[Federal Register: January 10, 2007 (Volume 72, Number 6)]
[Notices]
[Page 1250-1252]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja07-83]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 27653; 812-13319]
New River Funds and New River Advisers LLC; Notice of Application
January 3, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from section
15(a) of the Act and rule 18f-2 under the Act, as well as from certain
disclosure requirements.
-----------------------------------------------------------------------
Summary of the Application: Applicants request an order that would
permit them to enter into and materially amend subadvisory agreements
without shareholder approval and would grant relief from certain
disclosure requirements.
Applicants: New River Funds (``Trust''), and New River Advisers LLC
(``Manager'').
Filing Dates: The application was filed on August 1, 2006, and amended
on December 27, 2006.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on January 29, 2007 and should be accompanied by proof of service
on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request by
writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Applicants, c/o Doit L. Koppler
II, New River Advisers LLC, 1881 Grove Avenue, Radford, VA 24141.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel,
at (202) 551-6990, or Julia Kim Gilmer, Branch Chief, at (202) 551-6871
(Office of Investment Company Regulation, Division of Investment
Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 100 F Street, NE., Washington, DC
20549-0102 (telephone (202) 551-5850).
Applicants' Representations
1. The Trust, a Delaware statutory trust, is registered under the
Act as an open-end management investment company. The Trust currently
is comprised of two series (``Funds''), each with separate investment
objectives, policies, and restrictions.\1\ The Manager, a Virginia
limited liability company, is registered as an investment adviser under
the Investment Advisers Act of 1940 (``Advisers Act'') and serves as
investment manager to the Trust and each of the Funds pursuant to an
investment management agreement (``Management Agreement''). The
Management Agreement has been approved by the Trust's board of trustees
(``Board''), including a majority of the trustees who are not
``interested persons,'' as defined in section 2(a)(19) of the Act, of
the Trust or the Manager (``Independent Trustees''), as well as by the
shareholders of each Fund.
---------------------------------------------------------------------------
\1\ Applicants also request relief with respect to future series
of the Trust and any other existing or future registered open-end
management investment company or series thereof that: (a) Is advised
by the Manager; (b) uses the management structure as described in
the application; and (c) complies with the terms and conditions of
the application (included in the term ``Fund''). The only existing
registered open-end management investment company that currently
intends to rely on the requested order is named as an applicant. If
the name of any Fund contains the name of a Sub-Adviser (as defined
below), the name of the Manager will precede the name of the Sub-
Adviser.
---------------------------------------------------------------------------
2. Under the Management Agreement, the Manager is responsible for
providing investment advisory and administrative services to the Funds,
subject to oversight by the Board. The Management Agreement permits the
Manager to enter into a separate sub-advisory agreement (``Sub-Advisory
Agreement'') with one or more sub-advisers (each, a ``Sub-Adviser'') to
carry out the investment program of a Fund, subject to the approval of
the Board and the shareholders of the Fund. The Adviser has entered
into Sub-Advisory Agreements with two Sub-Advisers. Each Sub-Adviser is
registered
[[Page 1251]]
as an investment adviser under the Advisers Act. The Manager monitors
and evaluates the Sub-Advisers and makes recommendations to the Board,
regarding their hiring, retention and termination. The shareholders and
the Board, including a majority of the Independent Trustees, approve
the Sub-Advisory Agreements. The Manager compensates each Sub-Adviser
out of the fees paid to the Manager under the Management Agreement.
3. Applicants request relief to permit the Manager, subject to
Board approval, to enter into and materially amend Sub-Advisory
Agreements for the Funds without shareholder approval. The requested
relief will not extend to any Sub-Adviser that is an ``affiliated
person,'' as defined in section 2(a)(3) of the Act, of a Fund or of the
Manager, other than by reason of serving as a Sub-Adviser to one or
more of the Funds (``Affiliated Sub-Adviser'').
4. Applicants also request an exemption from the various disclosure
provisions described below that may require the Funds to disclose the
fees paid by the Manager to each Sub-Adviser. An exemption is requested
to permit each Fund to disclose, both as a dollar amount and as a
percentage of a Fund's net assets: (a) the aggregate fees paid to the
Manager and Affiliated Sub-Advisers; and (b) the aggregate fees paid to
Sub-Advisers other than Affiliated Sub-Advisers (``Aggregate Fee
Disclosure''). For any Fund that employs an Affiliated Sub-Adviser, the
Fund will provide separate disclosure of any fees paid to such
Affiliated Sub-Adviser.
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in relevant part, that it is
unlawful for any person to act as an investment adviser to a registered
investment company except under a written contract that has been
approved by the vote of a majority of the company's outstanding voting
securities. Rule 18f-2 under the Act provides that each series or class
of stock in a series company affected by a matter must approve such
matter if the Act requires shareholder approval.
2. Form N-1A is the registration statement used by open-end
investment companies. Item 14(a)(3) of Form N-1A requires disclosure of
the method and amount of the investment adviser's compensation.
3. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the
Securities Exchange Act of 1934 (``1934 Act''). Items 22(c)(1)(ii),
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A, taken together,
require a proxy statement for a shareholder meeting at which the
advisory contract will be voted upon to include the ``rate of
compensation of the investment adviser,'' the ``aggregate amount of the
investment adviser's fees,'' a description of the ``terms of the
contract to be acted upon,'' and, if a change in the advisory fee is
proposed, the existing and proposed fees and the difference between the
two fees.
4. Form N-SAR is the semi-annual report filed with the Commission
by registered investment companies. Item 48 of Form N-SAR requires
investment companies to disclose the rate schedule for fees paid to
their investment advisers, including the Sub-Advisers.
