[Federal Register Volume 64, Number 157 (Monday, August 16, 1999)]
[Notices]
[Pages 44560-44562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21191]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-23940; 812-11382]


The Chapman Funds, Inc., et al.; Notice of Application

August 10, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 15(a) of the Act and rule 18f-2 under

[[Page 44561]]

the Act and certain disclosure requirements.

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SUMMARY OF APPLICATION: The requested order would permit applicants, 
The Chapman Funds, Inc. (``Company'') and Chapman Capital Management 
(``CCM''), to hire subadvisers and materially amend subadvisory 
agreements without shareholder approval, and grant relief from certain 
disclosure requirements.

FILING DATES: The application was filed on October 29, 1998, and was 
amended on April 14, 1999. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in this 
notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request by writing to the Commission's Secretary and 
serving applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the Commission by 5:30 p.m. on 
September 7, 1999, and should be accompanied by proof of service on 
applicants, in the form of an affidavit, or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609; Applicants, World Trade Center-Baltimore, 28th Floor, 
401 East Pratt Street, Baltimore, Maryland 21202.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 942-0574 or Michael W. Mundt, 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 may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. The Company is organized as a Maryland corporation and 
registered under the Act as an open-end management investment company 
which offers shares in seven series (collectively, the ``Funds''), each 
of which has its own investment objectives, policies, and 
restrictions.\1\ CCM is registered under the Investment Advisers Act of 
1940 (``Advisers Act'') and is a subsidiary of Chapman Capital 
Management Holdings, Inc. CCM serves as the investment adviser to each 
Fund pursuant to advisory agreements between CCM and the Company 
(``Advisory Agreements'').
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    \1\ Applicants request that the relief also apply to all 
subsequently registered open-end management investment companies 
that in the future are advised by CCM or any entity controlling, 
controlled by, or under common control with CCM and that use the 
multi-manager structure described in this application (``Future 
Companies''), and to any series of the Company or Future Companies 
that may be created in the future. Applicants state that all 
registered open-end management investment companies that currently 
intend to rely on the requested order are named as applicants, and 
any Future Company that relies on the order will comply with the 
terms and conditions contained in the application.
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    2. For certain Funds (``Multi-Manager Funds''), CCM will seek to 
enhance performance and reduce market risk by allocating Fund assets 
among one or more subadvisers (``Subadvisers'').\2\ Each Subadviser is 
registered as an investment adviser under the Advisers Act. For the 
Multi-Manager Funds, CCM will monitor the performance of both the total 
Fund portfolio and the portion of the total Fund portfolio allocated to 
each Subadviser and will reallocate Fund assets among Subadvisers, or 
recommend to the Company's board of directors (``Board'') that the Fund 
employ or terminate particular Subadvisers. Under agreements between 
CCM and the Subadvisers (``Sub-Advisory Agreements''), the specific 
investment decisions for each Multi-Manager Fund will be made by 
Subadvisers subject to the general supervision of CCM and the Board. 
The Funds pay investment advisory fees to CCM, and CCM will pay 
Subadvisers out of its fees.
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    \2\ On behalf of DEM Multi-Manager Equity Fund and DEM Multi-
Manager Bond Fund, CCM currently intends to enter into Sub-Advisory 
Agreements with twelve Subadvisers and four Subadvisers, 
respectively.
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    3. Applicants request an exemption from section 15(a) of the Act 
and rule 18f-2 under the Act to permit Subadvisers approved by the 
Board to serve as Subadvisers for the Multi-Manager Funds, without the 
necessity of obtaining shareholder approval. Shareholder approval would 
continue to be required for any Subadviser that is an ``affiliated 
person,'' as defined in section 2(a)(3) of the Act, of the Company or 
CCM, other than by reason of serving as a Subadviser to one or more of 
the Multi-Manager Funds (an ``Affiliated Subadviser'').
    4. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Multi-Manager Funds to 
disclose the fees paid by CCM to the Subadvisers. For each Fund, the 
Company will disclose the following (both as a dollar amount and as a 
percentage of the Fund's net assets): (1) Aggregate fees paid to CCM 
and any Affiliated Subadvisers; and (2) aggregate fees paid to 
Subadvisers other than Affiliated Subadvisers (``Limited Fee 
Disclosure''). For any fund that employs an Affiliated Subadviser, the 
Fund will provide separate disclosure of any fees paid to such 
Affiliated Subadviser.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to act as an investment adviser to a registered 
investment company except under a written contract approved by a 
majority of the investment company's outstanding voting shares. Rule 
18f-2 under the Act provides that each series of class of stock in a 
series company affected by a matter must approve the matter if the Act 
requires shareholder approval.
    2. Form N1-A is the registration statement used by open-end 
investment companies. Items 3, 6(a)(1)(ii), and 15(a)(3) of Form N-1A 
(and items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A prior to the 
amendments effective June 1, 1998) require disclosure of the method and 
amount of the investment adviser's compensation.
    3. Form N-14 is the registration statement form for business 
combinations involving open-end management investment companies. Item 3 
of Form N-14 requires a fee table that shows current fees for the 
registrant and the company being acquired, and pro forma fees, if 
different, for the registrant after giving effect to the transaction.
    4. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the 
Securities Exchange Act of 1934 (``Exchange Act''). Item 22(a)(3)(iv) 
of Schedule 14A requires a proxy statement for a shareholder meeting at 
which a new fee will be established or an existing fee will be 
increased to include a table of the current and pro forma fees. Items 
22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9), taken together, 
require a proxy statement for a shareholder meeting at which the 
advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fees,'' a description of ``the terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and

