[Federal Register Volume 64, Number 233 (Monday, December 6, 1999)]
[Rules and Regulations]
[Pages 68019-68024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31333]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release Nos. IC-24177, IA-1846; File No. S7-22-98]
RIN 3235-AH02
Temporary Exemption for Certain Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is adopting amendments to the rule under the
Investment Company Act of 1940 that permits an investment adviser to
advise an investment company under a temporary contract that the
investment company's shareholders have not approved. The amendments
expand the circumstances in which the exemption provided by the rule is
available, to include a merger or similar business combination
involving an investment company's adviser. The amendments also lengthen
the maximum duration of the temporary contract. The amendments will
permit more investment advisers to rely on the rule rather than seek
individual exemptions from the Commission, and will continue to protect
the interests of investors pending their vote on a new advisory
contract.
EFFECTIVE DATE: The rule amendments will be effective December 13,
1999.
FOR FURTHER INFORMATION CONTACT: Penelope W. Saltzman, Senior Counsel,
(202) 942-0690, or C. Hunter Jones, Assistant Director, Office of
Regulatory Policy, Division of Investment Management, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') today is adopting amendments to rule 15a-4 (17 CFR
270.15a-4) under the Investment Company Act of 1940 (15 U.S.C. 80a)
(the ``Investment Company Act'' or the ``Act'').\1\
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\1\ Unless otherwise noted, all references to ``amended rule
15a-4,'' ``rule 15a-4, as amended,'' or any paragraph of the rule
will be to 17 CFR 270.15a-4, as amended by this release.
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Table of Contents
I. Executive Summary
II. Background
III. Discussion
A. Board Approval
B. Adviser Mergers
C. Duration of Interim Contract
IV. Effective Date
V. Cost-Benefit Analysis
VI. Effects on Efficiency, Competition, and Capital Formation
VII. Summary of Final Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Final Rule
I. Executive Summary
The Commission is adopting amendments to rule 15a-4 under the
Investment Company Act, the rule that permits an investment adviser to
an investment company (``fund'') to serve for a short period of time
under a contract that shareholders have not approved (``interim
contract''). The amendments expand and clarify coverage of the rule by:
Clarifying the timing of the board of directors' approval
of the interim contract;
[[Page 68020]]
Allowing an adviser to serve under an interim contract
after a merger or other business combination involving the adviser or a
controlling person of the adviser (``adviser merger''); and
Lengthening the maximum duration of the interim contract
from 120 to 150 days.
The amendments are designed to permit more funds and investment
advisers to rely on the rule rather than seek exemptive relief, while
protecting fund investors until they can approve a new advisory
contract.
II. Background
Section 15(a) of the Investment Company Act prohibits a person from
serving as an investment adviser to a fund except under a written
advisory contract that the fund's shareholders have approved.\2\
Section 15(a) also requires that an advisory contract terminate
automatically if it is assigned.\3\ This section is designed to give
shareholders a voice in a fund's investment advisory contract and to
prevent trafficking in fund advisory contracts.\4\ An unintended effect
of the law, however, may be to leave a fund without an investment
adviser if the fund's contract with the adviser terminates before the
fund's shareholders can vote on a new contract.\5\ To prevent funds
from being harmed by losing investment advisory services before
shareholders can approve a new contract, the Commission in 1980 adopted
rule 15a-4, which provides a temporary exemption from the requirement
that a fund's shareholders approve its advisory contract. The rule
permits a fund to be advised under a short-term contract until
shareholders can vote on a new contract.\6\
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\2\ 15 U.S.C. 80a-15(a). Section 15(a) requires that a majority
of the fund's outstanding voting securities approve the contract.
\3\ 15 U.S.C. 80a-15(a)(4) (requiring that an advisory contract
provide for its automatic termination upon assignment). An
``assignment'' of an investment advisory contract includes a
transfer of the contract to another investment adviser, as well as a
transfer of a controlling block of the investment adviser's voting
securities. 15 U.S.C. 80a-2(a)(4).
\4\ Hearings on S. 3580 Before the Subcomm. of the Senate Comm.
on Banking and Currency, 76th Cong. 3d Sess. 253 (1940) (statement
of David Schenker).
