' to mean a party that contracts with a fund's
principal adviser to provide investment advisory services to the
fund, and the term ``principal adviser'' to mean a party that
contracts directly with a fund to provide investment advisory
services to the fund. See proposed rule 15a-5(b)(2)-(3) (defining
``principal adviser'' and ``subadviser'' by reference to sections
2(a)(20)(A)-(B) of the Act [15 U.S.C. 80a-2(a)(20)(A) `` (B)]).
\4\ In the case of a series fund, the adviser seeks to achieve
the fund's investment objectives by hiring, supervising and, when
appropriate, discharging subadvisers for the management of all or a
portion of the portfolio of a series.
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Since they were first introduced in the early 1990s, manager of
managers funds have grown in popularity. Today more than 100 fund
complexes offer these types of funds, which hold more than 400 billion
dollars in assets.\5\ Many of these funds are sponsored by insurance
companies and operate as funding vehicles for separate accounts
offering variable annuity and variable
[[Page 61721]]
life insurance contracts.\6\ They represent one of the more recent
innovations in managed asset arrangements.
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\5\ Since 1995 we have issued over 100 orders allowing manager
of managers funds to retain subadvisers (and materially amend
subadvisory contracts) without shareholder approval. See, e.g.,
Hillview Investment Trust II and Hillview Capital Advisors, LLC,
Investment Company Act Release Nos. 24853 (Feb. 6, 2001) [66 FR
10037 (Feb. 13, 2001)] (notice) and 25055 (June 29, 2001) [66 FR
35676 (July 6, 2001)] (order); Sun Capital Advisers Trust and Sun
Capital Advisers, Inc., Investment Company Act Release Nos. 24368
(Mar. 27, 2000) [65 FR 17546 (Apr. 3, 2000)] (notice) and 24401
(Apr. 24, 2000) [72 SEC Docket 864 (May 23, 2000)] (order).
\6\ See Gary O. Cohen, Fitting Variable Annuity Contracts and
Variable Life Insurance into the Regulatory Framework of the
Investment Company Act of 1940 and Securities Act of 1933, 813 PLI/
Comm 129, 212-13 (2001).
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Many sponsors of manager of managers funds have sought and obtained
from us orders exempting them from section 15(a) of the Act,\7\ which
prohibits any person from serving as an investment adviser (or a
subadviser) to a fund except under a written contract that the fund's
shareholders have approved.\8\ The orders permit funds and advisers to
enter into and materially amend subadvisory contracts without
shareholder approval. Many sponsors of these funds have asserted that
without relief from the shareholder voting requirement, the costs and
delays associated with obtaining a shareholder vote would prevent
advisers from hiring and firing subadvisers and from achieving the
funds' investment objectives. They also have asserted that the
underlying purpose of section 15(a)--to give shareholders a voice in
the fund's investment advisory arrangements \9\--would be satisfied
without a shareholder vote on the subadvisory contracts because the
principal adviser's contract must still be approved by fund
shareholders. Moreover, the principal adviser would act in the
shareholders' interests by supervising and overseeing the fund's
subadvisers. Sponsors have analogized subadvisers in a manager of
managers arrangement to portfolio managers employed by a fund adviser
who may be hired and fired without the consent of shareholders.\10\
The Commission is today proposing a new rule, 15a-5, and amendments
to Form N-1A, which together would codify the orders we have issued for
manager of managers funds, including many of their conditions.\11\ The
Commission believes that the proposed rule would benefit shareholders
by allowing funds to terminate poorly performing subadvisers and hire
new subadvisers without the need for a shareholder vote.\12\ These
amendments are designed to limit the scope of the relief to subadvisers
of manager of managers funds, and to assure that investors in manager
of managers funds are fully informed of the identity of the current
subadviser(s) managing their portfolio, and of the fact that
subadvisers could be added or replaced without shareholder approval.
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\7\ 15 U.S.C. 80a-15(a).
\8\ See supra note 5.
\9\ See Investment Trusts and Investment Companies: Hearings on
S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 253 (1940) (statement of David
Schenker).
\10\ See, e.g., TIFF Investment Program, Inc. and Foundation
Advisers, Inc., Investment Company Act Release Nos. 21268 (Aug. 3,
1995) [60 FR 40875 (Aug. 10, 1995)] (notice) and 21328 (Aug. 30,
1995) [60 SEC Docket 316 (Sept. 26, 1995)] (order), in which the
applicant had represented that the employment of a new subadviser
was ``closely analogous to the decision by a money management firm
to hire another portfolio manager or analyst.'' See id., Investment
Company Act Release No. 21268, at text following n.1. Our disclosure
rules require that a change in portfolio managers be disclosed to
investors through a prospectus ``sticker.'' See Disclosure of Mutual
Fund Performance and Portfolio Managers, Investment Company Act
Release No. 19382 (Apr. 6, 1993) [58 FR 19050 (Apr. 12, 1993)], at
text accompanying nn.9-11. A fund also must disclose in its
prospectus the identity of the fund's subadvisers. See Item 6(a)(1)
of Form N-1A.
\11\ As discussed below, we also are proposing related
amendments to Regulation S-X under the Act and the Securities Act
and to Schedule 14A under the Securities Exchange Act. We are not,
however, proposing amendments to rule 18f-2 [17 CFR 270.18f-2] even
though we have provided relief, in response to requests, from rule
18f-2 in a number of our manager of managers exemptive orders. Rule
18f-2, among other things, describes how the shareholder voting
requirement of section 15(a) applies in the case of a fund with
multiple series or multiple classes. Because the relief we are
proposing today would provide exemptive relief from the requirements
of section 15(a), we believe that relief from rule 18f-2 is
unnecessary.
\12\ The inability of a fund adviser to hire a subadviser
without obtaining shareholder approval can inhibit a fund manager
from terminating a poorly performing subadviser and thus managing
the fund in the best interests of shareholders. An investment
adviser has a fiduciary duty to act in the best interests of a fund
it advises. See Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 1971);
Brown v. Bullock, 194 F.Supp. 207, 229, 234 (S.D.N.Y.), aff'd, 294
F.2d 415 (2d Cir. 1961). See also In the Matter of Provident
Management Corp., Securities Act Release No. 5115 (Dec. 1, 1970) at
n.12 and accompanying text.
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II. Discussion
Section 15(a) of the Investment Company Act was designed to protect
the interests and expectations of fund shareholders by requiring that
they approve advisory contracts,\13\ including subadvisory
contracts.\14\ The Congress that enacted section 15(a) anticipated
subadvisory arrangements, and concluded that shareholders should have a
role in the selection of subadvisers. In crafting this rule proposal
(and the exemptive orders that have preceded it), we have sought to
distinguish subadvisory arrangements in which the subadvisers have
resembled portfolio managers from the more traditional subadvisory
arrangements that Congress explicitly covered in the shareholder voting
requirement of section 15(a). Our proposed rule, therefore, contains
several conditions, which we discuss below, that limit the scope of
relief to subadvisers of manager of managers funds and that provide
other means of protecting fund investor expectations and interests.\15\
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\13\ See Investment Trusts and Investment Companies: Hearings on
S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 253 (1940) (statement of David
Schenker) (section 15 recognizes that a ``management contract is
personal, that it cannot be assigned, and that you cannot turn over
the management of other people's money to someone else'').
\14\ Section 15(a) of the Investment Company Act prohibits a
person from serving as an investment adviser to a fund except under
a written contract, whether with the fund or with an investment
adviser of the fund, that has been approved by the vote of a
majority of the fund's outstanding voting securities. Thus, the
shareholder voting requirement applies not only to an advisory
contract between a fund and an adviser, but also to a subadvisory
contract between a fund's adviser and a subadviser. See 15 U.S.C.
80a-2(a)(20) (defining investment adviser). See also Role of
Independent Directors of Investment Companies, Investment Company
Act Release No. 24816 (Jan 2, 2001) [66 FR 3734 (Jan. 16, 2001)] at
n.53 (``The Act does not distinguish an adviser from a sub-
adviser.'') (citing section 2(a)(20)). Section 15(c) also requires
that a majority of the fund's independent directors approve
contracts with all investment adisers, including subadvisers. 15
U.S.C. 80a-15(c).
\15\ Section 6(c) of the Act [15 U.S.C. 80a-6(c)] permits the
Commission, conditionally or unconditionally, to exempt any person,
security, or transaction (or classes of persons, securities, or
transactions) from any provision of the Act ``if and to the extent
that such exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions'' of the Act.
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Today we are proposing a rule that would eliminate the need for
funds to obtain exemptive orders to hire subadvisers that they
supervise. We have drafted the rule to preserve, to the extent
possible, the important role the Investment Company Act gives
shareholders in the governance of their funds while accommodating the
special needs of manager of managers funds. The other provisions of
section 15 would remain applicable. Under those provisions, the manager
of managers fund's principal adviser \16\ still must have its contract
approved by the fund's board and shareholders,\17\ and the board must
approve the terms of each subadvisory contract.\18\ Thus, the rule
would afford shareholders of a manager of managers fund the
opportunity, both directly through their consideration of the principal
advisory contract and indirectly through their representatives
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on the board of directors, to influence the terms of the advisory
contracts under which their fund is managed.
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\16\ We use the term ``principal adviser'' to mean a party that
contracts directly with a fund to provide investment advisory
services to the fund. See supra note 3.
