Rule 15a-5

33-8312.pdf

Investment Company Act rule 15a-5, 17 C.F.R. Sec. 270.15a-5, Exemption from shareholder approval for certain subadvisory contracts.

Rule 15a-5

OMB: 3235-0587

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Wednesday,
October 29, 2003

Part II

Securities and
Exchange
Commission
17 CFR Parts 210, et al.
Exemption From Shareholder Approval
for Certain Subadvisory Contracts;
Proposed Rule

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules

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.
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: [email protected]. 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
FOR FURTHER INFORMATION CONTACT:
Adam B. Glazer, Attorney, or C. Hunter
Jones, Assistant Director, Office of
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.

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Regulatory Policy, (202) 942–0690,
Division of Investment Management,
Securities and Exchange Commission,
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

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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-today 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.
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
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.
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).

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules
life insurance contracts.6 They represent
one of the more recent innovations in
managed asset arrangements.
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
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).
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.

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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.
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
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.
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

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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
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
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.
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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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules

on the board of directors, to influence
the terms of the advisory contracts
under which their fund is managed.
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
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
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).
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).

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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
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
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.
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

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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.
We request comment on the proposal.
• Should the Commission permit
fund directors to enter into subadvisory
contracts that increase advisory fees
without the consent of shareholders?
• 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?
• Do shareholders need information
about the amount of compensation paid
to each subadviser?
• 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
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,
compensation under section 36(b) of the Act,
without first making a demand on the board to
initiate such action).
25 17 CFR 239.17b–c, 274.11c–d.
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

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules
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
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
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.
29 Proposed rule 15a–5(a)(2)(i).
30 Proposed rule 15a–5(a)(2)(i).

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that are inherent when a principal
adviser hires an affiliated subadviser.31
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
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 whollyowned subsidiary’s subadvisory
contract without shareholder
approval.36 The rule would not permit
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).
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.
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 whollyowned subadviser hired by the fund would not
qualify for relief under the proposed rule, and its
subadvisory contract would have to be approved by

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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.
• We request comment on whether
the scope of the proposed rule should be
expanded to include wholly-owned
subadvisers replacing other affiliated
subadvisers.
• 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
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.
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).

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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
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
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)].
40 Proposed rule 15a–5(a)(3). If the fund has not
publicly offered securities or sold securities to nonaffiliates 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

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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.
• 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?
• 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
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).
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.
43 17 CFR 239.17a, 274.11b.

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N–3, and if so should the amendments
differ from the proposed Form N–1A
amendments?
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
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
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).
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

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules
• 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.
• 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.
• 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.
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)].
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.

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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
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
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.
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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independent directors to retain legal
counsel.
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
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
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,
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.
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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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
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
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,
60 Proposed

rule 15a–5(a)(5).
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.
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).
61 Proposed

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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.
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.
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
The Commission requests comments
on whether the proposed rule and
67 Pub. L. No. 104–121, Title II, 110 Stat. 857
(1996).
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).
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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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.
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,
71 44

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules
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
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.
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
72 Proposed

rule 15a–5(a)(4).
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.
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 × 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.
73 Proposed

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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.
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
To arrive at the total information
collection burden, a weighted average of
the first year burden and the annual
rule 15a–5(a)(5).
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.
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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78 Commission

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61727

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.
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
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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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules

(‘‘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 openend 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.
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
83 17

CFR 270.0–10.
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.
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
84 Some

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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.
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
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
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.
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.
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.
89 Proposed rule 15a–5(a)(1).
90 Proposed rule 15a–5(b)(4).

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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
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
91 Proposed

rule 15a–5(a)(2)(i).
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).
92 Proposed

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules
do would not result in a significant
burden being placed on the funds.98
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
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 whollyowned 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.
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
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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.
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
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
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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61729

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:

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules

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:
§ 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
§ 270.15a–5(b)(2) of this chapter) of the
Fund, in reliance on § 270.15a–5 of this
chapter, has entered into a contract or
contracts with a subadviser (as that term
is defined in § 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:

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:
§ 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 § 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 § 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
§ 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 § 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 § 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 § 270.15a–5(b)(2) of
this chapter) with which it has
contracted.
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940

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.

Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37, and 80a–39, unless otherwise
noted.

*

*

*
*
*
*
5. Section 240.14a–101, Item 22, is
amended by:

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6. The authority citation for Part 270
continues to read in part as follows:

*
*
*
*
7. Section 270.15a–5 is added to read
as follows:

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§ 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 whollyowned subsidiary has been hired as a
subadviser to replace another whollyowned subsidiary that has been
terminated as a subadviser to the fund,
or the subadvisory contract of a whollyowned 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

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Federal Register / Vol. 68, No. 209 / Wednesday, October 29, 2003 / Proposed Rules
Commission in accordance with the
requirements of § 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
§§ 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 § 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.

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61731

(i) * * * If the investment adviser is
a subadviser whose contract has not
been approved by shareholders in
reliance on § 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 § 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
§ 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

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File Typeapplication/pdf
File TitleProposed Rule: Exemption from Shareholder Approval for Certain Subadvisory Contracts
SubjectExemption from Shareholder Approval for Certain Subadvisory Contracts
AuthorSEC / U.S. Government Printing Office
File Modified2003-11-07
File Created2003-10-29

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