\5\ This situation could occur if, for example, a controlling
shareholder of the fund's adviser suddenly dies and control of the
adviser passes to an heir. See Temporary Exemption for Certain
Investment Advisers, Investment Company Act Release No. 23325 (July
22, 1998) [63 FR 40231 (July 28, 1998)] (``Proposing Release'') at
nn.5-6 and accompanying text.
\6\ The rule permits a fund to be advised under a temporary
contract when (i) the fund's directors or shareholders terminate or
decide not to renew the contract or (ii) a fund's advisory contract
is assigned (and therefore terminates) under circumstances in which
the investment adviser, or a controlling person of the adviser, does
not receive any money or other benefit. Under the rule, the fund's
board of directors, including a majority of directors who are not
interested persons (``independent directors''), must approve the
interim contract, and the compensation paid under the interim
contract must not exceed the compensation under the previous
contract. Rule 15a-4(a)-(b). See Exemptions for Certain Investment
Advisers and Principal Underwriters of Investment Companies,
Investment Company Act Release No. 11005 (Jan. 2, 1980) (45 FR 1860
(Jan. 9, 1980)).
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Rule 15a-4 was designed to deal with unforeseeable assignments of
advisory contracts by permitting the board to act on an emergency basis
to prevent the fund from being harmed by the absence of advisory
services. The rule did not extend to an interim contract entered into
after an adviser merger, which benefits the adviser, and which
generally is foreseeable. When the rule was adopted, the Commission
explained that when an adviser intends to assign its advisory contract
under reasonably foreseeable circumstances, the investor protection
concerns underlying section 15(a) were better fulfilled if shareholders
had the opportunity to approve the relationship with the successor
adviser before the adviser served the fund.\7\ In recent years, as a
result of greater consolidation in the financial services industry,
applicants have sought an increasing number of exemptive orders in
connection with adviser mergers. We have granted exemptive relief in
these situations subject to conditions designed to protect shareholders
pending their vote on a new advisory contract.
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\7\ Exemptions for Certain Investment Advisers and Principal
Underwriters of Investment Companies, Investment Company Act Release
No. 10809 (Aug. 6, 1979) (44 FR 47100 (Aug. 10, 1979)) at text
preceding n.11. As noted in the Proposing Release, funds also
typically do not participate in adviser mergers, and their interests
generally are not represented in the transaction. See Proposing
Release, supra note 5, at text following n.20.
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We proposed last year to amend rule 15a-4 to: (i) Clarify some of
its provisions; (ii) expand the availability of the rule to include
interim contracts entered into as a result of an adviser merger; and
(iii) extend the period of time when a fund can be advised under an
interim contract.\8\ We received six comment letters in response to the
proposal.\9\ Commenters generally supported the proposed amendments,
but each recommended specific changes.\10\ Today we are adopting the
amendments substantially as proposed, with minor modifications that
reflect issues raised by commenters.\11\
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\8\ Proposing Release, supra note 5.
\9\ The commenters included two closed-end fund investors, an
investment adviser, a trade association, a bar association, and a
law firm. The comment letters are available for public inspection
and copying in the Commission's Public Reference Room, 450 Fifth
Street, NW, Washington, DC (File No. S7-22-98).
\10\ Two commenters suggested that the Commission address
certain issues that arise in connection with the approval of
advisory contracts by closed-end fund shareholders. Because these
issues relate specifically to shareholder votes on new advisory
contracts, and not to an exemption from the shareholder approval
requirement, we have not addressed these issues in the final rule.
\11\ In addition to the changes described below, we are adopting
certain technical modifications to the rule, such as including in
the definition of the term ``fund'' a series of an investment
company. See amended rule 15a-4(a)(1).
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III. Discussion
A. Board Approval
Under section 15 of the Act and rule 15a-4, the board of directors
of a fund must approve an interim contract before or at the time the
fund enters into the contract. If an advisory contract terminates as a
result of an unforeseeable event, prior board approval of an interim
contract may be impracticable.\12\ To address this concern, we proposed
to allow the board of directors seven calendar days (i.e., one week) to
approve an interim contract. At the suggestion of one commenter, we are
extending the period to ten business days to provide investment
advisers sufficient time to prepare documentation supporting approval
of an interim contract and to give fund directors sufficient time to
consider proposals for the new contract.\13\ We also are adopting, as
proposed, an amendment that permits the board to participate in a
meeting to approve an interim contract by any means of communication
that allows all participants to hear each other at the same time, such
as a telephone conference.\14\
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\12\ See Proposing Release, supra note 5, at n.11 and
accompanying text.