5. Regulation S-X sets forth the requirements for financial
statements required to be included as part of investment company
registration statements and shareholder reports filed with the
Commission. Sections 6-07(2)(a), (b), and (c) of Regulation S-X require
that investment companies include in their financial statements
information about investment advisory fees.
6. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction or any class or classes of
persons, securities, or transactions from any provisions of the Act, or
from any rule thereunder, if 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. Applicants state that their requested relief meets this standard
for the reasons discussed below.
7. Applicants assert that permitting the Manager to hire or change
Sub-Advisers without incurring the unnecessary delay and expense of
obtaining shareholder approval of each Sub-Advisory Agreement is
appropriate in the interest of the Fund's shareholders and will allow
each Fund to potentially operate more efficiently. Applicants assert
that the shareholders have an expectation that the Manager will select
the most appropriate Sub-Adviser. Applicants compare the role of Sub-
Advisers to that of individual portfolio managers employed by
traditionally managed funds. Applicants note that the Management
Agreements will continue to be subject to section 15(a) of the Act and
rule 18f-2 under the Act.
8. Applicants assert that many investment advisers charge their
customers for advisory services according to a ``posted'' fee schedule.
Applicants state that while investment advisers typically are willing
to negotiate fees lower than those posted in the schedule, they are
reluctant to do so where the fees are disclosed to other prospective
and existing customers. Applicants submit that the requested relief
will encourage Sub-Advisers to negotiate lower sub-advisory fees with
the Manager.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Before a Fund may rely on the requested order, the operation of
the Fund in the manner described in this application will be approved
by a majority of the Fund's outstanding voting securities (as such term
is defined in Section 2(a)(42) of the Act), or, in the case of a Fund
whose public shareholders purchase shares on the basis of a prospectus
containing the disclosure contemplated by condition 2 below, by the
initial shareholder(s) before offering the Fund's shares to the public.
2. The prospectus for each Fund will disclose the existence,
substance and effect of any order granted pursuant to this application.
Each Fund relying on the order will hold itself out to the public as
employing the manager-of-managers arrangement described in this
application. The prospectus relating to each Fund will prominently
disclose that its Manager has the ultimate responsibility (subject to
oversight by the Board) to oversee Sub-Advisers and to recommend their
hiring, termination, and replacement.
3. Within 90 days of the hiring of a new Sub-Adviser for a Fund,
the affected Fund's shareholders will be furnished all information
about the new Sub-Adviser that would be included in a proxy statement
except as modified to permit the Aggregate Fee Disclosure. This
information will include Aggregate Fee Disclosure and any change in
such disclosure caused by the addition of a new Sub-Adviser. To meet
this condition, the Fund will provide shareholders within 90 days of
the hiring of a new Sub-Adviser with an information statement meeting
the requirements of Regulation 14C, Schedule 14C and Item 22 of
Schedule 14A under the 1934 Act, except as modified by the order to
permit Aggregate Fee Disclosure.
4. The Manager will not enter into a Sub-Advisory Agreement with
any Affiliated Sub-Adviser, without that agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Fund.
[[Page 1252]]
5. At all times, a majority of the Board will be Independent
Trustees, and the nomination of new or additional Independent Trustees
will be placed within the discretion of the then-existing Independent
Trustees.
6. When a Sub-Adviser change is proposed for a Fund with an
Affiliated Sub-Adviser, the Board, including a majority of the
Independent Trustees, will make a separate finding, reflected in the
applicable Board minutes, that such change is in the best interests of
such Fund and its shareholders and does not involve a conflict of
interest from which the Manager or the Affiliated Sub-Adviser derives
an inappropriate advantage.
7. The Manager will provide general management services to each
Fund, including overall supervisory responsibility for the general
management and investment of the Fund's assets and, subject to review
and approval of the Board, will: (i) Set each Fund's overall investment
strategies; (ii) evaluate, select and recommend Sub-Advisers to manage
all or a part of the Fund's assets; (iii) when appropriate, allocate
and reallocate the Fund's assets among multiple Sub-Advisers; (iv)
monitor and evaluate the investment performance of the Sub-Advisers;
and (v) implement procedures reasonably designed to ensure compliance
by the Sub-Advisers with the Fund's investment objectives, policies and
restrictions.
8. No trustee or officer of the Trust, or director or officer of
the Manager will own directly or indirectly (other than through a
pooled investment vehicle that is not controlled by such person) any
interest in a Sub-Adviser except for: (i) Ownership of interests in the
Manager or any entity that controls, is controlled by, or is under
common control with the Manager; or (ii) ownership of less than 1% of
the outstanding securities of any class of equity or debt of any
publicly traded company that is either a Sub-Adviser or an entity that
controls, is controlled by, or is under common control with a Sub-
Adviser.
9. Each Fund will disclose in its registration statement the
Aggregate Fee Disclosure.
10. Independent legal counsel, as defined in rule 0-1(a)(6) under
the Act, will be engaged to represent the Independent Trustees. The
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.
11. The Manager will provide the Board, no less frequently than
quarterly, with information about the profitability of the Manager on a
per-Fund basis. The information will reflect the impact on
profitability of the hiring or termination of any Sub-Adviser during
the applicable quarter.
12. Whenever a Sub-Adviser is hired or terminated, the Manager will
provide the Board with information showing the expected impact on the
profitability of the Manager.
13. The requested order will expire on the effective date of rule
15a-5 under the Act, if adopted.
For the Commission, by the Division of Investment Management,
under delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E7-161 Filed 1-9-07; 8:45 am]
BILLING CODE 8011-01-P