\17\ See 15 U.S.C. 80a-15(a). Although the proposed rule does
not exempt a fund's advisory contract with a principal adviser from
the shareholder approval requirement of section 15(a), rule 15a-4
under the Act [17 CFR 270.15a-4] allows for the possibility that a
principal adviser to the fund is temporarily serving the fund
without shareholder approval of its advisory contract.
\18\ See 15 U.S.C. 80a-15(c).
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A. Conditions of the Proposed Rule
1. Terms of the Subadvisory Contracts; Subadvisory Fees
The proposed amendments would largely rely on the principal
adviser, negotiating with each subadviser on an arm's length basis and
subject to the approval of the fund's board, to determine the terms of
the subadvisory contract, including the amount of the subadviser's fee.
As a condition to the rule, however, we would preclude a new or
modified subadvisory contract from directly or indirectly increasing
the management fees charged to the fund or its shareholders.\19\ As a
result, the rule would preserve the statutory requirement that
increases in the rate of advisory fees paid by the fund be approved by
shareholders.\20\
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\19\ Proposed rule 15a-5(a)(1). It's a new subadvisory contract
were to increase those fees, the subadviser entering into the
contract would not qualify for relief under the rule, and the
contract would need to be submitted to shareholders for their
approval. A subadvisory fee could be increased under the rule,
however, as long as the total amount of the advisory fees paid by
the fund does not exceed the total amount provided by advisory
contracts that shareholders have approved. For instance, a
subadvisory contract would still be eligible for relief under the
proposed rule even though it increases a fund's subadvisory fees, if
the increase is deducted from the principal adviser's fee. See
Republic Funds, Investment Company Act Release Nos. 24292 (Feb. 16,
2000) [65 FR 10132 (Feb. 25, 2000)] (notice) and 24338 (Mar. 14,
2000) [71 SEC Docket 2701 (Apr. 11, 2000)] (order) (granting
exemption from sharehold approval for subadvisory contracts where
the fund directly pays subadvisory fees and deducts the subadvisory
fees from the fee paid to the principal adviser).
\20\ See 15 U.S.C. 80a-15(a)(1) (requesting any investment
advisory contract to precisely describe all compensation to be paid
thereunder).
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In most cases, subadvisers are compensated by the fund's principal
adviser, which negotiates the amount of the subadvisers' compensation.
Consequently, a principal adviser is free to bargain for lower
subadvisory fees, which will benefit the fund to the extent that lower
subadvisory fees are passed on through lower advisory fees. Sponsors of
manager of managers funds have represented that they are able to
negotiate lower fees with subadvisers if they do not have to disclose
those fees separately, and in our orders we have provided them relief
from our disclosure requirements.\21\ We are proposing to codify this
relief, which permits a manager of managers fund to disclose only the
aggregate amount of advisory fees that it pays to subadvisers as a
group.\22\
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\21\ See, e.g., Endeavor Series Trust, Investment Company Act
Release Nos. 24054 (Sept. 27, 1999) [64 FR 53428 (Oct. 1, 1999)]
(notice) and 24108 (Oct. 22, 1999) [70 SEC Docket 3081 (Nov. 23,
1999)] (order); Frank Russell Investment Company, Investment Company
Act Release Nos. 21108 (June 2, 1995) [60 FR 30321 (June 8, 1995)]
(notice) and 21169 (June 28, 1995) [59 SEC Docket 2105 (June 25,
1995)] (order).
\22\ The individual fee paid to an unaffiliated subadviser of
the principal adviser would not have to be disclosed, but the
individual fee paid to each wholly-owned subadviser (defined below
in Section II.A.3) would have to be disclosed. Under our proposal, a
fund would disclose in its statement of Additional Information on
Form N-1A, in lieu of the individual fee paid to each subadviser,
(i) the individual fees paid to the principal adviser and to each
subadviser that is an affiliated person of the principal adviser
(including a wholly-owned subadviser whose contract has not been
approved by shareholders on reliance on the proposed rule), (ii) the
net advisory fee retained by the principal adviser after payment of
fees to all subadvisers, and (iii) the aggregate fees paid to all of
the fund's subadvisers that are not affiliated persons of the
principal adviser. Proposed Instruction 5 to Item 15(a)(3) of Form
N-1A. We also are proposing conforming amendments to rule 6-07 of
Regulation S-X and the Instructions to Item 22(c) of Schedule 14A.
Under the conditions of the manager of managers orders allowing
a fund to disclose the aggregate fees paid to all of the fund's
unaffiliated subadvisers, the principal adviser is required to
provide the board, no less frequently than quarterly, with
information about its profitability for each fund that is relying on
the order. In addition, the principal adviser is required to provide
the board with information showing the expected impact on the
principal adviser's profitablity whenever a subadviser is hired or
terminated. We have not included these conditions in the proposed
rule. However, information must still be provided to the board
pursuant to section 15(c) of the Act, which requires fund directors
to request and evaluate, and an investment adviser to the fund to
furnish, any information that may be necessary to evaluate the terms
of any investment advisory contract with the fund.
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We recognize that permitting aggregate disclosure of subadvisory
fees will not permit investors to understand the benefits obtained by a
principal adviser that negotiates lower subadvisory fees. We note,
however, that the Act compels a fund board to take into consideration
subadvisory fees when establishing the amount of the principal
adviser's compensation,\23\ and imposes significant liabilities on the
principal adviser itself with respect to that compensation.\24\ The
board is in the best position to assess the overall compensation of the
principal adviser when, for example, some subadvisory fees have
increased and some have decreased. Moreover, the reduction of an
individual subadvisory fee would be reflected in lower aggregate fees
that would be disclosed under the proposed amendments.
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\23\ Section 15(c) of the Act requires fund directors to request
and evaluate, and an investment adviser to the fund to furnish, any
information that may be necessary to evaluate the terms of any
investment advisory contract with the fund. Therefore, the board
must request, and the principal adviser must provide, information
regarding the fees paid to the principal adviser's subadvisers in
order for the board to evaluate properly the terms of the principal
adviser's contract with the fund.
\24\ Section 36(b) of the Act [15 U.S.C. 80a-35(b)] imposes a
fiduciary duty on an investment adviser with respect to its receipt
of compensation from the fund for services, and allows an action to
be brought by the Commission or a shareholder for a breach of this
duty. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 541-42
(1984) (discussing fund shareholders' right to initiate legal
proceedings against the fund's adviser for breach of the adviser's
fiduciary duty with regard to its receipt of compensation under
section 36(b) of the Act, without first making a demand on the board
to initiate such action).
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We request comment on the proposal.
[sbull] Should the Commission permit fund directors to enter into
subadvisory contracts that increase advisory fees without the consent
of shareholders?
[sbull] Should the Commission limit relief to subadvisory contracts
that do not increase the portion of the advisory fee retained by the
principal adviser in order to assure that subadvisers are selected
based on ability and performance?
[sbull] Do shareholders need information about the amount of
compensation paid to each subadviser?
[sbull] We also request comment on whether any amendments are
required to the fee table items of Forms N-4 and N-6, the registration
forms used by insurance company separate accounts registered under the
Act as unit investment trusts.\25\
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\25\ 17 CFR 239.17b-c, 274.11c-d.
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2. Obligation To Supervise
An important aspect of any manager of managers arrangement is the
responsibility assumed by the principal adviser to supervise, i.e.,
monitor and oversee, the subadvisers in the performance of their duties
for the fund.\26\ We propose to require that any principal advisory
contract under the rule obligate the principal adviser to supervise the
subadviser.\27\ In addition,
[[Page 61723]]
because the principal adviser must be able to discharge a subadviser in
order to effectively supervise the subadviser, our proposed rule
includes a condition requiring that the subadvisory contracts be
terminable at any time by the principal adviser, on no more than 60
days written notice, without payment of penalty.\28\
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\26\ See, e.g., Pitcairn Funds and Pitcairn Trust Company,
Investment Company Act Release Nos. 25106 (Aug. 9, 2001) [66 FR
42901 (Aug. 15, 2001)] (notice) and 25150 (Sept. 5, 2001) [75 SEC
Docket 2214 (Oct. 2, 2001)] (order); Frank Russell Investment
Company, Investment Company Act Release Nos. 21108 (June 2, 1995)
[60 FR 30321 (June 8, 1995)] (notice) and 21169 (June 28, 1995) [59
SEC Docket 2105 (July 25, 1995)] (order). A typical subadvisory
agreement stipulates that the subadviser, in carrying out its
investment management duties under the agreement, is subject to the
supervision and/or oversight of the board of directors and the
principal adviser.
\27\ Proposed rule 15a-5(a)(4). See Western Asset Management Co.
and Legg Mason Fund Adviser, Inc., Investment Advisers Act Release
No. 1980 (Sept. 28, 2001) (the Commission found that the principal
adviser failed to adequately supervise an employee of its affiliated
subadviser). Although the manager of managers orders do not require
the principal advisory contract to contain a provision requiring the
principal adviser to supervise all of the subadvisers it retains to
provide services to the fund, the orders do require the principal
adviser to supervise its subadvisers. See, e.g., Hillview Investment
Trust II and Hillview Capital Advisors, LLC, Investment Company Act
Release Nos. 24853 (Feb. 6, 2001) [66 FR 10037 (Feb. 13, 2001)]
(notice) and 25055 (June 29, 2001) [66 FR 35676 (July 6, 2001)]
(order); Frank Russell Investment Company, Investment Company Act
Release Nos. 21108 (June 2, 1995) [60 FR 30321 (June 8, 1995)]
(notice) and 21169 (June 28, 1995) [59 SEC Docket 2105 (July 25,
1995)] (order).
