[Federal Register Volume 61, Number 177 (Wednesday, September 11, 1996)]
[Notices]
[Pages 47988-47990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23120]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Rel. No. 22198; 812-10310]


The ARCH Fund, Inc., et al.; Notice of Application

September 4, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption Under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: The Arch Fund, Inc. (the ``Fund''), Mississippi 
Valley Advisors, Inc. (the ``Adviser''), and Clay Finlay Inc. (``CF'').

RELEVANT ACTION SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from section 15(a) of the Act.

SUMMARY OF APPLICATION: The order would permit the implementation, 
without shareholder approval, of a new sub-advisory contract for a 
period of up to 120 days following the date of the change in control of 
CF, a sub-adviser to the Fund (but in no event later than December 31, 
1996). The order also would permit CF to receive from the Fund fees 
earned under the new sub-advisory contract following approval by the 
Fund's shareholders.

FILING DATE: The application was filed on August 22, 1996. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is included in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on September 30, 
1996 and should be accompanied by proof of service on applicants, in 
the form of an affidavit, or, for lawyers, a certificate of service.

[[Page 47989]]

Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification of a hearing by 
writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants: the Fund, 3435 Stelzer Road, Columbus, Ohio 43219; 
the Adviser, One Mercantile Center, Seventh and Washington Streets, St. 
Louis, Missouri 63101; and CF, 200 Park Avenue, New York, New York 
10166.

FOR FURTHER INFORMATION CONTACT: Marianne H. Khawly, Staff Attorney, at 
(202) 942-0562, or Alison E. Baur, Branch Chief, at (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. The Fund is an open-end, management investment company 
registered under the Act. The Fund consists of 11 series including the 
International Equity Portfolio (the ``Portfolio''). The Adviser, a 
registered investment adviser under the Investment Advisers Act of 1940 
(the ``Advisers Act''), serves as the investment adviser to the Fund 
pursuant to an advisory agreement with the Fund. CF, also a registered 
investment adviser under the Advisers Act, provides sub-advisory 
services to the Portfolio pursuant to a sub-advisory agreement (the 
``Existing Sub-Advisory Agreement'') among the Portfolio, the Adviser, 
and CF.
    2. On July 17, 1996, CF and United Asset Management (``UAM'') 
entered into an agreement pursuant to which a wholly-owned subsidiary 
of UAM will be merged with and into CF (the ``Merger''), with CF to be 
the survivor and wholly-owned subsidiary of UAM. Pursuant to the 
Merger, shares of CF's common stock will be exchanged for shares of 
UAM's common stock.
    3. The parties to the Merger anticipate that the Merger will be 
consummated by August 29, 1996 (the ``Effective Date''). Upon 
consummation of the Merger, 100% of the outstanding voting securities 
of CF will be owned by UAM and CF will become a wholly-owned subsidiary 
of UAM. Thus, the Merger will result in a change of control of CF. 
Accordingly, the change of control will result in the assignment of the 
Existing Sub-Advisory Agreement and the determination of such agreement 
according to its terms.
    4. Applicants seek an exemption to permit the implementation, 
without shareholder approval, of a new sub-advisory agreement (the 
``New Sub-Advisory Agreement'') to be entered into by the Portfolio, 
the Adviser, and CF. The requested exemption would cover an interim 
period of not more than 120 days (the ``Interim Period'') beginning on 
the Effective Date and continuing through the date the new sub-advisory 
agreement is approved or disapproved by the Fund's shareholders (but in 
no event later than December 31, 1996). During the Interim Period, that 
portion of the advisory fees paid by the Adviser to CF for sub-advisory 
services would be paid into an escrow account.
    5. The New Sub-Advisory Agreement is identical to the Existing Sub-
Advisory Agreement, except for the effective date, escrow provisions, 
and as described below. The New Sub-Advisory Agreement will introduce 
fee ``break points'' that lower the amount of compensation to CF as the 
size of the Portfolio grows and will eliminate a provision that 
provides for fee waivers by CF when the Portfolio was in a start-up 
mode.
    6. In accordance with section 15(c) of the Act,\1\ the board of 
directors (the ``Board'') of the Fund met on August 21, 1996 and 
determined that the New Sub-Advisory Agreement would be in the best 
interests of the Fund and its shareholders. At this meeting, the Board, 
including a majority of the disinterested directors (the ``Independent 
Directors''), voted to approve the New Sub-Advisory Agreement.
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    \1\ Section 15(c) provides, in relevant part, that it shall be 
unlawful for any registered investment company to enter into an 
investment advisory contract unless the terms of such contract have 
been approved by the vote of a majority of directors, who are not 
parties to such contract or interested persons of any such party, 
cast in person at a meeting called for the purpose of voting on such 
approval.
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    7. Applicants propose to enter into an escrow arrangement that 
would provide that: (a) the fees payable to CF during the Interim 
Period under the New Sub-Advisory Agreement would be paid into an 
interest-bearing escrow account maintained by the escrow agent; (b) the 
amounts in the escrow account (including interest earned on such paid 
fees) would be paid to CF only upon approval of the Fund's shareholders 
of the New Sub-Advisory agreement or, in the absence of such approval, 
to the Portfolio; and (c) the escrow agent would release the monies to 
CF only upon approval of the New Sub-Advisory Agreement by the Fund's 
shareholders in accordance with section 15 of the Act or to the Fund if 
the Interim Period has ended and the New Sub-Advisory Agreement has not 
received the requisite shareholder approval. Before any such release is 
made, the Board would be notified. Any and all fees escrowed during the 
Interim Period will be less than or equal to the fees under the 
Existing Sub-Advisory agreement and, in addition, will be in accordance 
with the fee break points established in the New Sub-Advisory Agreement 
for the benefit of shareholders (after waiver by the Adviser of its 
portion of the fee) and will not be subject to the fee waivers of the 
Existing Sub-Advisory Agreement.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to section 6(c), exempting 
them from section 15(a) of the Act, to the extent necessary (i) to 
permit the implementation during the Interim Period, without prior 
shareholder approval, of the New Sub-Advisory Agreement and (ii) to 
permit CF to receive from the Adviser upon approval by the Portfolio's 
shareholders any and all fees earned under the New Sub-Advisory 
Agreement implemented during the Interim Period.
    2. Section 15(a) of the Act prohibits an investment adviser from 
providing investment advisory services to an investment company except 
under a written contract that has been approved by a majority of the 
voting securities of the investment company. Section 15(a) further 
requires that the written contract provide for automatic termination in 
the event of its assignment. Section 2(a)(4) of the Act defines 
``assignment'' to include any direct or indirect transfer of a contract 
by the assignor or of a controlling block of the assignor's outstanding 
voting securities by a security holder of the assignor. Section 2(a)(9) 
of the Act defines ``control'' as the power to exercise a controlling 
influence over the management or policies of a company. Upon 
consummation of the Merger, CF will become a wholly-owned subsidiary of 
UAM. Applicants state that the Merger therefore will result in an 
``assignment'' of the Existing Sub-Advisory Agreement within the 
meaning of section 2(a)(4), terminating such agreement according to its 
terms.
    3. Rule 15a-4 provides, in relevant part, that if an investment 
adviser's investment advisory contract with an investment company is 
terminated by assignment, the adviser may continue to act as such for 
120 days at the previous