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proposed fees and the difference between the two fees.
    5. Form N-SAR is the semi-annual report filed with the Commission 
by registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
their investment advisers, including subadvisers.
    6. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b), and (c) of Regulation S-X require 
that investment companies include in their financial statements 
information about investment advisory fees.
    7. Section 6(c) of the Act authorizes the Commission to exempt 
persons or transactions from the provisions of the Act to the extent 
that the exemption is necessary or appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policies and provisions of the Act. Applicants believe 
that their requested relief meets this standard for the reasons 
discussed below.
    8. Applicants assert that investors in a Multi-Manager Fund rely on 
CCM to select appropriate Subadvisers. Applicants contend that the role 
of the Subadvisers, from the perspective of the investor, will be 
comparable to that of the individual portfolio managers employed by 
other investment advisory firms. Applicants note that the Advisory 
Agreements will continue to be subject to section 15 of the Act and 
rule 18f-2 under the Act.
    9. Applicants assert that the information provided in the Limited 
Fee Disclosure will permit each investor to determine whether the fees 
for investment advisory services are competitive. In addition, 
applicants contend that some Subadvisers use a ``posted'' rate schedule 
to set their fees and may be unwilling to serve as Subadvisers at any 
rate other than their ``posted'' fee rates, unless the rates negotiated 
for the Funds are not publicly disclosed. Applicants state that 
requiring disclosure of Subadvisory fees would deprive CCM of its 
bargaining power to negotiate lower rates.

Applicants' Conditions

    Applicants agree that the order shall be subject to the following 
conditions:
    1. Before a Fund may rely on the requested order, the operation of 
the Fund in the manner described in the application will be approved by 
a majority of the outstanding voting securities, as defined in the Act, 
of the Fund, or, in the case of a new Fund whose public shareholders 
purchased shares on the basis of a prospectus containing the disclosure 
contemplated by condition 2 below, by the sole initial shareholder(s) 
before offering shares of such Fund to the public.
    2. Any Fund relying on the requested order will disclose in its 
prospectus the existence, substance, and effect of any order granted 
pursuant to the application. In addition, such Fund will hold itself 
out to the public as employing the management structure described in 
the application. The prospectus will prominently disclose that CCM has 
ultimate responsibility to oversee Subadvisers and to recommend their 
hiring, termination and replacement.
    3. CCM will provide general management and administration services 
to any Fund relying on the requested order, including overall 
supervisory responsibility for the general management and investment of 
such Fund, and subject to the review and approval of the Board will (1) 
set the overall investment strategies of the Fund; (2) evaluate, select 
and recommend Subadvisers; (3) allocate, and when appropriate, 
reallocate, the assets of the Fund among Subadvisers; (4) monitor and 
evaluate the investment performance of the Subadvisers; and (5) 
implement procedures reasonably designed to ensure that the Subadvisers 
comply with the investment objectives, policies, and restrictions of 
the Fund.
    4. At all times, a majority of the Board will be persons who are 
not ``interested persons'' of the Company as defined in section 
2(a)(19) of the Act (``Independent Directors''), and the nomination of 
new or additional Independent Directors will be placed within the 
discretion of the then existing Independent Directors.
    5. CCM will not enter into a Sub-Advisory Agreement with an 
Affiliated Subadviser without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Fund.
    6. When a change of a Subadviser is proposed for a Fund with an 
Affiliated Subadviser, the Board, including a majority of the 
Independent Directors, will make a separate finding, reflected in the 
Board minutes, that any such change of Subadviser is in the best 
interest of the Fund and its shareholders, and does not involve a 
conflict of interest from which CCM or the Affiliated Subadviser 
derives an inappropriate advantage.
    7. No director or officer of the Company or director or officer of 
CCM will own directly or indirectly (other than through a pooled 
investment vehicle that is not controlled by any such director or 
officer) any interest in a Subadviser except for ownership of interests 
in CCM or any entity that controls, is controlled by, or is under 
common control with CCM, or ownership of less than 1% of the 
outstanding securities of any class of equity or debt securities of any 
publicly traded company that is either a Subadviser or controls, is 
controlled by, or is under common control with a Subadviser.
    8. Within ninety days of the hiring of any Subadviser, the affected 
Fund will furnish its shareholders with all information about the new 
Subadviser that would be included in a proxy statement, except as 
modified by the order to permit Limited Fee Disclosure. Such 
information will include Limited Fee Disclosure and any change in such 
disclosure caused by the addition of a new Subadviser. The Fund will 
meet this condition by providing shareholders, within ninety days of 
the hiring of a Subadviser, with an information statement meeting the 
requirements of Regulation 14C and Schedule 14C under the Exchange Act. 
The information statement also will meet the requirements of Item 22 of 
Schedule 14A under the Exchange Act, except as modified by the order to 
permit Limited Fee Disclosure.
    9. The Company will disclose in its registration statement the 
Limited Fee Disclosure.
    10. CCM will provide the Board, no less frequently than quarterly, 
information about CCM's profitability for each Fund that relies on the 
requested relief. Such information will reflect the impact on 
profitability of the hiring or termination of any Subadviser during the 
applicable quarter.
    11. Whenever a Subadviser is hired or terminated, CCM will provide 
the Board information showing the expected impact on CCM's 
profitability.
    12. At all times, independent counsel knowledgeable about the Act 
and the duties of Independent Directors will be engaged to represent 
the Independent Directors. The selection of such counsel will remain 
within the discretion of the Independent Directors.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21191 Filed 8-13-99; 8:45 am]
BILLING CODE 8010-01-M