\28\ Proposed rule 15a-5(b)(4). The manager of managers
exemptive orders typically do not require that the principal adviser
be able to terminate a subadvisory contract. Most subadvisory
contracts for manager of managers funds operating under an exemptive
order, however, are terminable by the principal adviser. This
termination provision often is found in the same section of the
contract that provides, as required by section 15(a)(3) of the Act
[15 U.S.C. 80a-15(a)(3)], that the advisory contract is terminable
by the fund's board or shareholders.
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3. Arm's Length Relationship Between Principal Adviser and Subadvisers
We are proposing two related conditions designed to limit the rule
to arrangements in which the principal adviser is in a position to hire
and supervise (and, if necessary, discharge) subadvisers on the basis
of the subadviser's performance, rather than on the basis of other
business relationships the principal adviser may have with the
subadviser. First, we would preclude subadvisers relying on the rule
from being affiliated persons of the principal adviser with which they
contract or of the fund (other than by reason of serving as investment
advisers to the fund) (``affiliated subadviser'').\29\ Second, we would
preclude any director or officer of the fund and the principal adviser
or any director or officer of the principal adviser with which the
subadviser has contracted from owning, directly or indirectly, any
material interest in the subadviser other than through a pooled
investment vehicle that is not controlled by such person or entity.\30\
A principal adviser may not be in a position to discharge, for example,
a parent corporation or a sister corporation, or a person that controls
the principal adviser. It may have substantial economic incentives to
hire and refrain from discharging a subsidiary or other types of
affiliated persons. These conditions have been a key element of our
exemptive orders in order to protect against the conflict of interest
and potential for self-dealing that are inherent when a principal
adviser hires an affiliated subadviser.\31\
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\29\ Proposed rule 15a-5(a)(2)(i).
\30\ Proposed rule 15a-5(a)(2)(i).
\31\ See, e.g., Pitcairn Funds and Pitcairn Trust Company,
Investment Company Act Release Nos. 25106 (Aug. 9, 2001) [66 FR
42901 (Aug. 15, 2001)] (notice) and 25150 (Sept. 5, 2001) [75 SEC
Docket 2214 (Oct. 2, 2001)] (order); Frank Russell Investment
Company, Investment Company Act Release Nos. 21108 (June 2, 1995)
[60 FR 30321 (June 8, 1995)] (notice) and 21169 (June 28, 1995) [59
SEC Docket 2105 (July 25, 1995)] (order).
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The Commission, however, has issued an order expanding the
traditional relief to allow wholly-owned subsidiaries of the principal
adviser to replace other wholly-owned subsidiaries of the principal
adviser as subadvisers (``wholly-owned subadvisers'') to the manager of
managers fund and to allow the principal adviser to materially amend a
wholly-owned subsidiary's subadvisory contract without shareholder
approval.\32\ The applicants asserted that no impermissible conflict of
interest would be present when replacing one wholly-owned subadviser
with another wholly-owned subadviser.\33\
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\32\ See PIMCO Funds: Multi-Manager Series and PIMCO Advisors
L.P., Investment Company Act Release Nos. 24558 (July 17, 2000) [65
FR 45632 (July 24, 2000)] (notice) and 24597 (Aug. 14, 2000) [73 SEC
Docket 176 (Sept. 12, 2000)] (order) (``PIMCO''). A ``wholly-owned
subsidiary'' is defined in section 2(a)(43) of the Act [15 U.S.C.
80a-2(a)(43)].
\33\ See PIMCO, supra note. That order contains all of the other
conditions contained in a typical manager of managers order,
including the condition that prohibits a new subadvisory contract
from increasing the management fees. The principal adviser would be
unlikely to have a direct economic incentive to replace one wholly-
owned subadviser with another, because its overall compensation
would not increase by virtue of its ownership interest in both
entities.
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In light of the absence of an economic incentive for the principal
adviser to replace one wholly-owned subadviser with another (other than
to increase the fund's return on its investments),\34\ we are including
wholly-owned subadvisers within the scope of the proposed rule.\35\ We
are, however, limiting relief to allow the principal adviser to replace
only a wholly-owned subadviser with another wholly-owned subadviser and
to allow the principal adviser to materially amend a wholly-owned
subsidiary's subadvisory contract without shareholder approval.\36\ The
rule would not permit a principal adviser to replace any other type of
subadviser with a wholly-owned subadviser, because the principal
adviser would have an economic incentive in such a situation by virtue
of its total (or near total) ownership interest in the wholly-owned
subadviser, as compared to no ownership or a smaller ownership interest
in the subadviser being replaced.
\34\ Replacing one wholly-owned subadviser with another is no
different than the principal adviser terminating a wholly-owned
subadviser and directly managing the assets of the fund formerly
managed by the wholly-owned subadviser. In either situation, the
principal adviser's advisory fee (and the portion of the fee that it
retains after paying all unaffiliated subadvisers) remains the same.
\35\ Proposed rule 15a-5(a)(2)(ii).
\36\ Proposed rule 15a-5(a)(2)(ii). The first wholly-owned
subadviser hired by the fund would not qualify for relief under the
proposed rule, and its subadvisory contract would have to be
approved by shareholders. A wholly-owned subadviser that replaces
the original wholly-owned subadviser (and any wholly-owned
subadvisers thereafter that replace other wholly-owned subadvisers)
would then be eligible for exemptive relief under the proposed rule.
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[sbull] We request comment on whether the scope of the proposed
rule should be expanded to include wholly-owned subadvisers replacing
other affiliated subadvisers.
[sbull] Should the scope of the rule be expanded to include other
affiliated subadvisers? Should all subadvisory contracts be exempt from
the Act's shareholder voting requirement? If so, should the Commission
expand the proposed rule to include all subadvisers?
4. Board Oversight
Under the Investment Company Act, a fund's board plays an important
role in the selection and oversight of the fund's subadvisers.\37\
Because the rule would permit a fund board to approve subadvisory
contracts without the shareholder vote that the statute otherwise
requires, we propose to require that the fund adopt certain governance
practices that strengthen the role of the independent directors. As
part of our initiative to improve fund governance practices, in 2001 we
made similar amendments to a number of our exemptive rules, including
rule 15a-4, which permits boards of directors to approve interim
advisory contracts
[[Page 61724]]
without a shareholder vote.\38\ Thus, manager of managers funds relying
on the rule would be required to have a board of directors whose
independent directors (i) constitute a majority of directors, (ii) are
selected and nominated by independent directors, and (iii) if
represented by legal counsel, are represented by ``independent legal
counsel.'' \39\
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\37\ Section 15 of the Act requires that a majority of the
board's independent directors approve the fund's advisory contracts
(including subadvisory contracts), and that the board (or
shareholders) annually approve any advisory contract that continues
more than two years. 15 U.S.C. 80-15(a), 15(c). The directors also
must request and evaluate information reasonably necessary for them
to evaluate the terms of an advisory contract. 15 U.S.C. 80a-15(c).
The board in carrying out its obligations under the Act should
consider any material business arrangements between the adviser or
principal underwriter and the subadviser, including the involvement
of the subadviser in the distribution of the fund's shares. The
board when approving a wholly-owned subadviser's contract also
should consider the effect that the affiliation between the
principal adviser and wholly-owned subadviser had on the decision of
the principal adviser to replace a wholly-owned subadviser with
another wholly-owned subadviser (as opposed to replacing with an
unaffiliated subadviser).
\38\ See Role of Independent Directors of Investment Companies,
Investment Company Act Release No. 24816 (Jan. 2, 2001) [66 FR 3734
(Jan. 16, 2001)].
\39\ Proposed rule 15a-5(a)(7). See 17 CFR 270.0-1(a)(6)(i)
(defining ``independent legal counsel''). The manager of managers
exemptive orders have typically included these board composition and
nomination requirements. The manager of managers orders that also
include relief from our disclosure rules require independent
directors to retain independent counsel. Consistent with the
amendments to exemptive rules in 2001, the proposed rule would
require that the independent directors have independent counsel only
if they choose to retain counsel. See Role of Independent Directors
of Investment Companies, Investment Company Act Release No. 24816
(Jan. 2, 2001) [66 FR 3734 (Jan. 16, 2001)].
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5. Expectation of Investors
We also are proposing four requirements designed to assure that
investors understand that they are investing in a manager of managers
fund, and to require that they receive information about who the
subadvisers are and that the subadvisers could be changed at any time
without shareholder approval. First, the rule would require that,
except in the case of a newly offered fund, shareholders approve the
fund's operation as a manager of managers fund, by authorizing the
adviser (with the approval of the fund's board of directors) to enter
into subadvisory contracts without shareholder approval.\40\ Second, we
would amend Form N-1A to require that the fund disclose in its
prospectus the principal adviser's ability, subject to the approval of
the fund's board of directors, to retain and discharge subadvisers
without shareholder approval.\41\
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\40\ Proposed rule 15a-5(a)(3). If the fund has not publicly
offered securities or sold securities to non-affiliates or promoters
(or their affiliates), the rule would require that the board of
directors approve the fund's operation as a manager of managers fund
by authorizing the adviser to enter into subadvisory contracts
without shareholder approval. Id. This condition also has been
included as a condition to our orders.