\13\ Amended rule 15a-4(b)(1)(ii). The ten-day period for board
approval does not apply to interim contracts following adviser
mergers, which are discussed below.
\14\ Section 15(c) of the Act requires the board to meet ``in
person'' to approve an advisory contract. 15 U.S.C. 80a-15(c).
Directors must be physically present to satisfy the ``in person''
requirement. See Investment Company Amendments Act of 1969, S. Rep.
No. 184, 91st Cong., 1st Sess. 39 (1969); Report of the Securities
and Exchange Commission on the Public Policy Implications of
Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d Sess.
334-35 (1966); Provisions of Investment Company Amendments Act of
1970 (Pub. L. 91-547) Concerning Approval of Investment Advisory
Contracts and Other Matters Which Should Be Considered by
Registrants in Connection with their 1971 Annual Meetings,
Investment Company Act Release No. 6336 (Feb. 2, 1971) [36 FR 2867
(Feb. 11, 1971)] at n.3 and accompanying text.
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[[Page 68021]]
B. Adviser Mergers
As noted above, the Commission proposed to expand the availability
of rule 15a-4 to permit funds to operate under an interim advisory
contract when the previous contract is terminated as a result of an
adviser merger (i.e., when the adviser or a controlling person of the
adviser has received a benefit in connection with the assignment of the
previous contract). We are adopting these amendments substantially as
proposed. The amendments largely codify individual exemptive orders we
have issued over the years, and are designed to preserve the quality of
advisory or other services that the fund received before the merger
until the shareholders have voted on a new contract.
Under amended rule 15a-4, the board of directors, including a
majority of independent directors, must find that the scope and quality
of the advisory services to be provided under the interim contract are
at least equivalent to the scope and quality of the services provided
under the previous contract.\15\ The board also must approve the
interim contract before the previous contract is terminated.\16\ The
interim contract must contain generally the same terms and conditions
as the previous contract, and provide compensation to the adviser that
is no greater than the compensation under the previous contract.\17\
The interim contract also must provide that the board may terminate the
contract with no more than ten days written notice.\18\ Finally, any
fees earned by the adviser during the interim contract must be placed
in an interest-bearing escrow account and be paid to the adviser only
if shareholders approve the new advisory contract.\19\ If shareholders
do not approve the new contract, the adviser may receive the lesser of
the fees provided under the interim contract or the costs of providing
services under the interim contract.\20\
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\15\ Amended rule 15a-4(b)(2)(iii). See Proposing Release, supra
note 5, at nn.22-24 and accompanying text.
\16\ Amended rule 15a-4(b)(2)(ii).
\17\ Amended rule 15a-4(b)(2)(i), (v).
\18\ Amended rule 15a-4(b)(2)(iv). Two commenters argued that
this requirement is unnecessary and that any termination provisions
should be left to the board's discretion. We believe that the
termination clause helps to protect the fund by enabling the board
to respond quickly to declining quality of services under the
interim contract.
\19\ The escrow account must be maintained with a bank or the
fund's custodian. Amended rule 15a-4(b)(2)(vi)(A).
\20\ Amended rule 15a-4(b)(2)(vi). Any amounts remaining in the
account would be returned to the fund. Id.
The amended rule does not prohibit (as many of our exemptive
orders have prohibited) the fund from paying costs of shareholder
solicitation for approval of a new contract after an adviser merger.
Nevertheless, if an advisory contract is terminated as a result of
an adviser's action that benefits the adviser (such as an adviser
merger), issues may arise under other sections of the Act if the
fund pays the costs of soliciting shareholder approval of a new
contract. See 1979 Proposing Release, supra note 5, at n.13. The
1979 Proposing Release notes that if a fund were to bear any of the
costs caused by an adviser merger, including costs associated with
conducting a special shareholders' meeting, payment of those costs
might constitute compensation to the investment adviser and raise
questions regarding the availability of section 15(f) (15 U.S.C.