[[Page 47990]]

compensation rate if a new contract is approved by the board of 
directors of the investment company and if neither the investment 
adviser nor a controlling person thereof directly or indirectly 
receives money or other benefit in connection with the assignment. 
Applicants cannot rely on rule 15a-4 because of the benefits to the CF 
shareholders arising from the Merger.
    4. Applicants state that a proxy solicitation to the shareholders 
of the Fund is a complicated and time consuming task. The task will 
include the preparation, clearance, and mailing of proxy materials, and 
the solicitation efforts required to obtain the requisite votes. 
Because of the complexity of the proxy solicitation and the imposition 
of a confidentiality requirement that prevented CF from contacting the 
Fund and the Adviser in advance of the Merger, applicants state that it 
was not possible for the Fund to obtain shareholder approval of the New 
Sub-Advisory Agreement in accordance with section 15(a) of the Act 
prior to the Effective Date.
    5. Applicants submit that the requested relief would permit CF to 
provide continuity of investment management to the Portfolio during the 
Interim Period without a disruption of advisory services. In addition, 
the requested relief would also preserve the profitability of CF during 
the Interim Period by ensuring that investment advisory fees will 
continue to accrue to it from the Portfolio, subject to shareholder 
approval. These fees are an important part of CF's total revenue and 
are important to maintaining its ability to provide services to the 
Portfolio.
    6. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act, if and 
to the extent that such exemption is necessary or appropriate in the 
pubic interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. For 
the reasons stated above, applicants believe that the requested relief 
meets this standard.

Applicants' Conditions

    Applicants agree as conditions to the issuance of the exemptive 
order requested by this application that:
    1. The New Sub-Advisory Agreement will have the same terms and 
conditions as the Existing Sub-Advisory Agreement, except for the 
effective and termination dates, the introduction of fee break points 
and the elimination of a provision providing for fee waivers by CF when 
the Portfolio was in a start-up mode.
    2. Fees earned by CF and paid by the Adviser during the Interim 
Period in accordance with the New Sub-Advisory Agreement will be 
maintained in an interest-bearing escrow account, and amounts in the 
account (including interest earned on such amounts) will be paid to CF 
only after the requisite shareholder approval is obtained, or in the 
event such approval is not obtained, to the Portfolio.
    3. The Fund will hold a meeting of its shareholders to vote on the 
approval of the New Sub-Advisory Agreement on or before the 120th day 
following the termination of the Existing Sub-Advisory Agreement on the 
Effective Date (but in no event later than December 31, 1996).
    4. CF and/or UAM will pay the costs of preparing and filing this 
application. CF and/or UAM will pay the costs relating to the 
solicitation of the Fund shareholder approval, to the extent such costs 
relate to approval of the New Sub-Advisory Agreement necessitated by 
the Merger.
    5. CF will take all appropriate actions to ensure that the scope 
and quality of advisory and other services provided to the Portfolio 
under the New Sub-Advisory Agreement will be at least equivalent, in 
the judgment of the Fund's Board, including a majority of the 
Independent Directors, to the scope and quality of services previously 
provided. In the event of any material change in personnel providing 
services pursuant to the New Sub-Advisory Agreement caused by the 
Merger, CF will apprise and consult with the Board of the Fund to 
assure that the Board, including a majority of the Independent 
Directors members, is satisfied that the services provided by CF will 
not be diminished in scope or quality.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23120 Filed 9-10-96; 8:45 am]
BILLING CODE 8010-01-M