\41\ Proposed Instruction 3 to Item 4(b)(1) and proposed
amendments to Item 6(a)(1)(i) of Form N-1A. The amendments to Form
N-1A also would require the fund to disclose in its prospectus, in
the discussion of principal investment strategies, the fund's use of
(or reservation of its right to use) subadvisers that may be changed
at any time. Proposed Instruction 3 to Item 4(b)(1). A fund also
would have to disclose in its summary of principal investment
strategies, required by Item 2(b) of Form N-1A, that the fund uses
(or reserves the right to use) the services of one or more
subadvisers without shareholder approval. See Item 2(b) of Form N-1A
(Item 2(b) of the prospectus must identify, based on the information
given in response to Item 4(b), the fund's principal investment
strategies).
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Third, proposed rule 15a-5 would prohibit a fund from having a name
that contains the subadviser's name unless the name of the principal
adviser precedes the subadviser's name. This limitation is designed to
prevent confusion about the relative roles of the adviser and
subadviser. A fund name that includes the name of a subadviser might
serve to invite investors to invest in the fund to obtain the advisory
services of the subadviser rather than the adviser, which is arguably
inconsistent with the basis upon which we have granted relief from the
shareholder voting requirement for manager of managers funds. Use of
such a name also suggests that the principal adviser is unlikely to be
in a position to terminate the advisory contract without upsetting the
investors who have invested for the purpose of seeking the advisory
services of the subadviser. On the other hand, use of a subadviser's
name may merely identify one investment option among many in a series
fund.
Fourth, we are proposing to require that when the principal adviser
enters into a subadvisory contract or makes a material change to a
wholly-owned subadviser's contract, the fund furnish shareholders with
(and file with the Commission) an information statement that describes
the subadvisory agreement, and contains other information that would
have been provided in a proxy statement had a vote been held.\42\ This
condition has been included in our exemptive orders.
---------------------------------------------------------------------------
\42\ Proposed rule 15a-5(a)(5). The information would have to be
provided to shareholders within 90 days of entering into a
subadvisory contract or materially amending a wholly-owned
subadviser's contract.
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[sbull] We request comment on whether the proposed requirements are
adequate to assure that investors understand they are investing in a
manager of managers fund. If they are not adequate, what additional
requirements should be included? Should the rule simply prohibit the
use of the subadviser's name in a manager of managers fund to assure
that investors are investing in a fund based on the principal adviser's
reputation for selecting and supervising subadvisers?
[sbull] We are considering whether to adopt substantially similar
amendments to Form N-3, the registration form for insurance company
``managed separate accounts.'' \43\ Should we amend Form N-3, and if so
should the amendments differ from the proposed Form N-1A amendments?
---------------------------------------------------------------------------
\43\ 17 CFR 239.17a, 274.11b.
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6. Number of Subadvisers
Many manager of managers funds employ multiple subadvisers. Our
exemptive orders, however, do not require the retention of a minimum
number of subadvisers,\44\ and some funds operating under our orders
use only one subadviser for the fund, or for each series of the
fund.\45\
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\44\ See, e.g., Frank Russell Investment Company, Investment
Company Act Release Nos. 21108 (June 2, 1995) [60 FR 30321 (June 8,
1995)] (notice) and 21169 (June 28, 1995) [59 SEC Docket 2105 (July
25, 1995)] (order).
\45\ See, e.g., Managed Accounts Services Portfolio Trust and
Mitchell Hutchins Asset Management, Inc., Investment Company Act
Release Nos. 21590 (Dec. 11, 1995) [60 FR 64461 (Dec. 15, 1995)]
(notice) and 21666 (Jan. 11, 1996) [61 SEC Docket 142 (Feb. 6,
1996)] (order) (order granted to fund in which each series of the
fund was advised initially by a single subadviser).
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The conditions contained in our exemptive orders provide the same
protections for funds with single subadvisers and those with multiple
subadvisers.\46\ In each case, the conditions limit relief to funds in
which the subadviser is analogous to a portfolio manager and in which
shareholders were informed of the principal adviser's ability to retain
new subadvisers without shareholder approval. Moreover, the principal
adviser's ability to hire and fire subadvisers without shareholder
approval benefits shareholders by allowing funds to terminate poorly
performing subadvisers, while avoiding having to operate for a
significant period of time without a subadviser providing investment
management services.\47\ Also, subadviser changes are not infrequent
for funds advised by single subadvisers.\48\ Therefore, the Commission
has issued orders to funds with a single subadviser, and our proposed
rule would not require that each fund or portfolio engage a certain
minimum number of subadvisers.\49\
\46\ For example, the compensation received by subadvisers to
single subadviser funds is fully disclosed to investors. See supra
Section II.A.1.
\47\ Absent the impediment of operating without a subadviser, it
is more likely that poorly performing subadvisers would be
terminated.
\48\ For example, between August 1999 and October 2000, 6 of 27
American Skandia portfolios that employed only one subadviser
replaced the subadviser. Between October 1999 and September 2000, 3
of 11 Paine Webber PACE Select Advisors Trust portfolios that
employed only one subadviser (as of October 1999) replaced the
subadviser.
\49\ Some have argued that the conditions of the Commission's
exemptive orders were designed for funds in which a principal
adviser selects and supervises multiple subadvisers, and that the
costs and delays associated with a shareholder vote for a fund with
one subadviser do not warrant exemptive relief. See Hillview
Investment Trust II and Hillview Capital Advisors, LLC, Investment
Company Act Release No. 25055 (June 29, 2001) [66 FR 35676 (July 6,
2001)].
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[[Page 61725]]
[sbull] We request comment on whether the circumstances involving
single subadvisers are sufficiently similar to those involving multiple
subadvisers, to justify similar treatment under the proposed
amendments.
[sbull] Should the proposed rule include as a condition that the
principal adviser engage multiple subadvisers for each fund, or each
series of the fund? Should any of the conditions in the rule be
modified in the case of single subadviser funds?
B. Rescission of Previously Issued Exemptive Orders
As discussed above, we have issued over 100 orders permitting
manager of managers funds to operate without the need for shareholder
approval of new subadvisory contracts. Our rule proposal today is
designed largely to codify the relief we have provided by order.
However, the conditions in some of the orders vary slightly from
others.\50\ We are concerned that, if we permit the continued operation
of funds under the orders we have issued in the past, funds will be
operating under different sets of conditions, which might have an
adverse effect on competition.\51\ We therefore anticipate rescinding
those orders upon adoption of the proposed rule.
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\50\ It is not unusual for the conditions in our orders to
evolve as we and our staff gain experience with the operation of a
type of a fund under an exemptive order.
\51\ The rescission of the orders would not affect existing
subadvisory contracts entered into under an order prior to the
adoption of the proposed rule. However, new or renewed subadvisory
contracts entered into after adoption of the proposed rule would
have to comply with the proposed rule's requirements.
[sbull] We request comment on the possible effects caused by the
rescission of the orders. If the Commission does not rescind the
orders, how would competition be affected?
III. General Request for Comment
The Commission requests comment on the proposed rule, rule
amendments, and form amendments proposed in this Release. The
Commission also requests suggestions for additional changes to existing
rules or forms, and comments on other matters that might have an effect
on the proposals contained in this Release. Commenters are requested to
provide empirical data to support their views.
IV. Cost-Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. As discussed above, proposed rule 15a-5 and the proposed
amendments to Form N-1A would essentially codify existing exemptive
orders that allow manager of managers funds and their principal
advisers to enter into subadvisory contracts without shareholder
approval. Therefore this analysis examines the costs and benefits to
funds, advisers, and investors that would result from reliance on the
exemptive relief under the proposed amendments, in comparison to the
costs and benefits associated with obtaining an exemptive order from
the Commission.
A. Benefits
We anticipate that funds, their advisers, and their shareholders
would benefit from the proposed rule and amendments.\52\ Funds and
advisers that rely on the rule would be able to enter into subadvisory
contracts without obtaining exemptive relief from the Act's shareholder
approval requirement, which relief can be costly to funds and their
shareholders.\53\ Obtaining an exemptive order also can entail delays
for the fund that applies for relief, although these applications for
relief are typically processed expeditiously.\54\
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\52\ Our staff estimates that approximately 2,798 portfolios
(comprising portions of 631 open-end funds) have at least one
subadviser and as such could benefit from the proposed rule and
amendments. The staff's estimates are based on an examination of the
information reported on Form N-SAR from July through December 2002.
\53\ Based on discussions with fund representatives, the
Commission estimates that obtaining an exemptive order for a manager
of managers fund costs approximately $35,000.
\54\ Our staff estimates, based upon orders issued in the past,
that the exemptive application process (from initial filing to
issuance of order) takes about eight months. During that time,
Commission staff review and comment on applications, applicants
submit responses to comments, the completed application is
summarized in a notice to the public, and public comments are
received and evaluated.
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Some of the conditions included in the proposed rule and amendments
differ from the conditions or representations typically included in a
manager of managers exemptive order. We anticipate that these
differences will not yield significant costs or benefits. For example,
an exemptive order for a fund that intends to provide only aggregate
fee disclosure concerning subadvisers typically requires that the
fund's independent directors retain independent legal counsel.\55\ The
proposed rule would not require independent directors to retain legal
counsel.
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\55\ See, e.g., Pitcairn Funds and Pitcairn Trust Company,
Investment Company Act Release Nos. 25106 (Aug. 9, 2001) [66 FR
42901 (Aug. 15, 2001)] (notice) and 25150 (Sept. 5, 2001) [75 SEC
Docket 2214 (Oct. 2, 2001)] (order).