80a-15(f)) (creating safe harbor under which investment advisers may
receive a benefit in connection with a sale of securities of, or a
sale of any other interest in, an investment adviser that results in
an assignment of an investment advisory contract, if certain
conditions are met). The 1979 Proposing Release further comments
that a fund's payment of those costs also may raise questions under
sections 15(a)(1) (15 U.S.C. 80a-15(a)(1)) (advisory contract must
precisely describe all compensation to be paid under the contract)
and 36(b) [15 U.S.C. 80a-35(b)] (investment adviser's fiduciary duty
with respect to the receipt of compensation for services, or of
payments of a material nature, paid by the fund or its
shareholders)). But see Travelers Group Inc., et al., Investment
Company Act Release Nos. 22873 (Nov. 3, 1997) (62 FR 60540 (Nov. 10,
1997)) (notice) and 22911 (Nov. 26, 1997) (65 SEC Docket 2962 (Dec.
23, 1997)) (order) (adviser to pay costs of soliciting shareholder
approval of new advisory contract, except that if solicitation is in
conjunction with fund's annual meeting at which other matters are to
be discussed, fund may pay portion of costs).
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We are not adopting suggestions by several commenters that the rule
allow fund boards broad discretion in approving interim contracts after
adviser mergers.\21\ Exemptive relief in those circumstances would be
inconsistent with the statutory requirement that shareholders approve
advisory contracts.\22\ Thus, the amendments are designed to preserve
the status quo while shareholder approval is sought for a new contract.
The conditions are intended to prevent the new adviser (or new parent
of the adviser) after an adviser merger from materially altering the
services provided to a fund until shareholders have had an opportunity
to consider those changes when they vote on a new advisory contract.
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\21\ Two commenters, for example, recommended that the exemption
related to adviser mergers contain only the conditions that apply to
interim contracts in circumstances other than adviser mergers (i.e.,
board approval and no increase in compensation). Another commenter
suggested that instead of the specific terms and conditions
proposed, the rule should require the board to find that the interim
contract is in the ``best interests'' of shareholders, and allow the
board to approve materially different terms and conditions in the
interim contract when appropriate. These suggestions would increase
the board's discretion by allowing it to reduce services under the
interim contract or increase services for a higher fee.
\22\ See text accompanying note 7, supra.
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Finally, we are not adopting the suggestion of some commenters that
advisers receive the full fee under the interim contract without escrow
arrangements, regardless of whether shareholders approve the new
advisory contract. Like our exemptive orders, the amendments permit the
adviser to receive all of the fees due it under the interim contract if
the new contract is renewed and shareholders have, in effect, ratified
the interim contract. Unlike our exemptive orders, which precluded the
adviser from receiving any fees due it under the interim contract when
shareholders fail to approve the new advisory contract, the amendments
permit the adviser to be compensated for its costs. We believe that
this new approach sufficiently addresses the concerns of fund advisers
without compromising investor interests.
C. Duration of Interim Contract
The amended rule extends the maximum duration of an interim
contract from 120 days to 150 days, in order to provide additional time
to solicit proxies and obtain a quorum of voting shareholders.\23\
Although some commenters argued for a longer period,\24\ our experience
has shown that funds generally have not needed more than 150 days for
an interim contract.\25\
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\23\ In response to the suggestion of one commenter, and
consistent with our exemptive orders, the amended rule also
clarifies that the exemptive period begins as of the date the
previous contract terminates. Amended rule 15a-4(a)(2)(ii).
\24\ Three commenters recommended extending the period further,
largely for administrative convenience. Two recommended a period of
up to 180 days because of the increasing complexity of adviser
mergers. One of these commenters and another commenter also
advocated extending the exemptive period, for funds that hold annual
shareholder meetings, until the next annual meeting. These funds are
generally closed-end funds, the shares of which typically are listed
on an exchange that requires listed companies to hold annual
shareholder meetings. See, e.g., New York Stock Exchange Listed
Cmpany Manual para. 302.00. We are not adopting these suggested
changes. Permitting an extension until the next annual meeting could
result in an interim contract of up to one year. We believe that the
shareholders' interest in limiting the duration of an advisory
contract that they have not approved outweighs the possible cost
savings to advisers if the shareholder vote is postponed beyond 150
days.
\25\ In 1998, all applications for exemptive relief from section
15(a) concerning interim contracts in connection with an adviser
merger, sought relief for 150 days or less, and half (10 out of 20)
sought relief for periods between 60 and 120 days. The one applicant
that sought to extend its original 120-day exemption for an
additional 60 days, did so to explore possibilities of merging funds
before seeking approval of new advisory contracts. See DG Investor
Series, Investment Company Act Release Nos. 23420 (Aug. 31, 1998)
(63 FR 47540 (Sept. 8, 1998)) (notice) and 23445 (Sept. 22, 1998)
(68 SEC Docket 232) (order).
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IV. Effective Date
The amendments to rule 15a-4 will be effective December 13, 1999.
This
[[Page 68022]]
effective date is less than 30 days after publication so that funds and
advisers may benefit sooner from the rule amendments.\26\
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\26\ See 5 U.S.C. 553(d)(1) (permitting exemptive rules to
become effective less than 30 days after publication).
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V. Cost-Benefit Analysis
The Commission is sensitive to the costs and benefits that result
from its rules. In the Proposing Release, we requested comment and
specific data regarding the costs and benefits of the proposed
amendments, but commenters did not address any specific costs or
quantify any benefits.
We believe the amendments are likely to result in cost savings for
investment advisers by removing the need to seek exemptive relief in
the case of adviser mergers.\27\ Based on orders issued in 1998, we
estimate that the total annual cost savings for investment advisers
resulting from the proposed amendments would be approximately $400,000,
and possibly more. In 1998, the Commission issued 20 orders granting
exemptive relief in connection with adviser mergers at an estimated
cost to the applicants of $20,000 for each application.\28\ We expect
that cost savings could be greater in the future based on the steady
increase in orders issued in connection with adviser mergers over the
past four years.\29\ In addition, we believe the conditions of the rule
will not result in increased costs for funds or their investors. The
condition regarding director findings should not be burdensome in view
of the fact that section 15(c) already requires the fund's independent
directors to review and approve the new advisory contract. In addition,
we expect funds and advisers that are eligible for exemptive relief
under circumstances other than after an adviser merger \30\ will
realize cost savings because directors may participate in the meeting
to approve the advisory contract ``by any means of communication that
allows all directors participating to hear each other simultaneously
during the meeting.'' This provision should result in savings in time
and travel costs.\31\
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\27\ One of the standard conditions to the adviser merger orders
is that the costs of the exemptive application will be paid by the
adviser or advisers. As discussed above, several commenters agreed
that removing the need to apply for an exemptive order would be a
benefit, although none provided any specifics on the amount of
savings that might be realized.
\28\ This number is based on an estimate of the average cost
provided by attorneys in private practice who have prepared these
type of exemptive applications. The cost of preparing an
application, however, may vary significantly depending on the
applicant.
\29\ From 1995 through 1998, the Commission issued 6, 11, 13 and
20 exemptive orders each year in connection with adviser mergers.
\30\ See supra note 6.
\31\ Several commenters also agreed that this provision would be
a benefit, but none quantified the savings that funds might realize.
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Unlike most prior exemptive orders, the amendments do not prohibit
funds from paying costs associated with soliciting shareholder approval
of a new advisory contract after an adviser merger. Thus, the
amendments could result in increased costs for funds if they bear those
expenses in the future. In most investment adviser business
combinations, however, the advisers bear the costs of the
transaction.\32\ While we cannot predict what will happen after the
rule is amended, we believe that advisers, consistent with their other
obligations under the statute,\33\ are likely to continue to pay these
costs and, therefore, the amendments are not likely to result in
increased shareholder solicitation costs for funds.
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\32\ See 1 Thomas P. Lemke, et al., Regulation of Investment
Companies Sec. 24.02[1][c].
\33\ See supra note 20.
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VI. Effects on Efficiency, Competition and Capital Formation
Section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is consistent with the public interest, to consider
whether the action will promote efficiency, competition, and capital
formation.\34\ As discussed above, the Commission anticipates that the
amendments to rule 15a-4 will result in cost savings for investments
advisers, funds and investors. We also have considered, in addition to
the protection of investors, whether the amendments adopted today will
promote efficiency, competition or capital formation.
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\34\ 15 U.S.C. 80a-2(c).
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VII. Summary of Final Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with 5 U.S.C. 604 relating to the amendments.