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B. Costs
Funds that choose to rely on the proposed amendments, as well as
their advisers, would incur certain costs in complying with the
rules.\56\ As discussed above, proposed rule 15a-5 includes a condition
requiring the contract between a manager of managers fund and its
principal adviser to provide that the adviser will supervise and
monitor the performance of its subadvisers.\57\ If the Commission
rescinds the previous exemptive orders granted for manager of managers
funds, a fund that already has an exemptive order would need to modify
its advisory contract to include that provision. Similarly, if an
existing fund were to choose to operate as a manager of managers fund
under the proposed amendments, it would need to modify its advisory
contract.\58\
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\56\ Because the proposed rule is an exemptive rule, funds can
choose whether or not to rely on it. Only those funds that choose to
rely on the proposed rule would incur costs in complying with the
rule.
\57\ See supra Section II.A.2.
\58\ Under our proposal, contracts between the principal adviser
and subadvisers also would be required to authorize the principal
adviser to terminate the subadvisory contract at any time without
penalty. However, most if not all subadvisory contracts already
contain such a provision, and therefore this condition would not
impose a new cost on funds.
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The modification of advisory contracts in response to the proposed
rule would impose one-time costs. The Commission anticipates providing
a sufficiently long compliance period for the proposed amendments, so
that the contract modifications could be made when the fund's board
next approves a new advisory contract. Therefore we believe the costs
involved in making the modifications would be minor.\59\
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\59\ For purposes of the Paperwork Reduction Act, the Commission
staff has estimated that it would take a total of 5 hours and
$1,287.77 per fund to comply with the condition of proposed rule
15a-5 related to the supervision of subadvisers. During the first
year after adoption of the rule, it is estimated that all funds that
currently rely on exemptive orders (plus existing funds that would
choose to rely on the proposed rule during the first year) would
spend a total of 600 hours and $154,719 to comply with the
supervision requirement. After the first year, the staff estimates
that ten funds per year, whose securities have already been publicly
offered, would seek to rely on the proposed rule and therefore would
need to modify their advisory contracts with principal advisers. The
Commission staff estimates that, after the first year, those ten
funds together would annually spend 50 hours and $12,877 to comply
with the supervision requirement.
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There are no new costs associated with any of the remaining
conditions of the proposed rule and amendments. First, the proposed
rule would require that the fund provide shareholders,
[[Page 61726]]
within 90 days of the entry into a subadvisory contract or a material
change to a wholly-owned subadviser's contract, with an information
statement that contains the information that would have been provided
to shareholders in a proxy statement if a shareholder vote had been
held.\60\ Second, the proposed rule would require funds to obtain
shareholder authorization for a principal adviser to enter into
subadvisory contracts without shareholder approval.\61\ Third, the
proposed rule would require that disinterested directors comprise a
majority of the fund board, and that the disinterested directors select
and nominate any other disinterested directors.\62\ Fourth, the
proposed rule would require independent directors, if they hire legal
counsel, to hire an independent legal counsel.\63\ All of these
conditions (or their substantial equivalent) are typically included in
manager of managers exemptive orders, and therefore would not result in
any new costs to funds, their advisers, or investors.\64\
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\60\ Proposed rule 15a-5(a)(5).
\61\ Proposed rule 15a-5(a)(3).
\62\ Proposed rule 15a-5(a)(7)(i).
\63\ Proposed rule 15a-5(a)(7)(ii).
\64\ The manager of managers orders that also include relief
from our disclosure rules require independent directors to retain
independent counsel. The proposed rule would require that the
independent directors have independent counsel only if they choose
to retain counsel. Moreover, the amendments we made to a number of
exemptive rules in January 2001, see supra notes 38-39 and
accompanying text, make it likely that most funds that would use the
exemptive relief provided by the proposed rule would already have
independent counsel or would not retain legal counsel.
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Although the proposed rule would alter the relationship between the
principal adviser and shareholders (by allowing the principal adviser
to hire and terminate subadvisers without shareholder approval) and the
principal adviser and its subadvisers, the effects of such alterations
would be minimal because shareholders have the right to terminate
subadvisers \65\ and principal advisers have a contractual duty to
supervise their subadvisers.\66\
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\65\ Section 15(a)(3) of the Act [15 U.S.C. 80a-15(a)(3)]
provides that any advisory contract must be terminable at any time
by vote of a majority of the outstanding voting securities of the
fund.
\66\ The proposed rule would require the principal adviser's
contract with the fund to include a provision requiring the
principal adviser to supervise its subadvisers. See proposed rule
15a-5(a)(4).
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C. Request for Comment
The Commission requests comment on the potential costs and benefits
of the proposed rule and amendments and any suggested alternatives to
the proposals. We encourage commenters to identify, discuss, analyze,
and supply relevant data regarding any additional costs and benefits.
For purposes of the Small Business Regulatory Enforcement Act of
1996,\67\ the Commission also requests information regarding the
potential impact of the proposals on the U.S. economy on an annual
basis. Commenters are requested to provide data to support their views.
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\67\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
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V. Consideration of Promotion of Efficiency, Competition, and Capital
Formation
Section 2(c) of the Investment Company Act, section 2(b) of the
Securities Act, and section 3(f) of the Exchange Act require the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider whether the action will promote efficiency,
competition, and capital formation.\68\ The Commission anticipates that
the proposed amendments would not adversely affect efficiency,
competition, or capital formation.
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\68\ 15 U.S.C. 80a-2(c), 15 U.S.C. 77b(b), and 15 U.S.C. 78c(f).
Section 23(a)(2) of the Exchange Act also requires the Commission,
in adopting rules under the Exchange Act, to consider the
anticompetitive effects of any rule it adopts. 15 U.S.C. 78w(a)(2).
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The proposed amendments are intended to allow funds to enter into
subadvisory contracts without shareholder approval, which would
eliminate the need for funds to hold a shareholder meeting or obtain
specific exemptive relief, either of which can be costly and time
consuming. We anticipate that the proposed amendments would enhance
efficiency by significantly reducing the time period needed for
selecting subadvisers, while also reducing the fund's costs associated
with the hiring of a new subadviser.\69\ Adoption of the proposed rule
and rescission of the exemptive orders would subject all funds and
advisers to the same conditions, and enable them to compete under more
uniform conditions. The Commission does not expect the proposed
amendments to have a material effect on competition or capital
formation.\70\
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\69\ The proposed amendments permitting a fund to disclose only
the aggregate fees paid to all of the fund's unaffiliated
subadvisers also could enhance efficiency by allowing funds to
negotiate fees lower than the subadviser's usual fee. See supra
Section II.A.1.
\70\ Similarly, the Commission does not expect the adoption of
the proposed rule and amendments to have any anticompetitive
effects. See supra note 68.
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The Commission requests comments on whether the proposed rule and
proposed form and rule amendments, if adopted, would promote
efficiency, competition, and capital formation. Comments will be
considered by the Commission in satisfying its responsibilities under
section 2(c) of the Investment Company Act, section 2(b) of the
Securities Act, and sections 3(f) and 23(a)(2) of the Exchange Act.
VI. Paperwork Reduction Act
Certain provisions of proposed rule 15a-5 and certain provisions of
the proposed amendments to Form N-1A would result in new ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\71\ The Commission is submitting these proposals
to the Office of Management and Budget (``OMB'') for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the
collection of information associated with the proposed rule is ``Rule
15a-5 under the Investment Company Act of 1940, `Exemption from
shareholder approval for certain subadvisory contracts.' '' The title
for the collection of information associated with the proposed
amendments is ``Form N-1A under the Investment Company Act of 1940 and
Securities Act of 1933, `Registration Statement of Open-End Management
Investment Companies.' '' An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number. The approved
collection of information associated with Form N-1A, which would be
revised by the proposed amendments, displays control number 3235-0307.
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\71\ 44 U.S.C. 3501.
---------------------------------------------------------------------------
Proposed rule 15a-5 and the proposed amendments to Form N-1A would
permit manager of managers funds to operate without obtaining
shareholder approval when the fund's principal adviser hires a new
subadviser or replaces an existing subadviser subject to certain
conditions. The rule and amendments would largely codify numerous
exemptive orders issued by the Commission. We believe that the
information collection requirements of the proposed rule and amendments
ensure that only manager of managers funds are eligible for relief,
that shareholders are provided with information on the identity of the
fund's subadvisers, and that shareholders are aware of a fund's and a
principal adviser's ability to hire and fire subadvisers without
shareholder approval. The provision of information in accordance with
the proposed rule and amendments would be voluntary,
[[Page 61727]]
because rule 15a-5 is an exemptive rule and, therefore, funds may
choose whether to rely on it. Because the information provided to the
Commission on Form N-1A is available to the public, this analysis does
not address the confidentiality of responses under the proposed rule.
The proposed rule would require that a fund's contract with each
principal adviser that retains the services of one or more subadvisers
contain a provision obligating the principal adviser to supervise and
oversee the activities of its subadvisers.\72\ The proposed rule also
would require all contracts with subadvisers that are retained without
shareholder approval to provide that the principal adviser may
terminate the subadviser at any time without penalty.\73\
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\72\ Proposed rule 15a-5(a)(4).
\73\ Proposed rule 15a-5(b)(4). Most subadvisory contracts
already contain terms that allow the principal adviser to terminate
the contract at any time. We therefore estimate that there would be
no costs imposed on funds by this requirement.