A summary of the Initial Regulatory Flexibility Analysis (``IRFA''),
which was prepared in accordance with 5 U.S.C. 603, was published in
the Proposing Release. We received no comments on the IRFA.
Current rule 15a-4 provides a temporary exemption in certain
circumstances from the requirement that shareholders approve an
investment advisory contract. The rule does not, however, cover interim
contracts entered into as a result of adviser mergers. Due to the
growing number of acquisitions and mergers in the financial services
industry, the Commission has received an increasing number of
applications for exemption from the shareholder approval requirement in
connection with adviser mergers. In addition, funds have advised the
Commission that the 120-day exemptive period in rule 15a-4 is too short
to obtain shareholder approval of an advisory contract.
The amendments extend rule 15a-4 to adviser mergers, extend the
length of the exemptive period to 150 days, and clarify the timing of
board approval of the fund's advisory contract. The amendments
significantly reduce the need to file exemptive applications, resulting
in cost and time savings for funds and investment advisers.
Rule 15a-4 applies to funds (including business development
companies (``BDCs'')) and their investment advisers.\35\ The rule does
not affect funds that do not have an external investment adviser (i.e.,
unit investment trusts or other internally managed funds).\36\
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\35\ Section 59 of the Act (15 U.S.C. 80a-58) provides, among
other things, that sections 15(a) and 15(c) of the Act apply to a
BDC to the same extent as if it were a registered closed-end
investment company.
\36\ The vast majority of open-end and closed-end funds are
externally managed. All face-amount certificate companies currently
in existence are externally managed. The Commission does not keep
statistics on how many BDCs are externally managed.
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An investment adviser is a small entity for purposes of the
Regulatory Flexibility Act (``Reg. Flex. Act'') if it (i) manages less
than $25 million in assets, (ii) has total assets of less than $5
million on the last day of its most recent fiscal year, and (iii) does
not control, is not controlled by, and is not under common control with
another investment adviser that manages $25 million or more in assets,
or any person (other than a natural person) that had total assets of $5
million or more on the last day of the most recent fiscal year.\37\ We
estimate that approximately 165 out of 901 investment advisers that
advise funds are small entities. A fund is a small entity for purposes
of the Reg. Flex. Act if it, together with other funds in the same
group of related funds, has net assets of $50 million or less as of the
end of its most recent fiscal year.\38\ We estimate that approximately
222 out of 3,560 active management companies, and approximately 34 out
of 62 BDCs are small entities.
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\37\ 17 CFR 275.0-7
\38\ 17 CFR 270.0-10.
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[[Page 68023]]
We believe that the proposed amendments would decrease the burdens
on small funds and small investment advisers by making it unnecessary
for them to seek an exemptive order from the Commission in order to
delay the shareholder vote required by section 15(a). The requirements
of the rule, as explained above in section III, are designed to protect
the interests of investment companies, including small funds and their
shareholders, and therefore an exemption from any of those requirements
for small entities would not be consistent with the protection of
investors. We believe that the burden these requirements place on small
advisers is minimal because the requirements generally are intended to
maintain the status quo until the shareholder vote can be held.
The amendments require escrow arrangements that differ from the
escrow arrangements required under most exemptive orders issued to date
to funds seeking relief similar to that provided by the amendments.
Similar to most exemptive orders, the amendments require the advisory
fee to be paid under the interim contract to be placed in escrow.
Contrary to most of these orders, however, the amendments allow an
investment adviser to recover its costs of performing the interim
contract if a fund's shareholders do not approve a new advisory
contract. Prior exemptive orders generally required that all the
escrowed fees be returned to the fund if shareholders did not approve a
new contract with the investment adviser. This change from conditions
imposed under prior exemptive orders is designed to allow shareholders
to withhold profits under an interim contract when the shareholders
reject a new contract with that adviser, while providing for
compensation for services provided by the adviser. This provision may
be of particular benefit to small advisers.
The Commission has not identified any overlapping or conflicting
federal rules. We have considered alternatives to the proposed rule
amendment that would accomplish the objective of the rule and minimize
the impact on small entities. These alternatives include: (i)
Establishing different compliance requirements that take into account
the resources available to small entities; (ii) clarifying,
consolidating, or simplifying compliance requirements under the rule
for small entities; (iii) using performance rather than design
standards; and (iv) exempting small entities from coverage of the rule,
or any part of the rule.
We believe that further clarification, consolidation, or
simplification of the compliance requirements is not necessary.
Standards established in the amendments contain performance, rather
than design standards.\39\ An exemption from coverage of the rule for
small advisers or small funds would prevent those entities from
benefiting from rule 15a-4 and would not be consistent with the
protection of investors.
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\39\ See amended rule 15a-4(b)(2)(iii).
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To obtain a copy of the FRFA, contact Penelope Saltzman, Securities
and Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0506.
VIII. Statutory Authority
The Commission is amending rule 15a-4 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.
List of Subjects in 17 CFR Part 270
Investment companies, Securities.
Text of Final Rule
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39
unless otherwise noted;
* * * * *
2. Section 270.15a-4 is revised to read as follows:
Sec. 270.15a-4 Temporary exemption for certain investment advisers.
(a) For purposes of this section:
(1) Fund means an investment company, and includes a separate
series of the company.
(2) Interim contract means a written investment advisory contract:
(i) That has not been approved by a majority of the fund's
outstanding voting securities; and
(ii) That has a duration no greater than 150 days following the
date on which the previous contract terminates.
(3) Previous contract means an investment advisory contract that
has been approved by a majority of the fund's outstanding voting
securities and has been terminated.
(b) Notwithstanding section 15(a) of the Act (15 U.S.C. 80a-15(a)),
a person may act as investment adviser for a fund under an interim
contract after the termination of a previous contract as provided in
paragraphs (b)(1) or (b)(2) of this section:
(1) In the case of a previous contract terminated by an event
described in section 15(a)(3) of the Act (15 U.S.C. 80a-15(a)(3)), by
the failure to renew the previous contract, or by an assignment (other
than an assignment by an investment adviser or a controlling person of
the investment adviser in connection with which assignment the
investment adviser or a controlling person directly or indirectly
receives money or other benefit):
(i) The compensation to be received under the interim contract is
no greater than the compensation the adviser would have received under
the previous contract; and
(ii) The fund's board of directors, including a majority of the
directors who are not interested persons of the fund, has approved the
interim contract within 10 business days after the termination, at a
meeting in which directors may participate by any means of
communication that allows all directors participating to hear each
other simultaneously during the meeting.
(2) In the case of a previous contract terminated by an assignment
by an investment adviser or a controlling person of the investment
adviser in connection with which assignment the investment adviser or a
controlling person directly or indirectly receives money or other
benefit:
(i) The compensation to be received under the interim contract is
no greater than the compensation the adviser would have received under
the previous contract;
(ii) The board of directors, including a majority of the directors
who are not interested persons of the fund, has voted in person to
approve the interim contract before the previous contract is
terminated;
(iii) The board of directors, including a majority of the directors
who are not interested persons of the fund, determines that the scope
and quality of services to be provided to the fund under the interim
contract will be at least equivalent to the scope and quality of
services provided under the previous contract;
(iv) The interim contract provides that the fund's board of
directors or a majority of the fund's outstanding voting securities may
terminate the contract at any time, without the payment of any penalty,
on not more than 10 calendar days' written notice to the investment
adviser;
[[Page 68024]]
(v) The interim contract contains the same terms and conditions as
the previous contract, with the exception of its effective and
termination dates, provisions governed by paragraphs (b)(2)(i),
(b)(2)(iv), and (b)(2)(vi) of this section, and any other differences
in terms and conditions that the board of directors, including a
majority of the directors who are not interested persons of the fund,
finds to be immaterial; and
(vi) The interim contract contains the following provisions:
(A) The compensation earned under the contract will be held in an
interest-bearing escrow account with the fund's custodian or a bank;
(B) If a majority of the fund's outstanding voting securities
approve a contract with the investment adviser by the end of the 150-
day period, the amount in the escrow account (including interest
earned) will be paid to the investment adviser; and
(C) If a majority of the fund's outstanding voting securities do
not approve a contract with the investment adviser, the investment
adviser will be paid, out of the escrow account, the lesser of:
(1) Any costs incurred in performing the interim contract (plus
interest earned on that amount while in escrow); or
(2) The total amount in the escrow account (plus interest earned).
Dated: November 29, 1999.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-31333 Filed 12-3-99; 8:45 am]
BILLING CODE 8010-01-U