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During the first year after adoption of the rule, the Commission
staff estimates that requiring funds to modify their existing contracts
with principal advisers so that each principal adviser is required to
supervise and oversee the activities of its subadvisers would create an
initial one-time burden of 5 hours per fund (4 hours by in-house
counsel, .5 hours by fund directors, .5 hours by support staff) \74\ or
about 600 burden hours.\75\ The Commission staff estimates that after
the first year, approximately 10 registered open-end investment
companies \76\ would spend, on average, 5 hours annually (4 hours by
in-house counsel, .5 hours by fund directors, .5 hours by support
staff) to modify their contracts regarding supervision, for a total of
50 burden hours.
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\74\ These estimates are based on discussions with fund
representatives.
\75\ The Commission staff estimates that 120 funds would have to
modify their advisory contracts with their principal advisers to
comply with the proposed rule. These 120 funds include 101 funds
that currently rely on exemptive orders, 9 funds that have filed an
application for an exemptive order and, as explained infra note 76,
10 additional funds that would choose to rely on the proposed rule
during the first year. The total number of burden hours for the
first year is 120 funds x 5 hours = 600 hours.
\76\ Based on the number of manager of managers applications
submitted since 1995, the staff estimates that 20 additional funds
per year would seek to rely on the proposed rule. Approximately 10
of those funds would be funds whose securities have already been
publicly offered, and therefore would need to modify their advisory
contracts with principal advisers.
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Rule 15a-5 also would require funds to provide shareholders (and
file with the Commission), within 90 days of entering into a
subadvisory contract or materially amending a wholly-owned subsidiary's
subadvisory contract, with an information statement describing the
agreement and containing all of the information shareholders would have
received in a proxy statement had a shareholder vote been held.\77\
During the first 3 years after adoption of the proposed rule, the
Commission staff estimates that 150 registered open-end investment
companies \78\ would each spend 20 hours \79\ annually in preparing and
distributing information statements. The total annual burden estimate
for complying with the reporting requirement of rule 15a-5 would be
3,000 hours annually.
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\77\ Proposed rule 15a-5(a)(5).
\78\ Commission staff estimates that 130 funds (including 101
funds that currently rely on exemptive orders, 9 funds that have
filed an application for an exemptive order, and 20 additional funds
that would have filed for exemptive relief during the first year
after the rule's adoption) would rely on the proposed rule during
the first year after its adoption. After the first year, the staff
estimates that each year 20 additional funds would rely on the
proposed rule.
\79\ Based on discussions with fund representatives, the
Commission estimates that on average each fund would hire two new
subadvisers per year. Therefore, funds would be required to send to
shareholders two information statements per year. Based on
discussions with fund representatives, the Commission estimates that
each fund would spend 10 hours to prepare and mail each information
statement.
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The proposed amendments also would result in new information
collection requirements. The proposed amendments to Form N-1A would
require any fund that is authorized to hire one or more subadvisers
without shareholder approval pursuant to proposed rule 15a-5, to
disclose this information in its prospectus.\80\ The Commission
believes that the added information collection burdens would be
negligible and would be mostly offset by other disclosure amendments
that would permit funds that comply with the requirements of proposed
rule 15a-5 to disclose the aggregate fees paid to all unaffiliated
subadvisers of the principal adviser, in lieu of the individual fee
paid to each subadviser.\81\
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\80\ Proposed Instruction 3 to Item 4(b)(1) of Form N-1A would
require a fund to disclose if it is authorized to use the services
of subadvisers without shareholder approval. Proposed Item
6(a)(1)(i) of Form N-1A would require a fund in its identification
and description of its investment advisers to explain for each
subadviser that serves the fund without shareholder approval that
such adviser may be replaced, and additional subadvisers may be
retained, without shareholder approval.
\81\ Proposed Instruction 5 to Item 15(a)(3) of Form N-1A would
allow funds to disclose the aggregate fees paid to all unaffiliated
subadvisers of the principal adviser in lieu of the individual fee
paid to each such subadviser.
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To arrive at the total information collection burden, a weighted
average of the first year burden and the annual burden after the first
year was calculated. Using a three-year period, the weighted average
information collection burden is 3,232 hours.\82\ Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission solicits comments in order to: (i)
Evaluate whether the proposed collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information will have practical utility; (ii)
evaluate the accuracy of the Commission's estimate of the burden of the
proposed collections of information; (iii) determine whether there are
ways to enhance the quality, utility, and clarity of the information to
be collected; and (iv) minimize the burden of the collections of
information on those who are to respond, including through the use of
automated collection techniques or other forms of information
technology.
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\82\ The first year burden of 3,600 hours (600 hours to modify
existing contracts + 3,000 hours to comply with the reporting
requirement) is weighted (1 year / 3 years = 33 percent) as 1,188
hours. The burden after the first year of 3,050 hours (50 hours to
modify contracts + 3,000 hours to comply with the reporting
requirement) is weighted (2 years / 3 years = 67 percent) as 2,044
hours. The total weighted information collection burden hours for
the proposed amendments are 1,188 + 2,044 = 3,232 hours.
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Persons wishing to submit comments on the collection of information
requirements of the proposed rule and amendments should direct them to
the Office of Management and Budget, Attention Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Room 10102, New Executive Office Building,
Washington, DC 20503, and should send a copy to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609, with reference to File No. S7-20-03. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this Release; therefore a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days after publication of this Release. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
20-03, and be submitted to the Securities and Exchange Commission,
Records Management, Office of Filings and Information Services.
VII. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis
[[Page 61728]]
(``IRFA'') in accordance with 5 U.S.C. 603 regarding proposed rule 15a-
5 under the Investment Company Act and proposed amendments to rule 6-07
of Regulation S-X under the Investment Company Act and the Securities
Act, Form N-1A under the Investment Company Act and the Securities Act,
and Schedule 14A under the Exchange Act. The following summarizes the
IRFA.
The IRFA summarizes the background of the proposed rule and
amendments. The IRFA also discusses the reasons for the proposed rule
and amendments and the objectives of, and legal basis for, the rule and
amendments. Those items are discussed above in this Release.
The IRFA discusses the effect of the proposed rule and amendments
on small entities. A small business or small organization
(collectively, ``small entity'') for purposes of the Regulatory
Flexibility Act is a fund that, together with other funds in the same
group of related investment companies, has net assets of $50 million or
less as of the end of its most recent fiscal year.\83\ Of approximately
2,200 registered open-end investment companies (consisting of about
9,000 portfolios), approximately 157 are small entities.\84\
Approximately 2,798 portfolios (comprising portions of 631 registered
open-end investment companies) currently retain one or more
subadvisers. Approximately 13 of the 631 registered open-end companies
(containing 35 of the 2,798 portfolios) are small entities.\85\ Funds
that are small entities, like other funds, may rely on the rule if they
satisfy its conditions. The rule is an exemptive rule and therefore
funds may choose not to rely on it.
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\83\ 17 CFR 270.0-10.
\84\ Some or all of these entities may contain multiple series
or portfolios. If a registered investment company is a small entity,
the portfolios or series it contains are also small entities.
\85\ These estimates are based on data reported on Form N-SAR
filed with the Commission between July and December 2002.
---------------------------------------------------------------------------
The Commission staff estimates that only two of the approximately
one hundred exemptive orders issued by the Commission involved small
entities. The staff anticipates that the number of funds seeking
exemptive relief will continue to rise, but that the proportion of
small funds to total funds will remain relatively stable in the
future.\86\
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\86\ The Commission believes that small funds are unlikely to
retain multiple subadvisers to manage fund assets because it would
not be practical for subadvisers to manage a portion of a small
fund's assets. A subadviser receives as a fee a percentage of the
value of the assets under its management. Therefore, providing
management services to a portion of a small fund's assets would not
provide a large enough fee to justify the subadviser's time or
effort. Because it is unlikely that a small fund would retain more
than one subadviser, small funds rarely have reason to seek
exemptive relief.
---------------------------------------------------------------------------
The Commission staff expects the proposed rule and amendments to
have little impact on small entities. Like other funds, small entities
will be affected by the proposed rule and amendments only if they enter
into a subadvisory contract with an unaffiliated or wholly-owned
subadviser. Because the proposed rule is voluntary in nature, only
small entities that choose to rely on the rule will be subject to its
conditions.\87\ Moreover, the burdens imposed by the proposed rule and
amendments should be more than offset by the fact that the proposed
rule and amendments would enable funds, including small entities, to
enter into subadvisory contracts without incurring the expenses
associated with a shareholder vote or the filing of an application for
exemption under section 6(c) of the Act.
---------------------------------------------------------------------------
\87\ As noted above, to date only two small funds have obtained
an exemptive order allowing them to enter into subadvisory contracts
without shareholder approval. The Commission does not believe that
the number of small funds seeking such relief will increase in the
future. See supra note 86 and accompanying text.
---------------------------------------------------------------------------
The IRFA discusses the reporting, recordkeeping, and compliance
requirements associated with the proposed rule and amendments. It notes
that the proposed rule would require funds to provide an information
statement to its shareholders (and file it with the Commission) within
90 days of the entry into a subadvisory contract or a material change
to a wholly-owned subadviser's contract as a substitute for the proxy
statement that the fund would have had to provide to each shareholder
if a shareholder vote had been held.\88\
---------------------------------------------------------------------------
\88\ Proposed rule 15a-5(a)(5). The exemptive orders that have
been issued by the Commission require that shareholders be provided
with an information statement in place of the proxy statement.
---------------------------------------------------------------------------
The IRFA also explains that the proposed rule would impose
compliance requirements. For funds relying on the proposed rule, the
rule would require that: (i) the subadvisory contract: (a) does not
directly or indirectly increase the management and advisory fees
charged to the fund or its shareholders,\89\ and (b) provides that it
may be terminated at any time, on no more than 60 days written notice,
without penalty, by the principal adviser; \90\ (ii) the subadviser is
not an affiliated person of the fund or the principal adviser with
which it has contracted (other than by reason of serving as an
investment adviser to the fund); \91\ (iii) no director or officer of
the fund, and no principal adviser or director or officer of the
principal adviser with which the subadviser has contracted, directly or
indirectly owns any material interest in the subadviser other than an
interest through ownership of shares of a pooled investment vehicle
that is not controlled by such person or entity; \92\ (iv) shareholders
of the fund have authorized a principal adviser, subject to approval by
the board of directors, to enter into subadvisory contracts without
shareholder approval or, if the fund's securities have not been
publicly offered or sold to persons who are not promoters or affiliated
persons of the fund, the directors have authorized the principal
adviser to enter into such contracts; \93\ (v) the contract between the
fund and a principal adviser provides that the principal adviser must
supervise and oversee the activities of its subadvisers on behalf of
the fund; \94\ (vi) if the fund identifies the subadviser as part of
the fund's name or title, it also clearly identifies the principal
adviser with which the subadviser has contracted, before the name of
the subadviser; \95\ (vii) a majority of the directors of the fund are
not interested persons of the fund, and those directors select and
nominate any other disinterested directors; \96\ and (viii) any person
who acts as legal counsel for the disinterested directors is an
independent legal counsel.\97\
---------------------------------------------------------------------------
\89\ Proposed rule 15a-5(a)(1).
\90\ Proposed rule 15a-5(b)(4).
\91\ Proposed rule 15a-5(a)(2)(i).
\92\ Proposed rule 15a-5(a)(2)(i). The proposed rule would allow
a wholly-owned subadviser to qualify for relief from section 15(a)
of the Act even though it is an affiliate of the principal adviser
and the principal adviser has an ownership interest in the
subadviser, if the wholly-owned subadviser meets all of the other
conditions of the proposed rule and the wholly-owned subadviser is
replacing another wholly-owned subadviser or its contract has been
materially amended. Proposed rule 15a-5(a)(2)(ii).
\93\ Proposed rule 15a-5(a)(3).
\94\ Proposed rule 15a-5(a)(4).
\95\ Proposed rule 15a-5(a)(6).
\96\ Proposed rule 15a-5(a)(7)(i).
\97\ Proposed rule 15a-5(a)(7)(ii).
---------------------------------------------------------------------------
The IRFA explains that the proposed rule would benefit funds by
allowing them to enter into subadvisory contracts without shareholder
approval, and thereby avoid incurring the costs and delay associated
with the exemptive application process or with obtaining shareholder
approval. The IRFA also notes that while the proposed rule would
require funds to comply with numerous conditions, many of the
compliance requirements do not involve any new costs on funds and those
that
[[Page 61729]]
do would not result in a significant burden being placed on the
funds.\98\
---------------------------------------------------------------------------
\98\ The requirements regarding prohibited relationships between
the subadviser and the fund or principal adviser (or their
affiliates) do not involve any costs or burdens. The requirements
regarding board composition and the selection and nomination of
independent directors would not impose any new costs or burdens.
Under our current manager of managers orders, funds are required to
comply with the same board composition and selection and nomination
requirements. The independent legal counsel requirement does not
require independent directors to retain legal counsel, but those who
are represented by counsel that does not meet the definition of
``independent legal counsel'' would be required to retain different
counsel if their fund chooses to rely on the proposed rule. The
manager of managers orders that also include relief from our
disclosure rules require independent directors to retain independent
counsel. Moreover, the amendments we made to a number of exemptive
rules in January 2001, see supra notes 38 and 39 and accompanying
text, make it likely that most funds that would use the exemptive
relief provided by the proposed rule would already have independent
counsel or would not retain legal counsel.
Requiring funds to furnish shareholders with an information
statement (and file such statement with the Commission) following
the retention of a new subadviser or a change in the fee paid to a
wholly-owned subadviser would not impose any new costs on funds.
Currently, funds either have to provide shareholders with a proxy
statement in connection with seeking shareholder approval of the
subadvisory contract or, if operating under a manager of managers
exemptive order, have to provide shareholders with an information
statement (and file such statement with the Commission). In the
absence of the proposed rule, therefore, the fund still would be
required to provide shareholders with the same information.
Similarly, requiring the shareholders or the board of the fund to
authorize the principal advisers to enter into subadvisory contracts
without shareholder approval would not impose any new costs on the
fund. Currently, a fund either has to receive shareholder approval
of all subadvisory contracts or, if operating under a manager of
managers exemptive order, obtain shareholder authorization for
entering into subadvisory contracts without shareholder approval. In
the absence of the proposed rule, therefore, the fund would still
incur the same or greater costs in obtaining shareholder approval or
operating under an order.
---------------------------------------------------------------------------
The IRFA explains that the proposed amendments would impose
reporting requirements on funds, but would not impose recordkeeping or
compliance requirements. The proposed amendments would require any fund
that is authorized to hire one or more subadvisers without shareholder
approval pursuant to proposed rule 15a-5, to disclose this ability in
its prospectus.\99\ Compliance with these amendments would require
little time, involve no extra costs to funds, and should not impose a
significant burden, if any, on funds, including small entities.
Shareholders of funds would benefit by being fully informed of the
fund's ability to replace subadvisers without shareholder approval.
---------------------------------------------------------------------------
\99\ Proposed Instruction 3 to Item 4(b)(1) of Form N-1A would
require a fund to disclose if it is authorized to use the services
of subadvisers without shareholder approval. Proposed Item
6(a)(1)(i) of Form N-1A would require a fund in its identification
and description of its investment advisers to explain for each
subadviser that serves the fund without shareholder approval that
such subadviser may be replaced, and additional subadvisers may be
retained, without shareholder approval.
---------------------------------------------------------------------------
The proposed amendments also would allow a fund that complies with
the requirements of proposed rule 15a-5 to decide not to disclose the
individual fee paid to each unaffiliated subadviser of the principal
adviser.\100\ For purposes of fee disclosure in the fund's Statement of
Additional Information, the fund would be required to disclose in place
of the individual fee paid to each subadviser (both as a dollar amount
and as a percentage of its net assets) (i) the individual fees paid to
the principal adviser and to each of its affiliated subadvisers
(including its wholly-owned subadvisers), (ii) the net advisory fee
retained by the principal adviser after payment of fees to all
subadvisers, and (iii) the aggregate fees paid to all subadvisers that
are not affiliated persons of the principal adviser.\101\ These
amendments would benefit funds, including small entities, by reducing
the disclosure burden on funds that qualify for relief under the
proposed rule and by allowing the principal adviser to negotiate a
lower advisory fee with each unaffiliated subadviser than the fee
normally charged by each such subadviser.\102\
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\100\ Proposed rule 6-07(2)(d) of Regulation S-X, proposed
Instruction 2 to Item 22(c) of Schedule 14A, and proposed
Instruction 5 to Item 15(a)(3) of Form N-1A. In the absence of these
amendments, funds would be required to disclose the individual fee
paid to each subadviser.
\101\ Proposed Instruction 5 to Item 15(a)(3) of Form N-1A.
\102\ By allowing funds to disclose only the aggregate fee paid
to all unaffiliated subadvisers, each unaffiliated subadviser would
be more likely to accept a lower fee than the fee it charges to its
other clients, because a subadviser's other clients would not be
aware of the exact fee paid to each subadviser.
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The IRFA explains that the Commission has considered significant
alternatives to the proposed rule and amendments that would accomplish
the stated objective, while minimizing any significant adverse impact
on small entities. The Commission believes that no alternative could
carry out these objectives as effectively as the proposed rule and
amendments.
The Commission encourages the submission of comments on matters
discussed in the IRFA. Specifically, comment is requested on the
effects the proposed rule and amendments would have on small entities,
and the number of small entities that would be affected. Commenters are
asked to describe the nature of any effect and provide empirical data
supporting the extent of the effect. These comments will be placed in
the same public file as comments on the proposed rule and amendments
themselves. A copy of the IRFA may be obtained by contacting Adam B.
Glazer, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0506.
VIII. Statutory Authority
The Commission is proposing to adopt new rule 15a-5 pursuant to the
authority set forth in sections 6(c) and 38(a) [15 U.S.C. 80a-6(c) and
80a-37(a)] of the Investment Company Act. The Commission is proposing
amendments to rule 6-07 of Regulation S-X pursuant to authority set
forth in section 7 of the Securities Act [15 U.S.C. 77g] and sections 8
and 38(a) of the Investment Company Act [15 U.S.C. 80a-8, 80a-37(a)].
We are proposing amendments to Schedule 14A pursuant to authority set
forth in sections 14 and 23(a)(1) of the Exchange Act [15 U.S.C. 78n,
78w(a)(1)] and sections 20(a) and 38 of the Investment Company Act [15
U.S.C. 80a-20(a), 80a-37]. We are proposing amendments to Form N-1A
pursuant to authority set forth in sections 6, 7, 10, and 19(a) of the
Securities Act [15 U.S.C. 77f, 77g, 77j, 77s(a)] and sections 8, 24(a),
and 30 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), and
80a-29].
List of Subjects
17 CFR Part 210
Accounting, Reporting and recordkeeping requirements, Securities.
17 CFR Parts 239 and 240
Reporting and recordkeeping requirements, Securities.
17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Rules and Form Amendments
For reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is proposed to be amended as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for part 210 continues to read as
follows:
[[Page 61730]]
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5,
78w(a), 78ll, 78mm, 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-
29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless
otherwise noted.
2. Section 210.6-07 is amended by:
a. Redesignating paragraphs 2.(d), (e), (f), and (g) as paragraphs
2.(e), (f), (g), and (h); and
b. Adding new paragraph 2.(d) to read as follows:
Sec. 210.6-07 Statements of operations.
* * * * *
2. Expenses. * * *
(d) If a registered investment company or separate series of a
registered investment company (``Fund'') or a principal adviser (as
defined in Sec. 270.15a-5(b)(2) of this chapter) of the Fund, in
reliance on Sec. 270.15a-5 of this chapter, has entered into a
contract or contracts with a subadviser (as that term is defined in
Sec. 270.15a-5(b)(3) of this chapter) of the Fund without approval by
a vote of the securities of the Fund, the investment advisory fee paid
to any subadviser that is not an affiliated person (as defined in 15
U.S.C. 80a-2(a)(3)) of the principal adviser with which it has
contracted or of the Fund (other than by reason of serving as an
investment adviser to the Fund) need not be disclosed as a separate
expense item in response to paragraphs 2.(a), (b), or (c) of this
section.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
3. The authority citation for part 239 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and
80a-37, unless otherwise noted.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
4. The authority citation for part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
5. Section 240.14a-101, Item 22, is amended by:
a. Designating the Instruction before paragraph (c)(1) as
Instruction 1 and adding Instruction 2; and
b. Designating the Instruction after paragraph (c)(10) as
Instruction 1 and adding Instruction 2.
These additions and revisions read as follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 22. Information required in investment company proxy statement.
* * * * *
(c) * * *
Instructions to paragraph (c). 1.* * *
2. Where information is furnished in response to this item in order
to comply with the requirements of Sec. 270.15a-5(a)(5) of this
chapter, the rate of compensation and the aggregate amount of the fee
paid to the subadviser (as that term is defined in Sec. 270.15a-
5(b)(3) of this chapter) need not be disclosed in response to any
paragraph of this item, and the information required by paragraph
(c)(9) of this item need not be disclosed, unless such subadviser is a
wholly-owned subsidiary (as defined in 15 U.S.C. 80a-2(a)(43)) of the
principal adviser (as that term is defined in Sec. 270.15a-5(b)(2) of
this chapter) with which it has contracted.
* * * * *
(10) * * *
Instructions to paragraph (c)(10). 1. * * *
2. Where information is furnished in response to this item in order
to comply with the requirements of Sec. 270.15a-5(a)(5) of this
chapter, the compensation information required by this paragraph
(c)(10) need not be disclosed, unless the information pertains to a
subadviser (as that term is defined in Sec. 270.15a-5(b)(3) of this
chapter) that is a wholly-owned subsidiary (as defined in 15 U.S.C.
80a-2(a)(43)) of the principal adviser (as that term is defined in
Sec. 270.15a-5(b)(2) of this chapter) with which it has contracted.
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
6. The authority citation for Part 270 continues to read in part as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
7. Section 270.15a-5 is added to read as follows:
Sec. 270.15a-5 Exemption from shareholder approval for certain
subadvisory contracts.
(a) Exemption from shareholder approval. Notwithstanding section
15(a) of the Act (15 U.S.C. 80a-15(a)), a subadvisory contract need not
be approved by a vote of a majority of the outstanding voting
securities of a fund, if the following conditions are met:
(1) No increase in fees. The subadvisory contract does not directly
or indirectly increase the management and advisory fees charged to the
fund or its shareholders.
(2) Conflicting relationships prohibited.
(i) The subadviser is not an affiliated person of the principal
adviser with which it has contracted or of the fund (other than by
reason of serving as an investment adviser to the fund), and no
director or officer of the fund, and no principal adviser or director
or officer of the principal adviser with which the subadviser has
contracted, directly or indirectly owns any material interest in the
subadviser other than an interest through ownership of shares of a
pooled investment vehicle that is not controlled by such person (or
entity); or
(ii) The subadviser is a wholly-owned subsidiary (as defined in
section 2(a)(43) of the Act (15 U.S.C. 80a-2(a)(43)) of the principal
adviser, and the wholly-owned subsidiary has been hired as a subadviser
to replace another wholly-owned subsidiary that has been terminated as
a subadviser to the fund, or the subadvisory contract of a wholly-owned
subsidiary has been materially amended.
(3) Shareholder authorization. Shareholders of the fund have
authorized a principal adviser, subject to approval by the board of
directors, to enter into contracts with subadvisers without approval by
a vote of the outstanding voting securities of the fund or, if the
fund's securities have not been publicly offered or sold to persons who
are not promoters or affiliated persons of the fund, the directors of
the fund have authorized the principal adviser to enter into such
contracts.
(4) Supervision of subadvisers. A contract between the fund and a
principal adviser provides that the principal adviser must supervise
and oversee the activities of the subadviser under the subadvisory
contract on behalf of the fund.
(5) Disclosure to shareholders. Within 90 days after entry into a
new subadvisory contract or after making a material change to a wholly-
owned subsidiary's existing subadvisory contract, the fund furnishes
its shareholders with an information statement, which must be filed
with the
[[Page 61731]]
Commission in accordance with the requirements of Sec. 240.14c-5(b) of
this chapter, that describes the new agreement, and contains the
information specified in Regulation 14C (17 CFR 240.14c-1 through
240.14c-7), Schedule 14C (17 CFR 240.14c-101), and Item 22 of Schedule
14A (17 CFR 240.14a-101) under the Securities Exchange Act of 1934 (15
U.S.C. 78a-mm).
(6) Fund name. If the fund identifies the subadviser as a part of
the fund's name or title, it also clearly identifies in its name or
title the principal adviser with which the subadviser has contracted,
before the name of the subadviser.
(7) Board of directors composition, selection, and representation.
(i) A majority of the directors of the fund are not interested
persons of the fund, and those directors select and nominate any other
disinterested directors; and
(ii) Any person who acts as legal counsel for the disinterested
directors is an independent legal counsel.
(b) Definitions.
(1) Fund means a registered open-end management investment company,
or separate series of a registered open-end management investment
company.
(2) Principal adviser means an investment adviser as defined in
section 2(a)(20)(A) of the Act (15 U.S.C. 80a-2(a)(20)(A)).
(3) Subadviser means an investment adviser as defined in section
2(a)(20)(B) of the Act (15 U.S.C. 80a-2(a)(20)(B)).
(4) Subadvisory contract means a contract between a principal
adviser and subadviser to a fund, under which contract the subadviser
agrees to perform investment advisory services on behalf of the fund,
and which is terminable at any time by the principal adviser, on no
more than 60 days written notice, without payment of penalty.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
8. The authority citation for part 274 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
9. Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) is
amended by:
a. In Item 4(b)(1) by redesignating Instructions 3, 4, 5, 6, and 7
as Instructions 4, 5, 6, 7, and 8 and adding new Instruction 3;
b. In Item 6 adding a sentence to the end of paragraph (a)(1)(i)
and a Note; and
c. In Item 15 adding Instruction 5 before paragraph (b).
These additions and revisions read as follows:
Note: The text of Form N-1A does not and these amendments will
not appear in the Code of Federal Regulations.
Form N-1A
* * * * *
Item 4. Investment Objectives, Principal Investment Strategies, and
Related Risks
* * * * *
(b) * * *
(1) * * *
Instructions. * * *
3. A Fund that uses (or reserves the right to use) the services of
any other investment adviser to implement the investment objectives,
strategies, and policies of the Fund, without shareholder approval of
those advisers' contracts in reliance on Sec. 270.15a-5, should regard
such use (or reservation to use) as a principal investment strategy.
* * * * *
Item 6. Management, Organization, and Capital Structure
(a) * * *
(1) Investment Adviser.
(i) * * * If the investment adviser is a subadviser whose contract
has not been approved by shareholders in reliance on Sec. 270.15a-5,
explain that the subadviser may be replaced, and that additional
subadvisers may be retained, without shareholder approval.
Note: If the Fund uses the services of more than one subadviser
whose contracts have not been approved by shareholders in reliance
on Sec. 270.15a-5, then the Fund may include a general statement,
appropriately located, explaining that any of the subadvisers may be
replaced, and that additional subadvisers may be retained, without
shareholder approval.
* * * * *
Item 15. Investment Advisory and Other Services
(a) * * *
(3) * * *
Instructions. * * *
5. If the Fund and an investment adviser comply with the conditions
of Sec. 270.15a-5(a)(1)-(7) and (b)(4) (which permits a subadviser to
advise the Fund without shareholder approval), the Fund may elect not
to disclose separately the fees paid to each subadviser that is not an
affiliated person of the principal adviser with which it has
contracted, if the Fund instead discloses, both as a dollar amount and
as a percentage of its net assets:
(a) The individual fees paid to the principal adviser of the Fund
and to each subadviser that is an affiliated person of the principal
adviser with which it has contracted;
(b) The net advisory fee retained by the principal adviser after
payment of fees to all subadvisers; and
(c) The aggregate fees paid to all subadvisers of the Fund that are
not affiliated persons of the principal adviser with which they have
contracted.
* * * * *
By the Commission.
Dated: October 23, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-27198 Filed 10-28-03; 8:45 am]
BILLING CODE 8010-01-P