[Federal Register Volume 65, Number 14 (Friday, January 21, 2000)]
[Notices]
[Pages 3505-3507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1472]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24253; 812-11750]


The Wachovia Funds and Wachovia Bank, N.A.; Notice of Application

January 14, 2000.
AGENCY:  Securities and Exchange Commission (``Commission'').

ACTION:  Notice of an application 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 the Act, as well as from certain 
disclosure requirements.

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SUMMARY OF THE APPLICATION: Applicants, The Wachovia Funds (the 
``Trust'') and Wachovia Bank, N.A. (``Wachovia''), request an order to 
permit them to enter into and materially amend subadvisory agreements 
without shareholder approval and to grant relief from certain 
disclosure requirements.

FILING DATE: The application was filed on August 17, 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 a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on February 7, 2000, 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, c/o Courtney S. Thornton, Esq. Kirkpatrick 
& Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 
20036.

FOR FURTHER INFORMATION CONTACT:  Emerson S. Davis, Sr., Senior 
Counsel, at (202) 942-0714, or George J. Zornada, 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 from 
the Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. The Trust, a Massachusetts business trust, is registered under 
the Act as an open-end management investment company. The Trust 
currently is comprised of sixteen series (each a ``Fund''), including 
Wachovia Executive Equity Fund (``Equity Fund'') and Wachovia Executive 
Fixed Income Fund (``Fixed Income Fund'' and with the Equity Fund, the 
``New Funds''). Each Fund has its own investment objectives, policies 
and restrictions. Wachovia is a wholly-owned subsidiary of Wachovia 
Corporation, a publicly-held bank holding company, and is exempt from 
registration under the Investment Advisers Act of 1940 (``Advisers 
Act''). Wachovia Asset Management (the ``Adviser''), a business unit of 
Wachovia, serves as the investment adviser to each of the Funds.\1\
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    \1\ Applicants also request relief with respect to future Funds, 
and any other registered open-end management investment companies or 
series thereof (a) that are advised by the Adviser or any entity 
controlling, controlled by, or under common control with the 
Adviser, and (b) which operate in substantially the same manner as 
the Funds (``Future Funds,'' and together with the Funds, the 
``Funds''). Any Fund that relies on the requested order will do so 
only in accordance with the terms and conditions contained in the 
application. The Trust is the only existing investment company that 
currently intends to rely on the order.
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    2. The Trust, on behalf of each Fund, and the Adviser have entered 
into an investment management agreement (``Advisory Agreement'') that 
was approved by the board of trustees of the Trust (the ``Board''), 
including a majority of the trustees who are not ``interested 
persons,'' as defined in section 2(a)(19) of the Act (``Independent 
Trustees''), and the shareholder(s) of each Fund. Under the terms of 
the Advisory Agreement, the Adviser manages the investment of assets of 
each Fund and may, subject to oversight by the Board, hire one or more 
sub-advisers (``Sub-Advisers'') to provide portfolio management 
services to each of the Funds pursuant to separate investment advisory 
agreements (``Sub-Advisory Agreements'').\2\ Each Sub-Adviser is, or 
will be, an investment adviser that is either registered or exempt from 
registration under the Advisers Act. Sub-Advisers are recommended to 
the Board by the Adviser and selected and approved by the Board, 
including a majority of the Independent Trustees. Each Sub-Advisers's 
fees are, or will be, paid by the Adviser out of the management fees 
received by the Adviser from the respective Fund.
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    \2\ The New Funds use Sub-Advisers, with Equity Fund having four 
Sub-Advisers and Fixed Income Fund having two Sub-Advisers.
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    3. The Adviser recommends Sub-Adviser based on its continuing 
quantitative and qualitative evaluation of their skills in managing 
assets pursuant to particular investment styles. The Adviser monitors 
the Funds and the Sub-Advisers and makes recommendations to the Board 
regarding allocation, and reallocation, of assets between Sub-Advisers 
and is responsible for recommending the hiring, termination and 
replacement of Sub-Advisers.
    4. Applicants request relief to permit the Adviser, subject to the 
oversight of the Board, to enter into and materially amend Sub-Advisory 
Agreements without shareholder approval. The requested relief will not 
extend to a Sub-Adviser that is an affiliated person, as defined in 
section 2(a)(3) of the Act,

[[Page 3506]]

of the Trust or the Adviser, other than by reason of serving as a Sub-
Adviser to one or more of the Funds (an ``Affiliated Sub-Adviser'').\3\
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    \3\ The Trust employs officers and employees of the Trust's 
administrator, Federated Services Company (``Federated''), and 
affiliated persons of Federated, to serve as officers of the Trust. 
For purposes of the requested order, the term Affiliated Sub-Adviser 
includes Federated Investment Management Company, an affiliated 
person of Federated and a Sub-Adviser to Equity Fund, and any other 
affiliated person of Federated that serves as a Sub-Adviser to a 
Fund.
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    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Funds to disclose the 
fees paid by the Adviser to the Sub-Advisers. The Trust will disclose 
for each Fund (both as a dollar amount and as a percentage of a Fund's 
net assets): (a) aggregate fees paid to the Adviser and Affiliated Sub-
Advisers; and (b) aggregate fees paid to Sub-Advisers other than 
Affiliated Sub-Advisers (``Aggregate Fee Disclosure''). For any Fund 
that employs an Affiliated Sub-Adviser, the Fund will provide separate 
disclosure of any sub-advisory fees paid to the Affiliated Sub-Adviser.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to act as an investment adviser to a registered 
investment company except pursuant to a written contract that has been 
approved by the vote of the company's outstanding voting securities. 
Rule 18f-2 under the Act provides that each series or class of stock in 
a series company affected by a matter must approve such matter if the 
Act requires shareholder approval.
    2. Form N-1A is the registered statement used by open-end 
investment companies. Item 15(a)(3) of Form N-1A requires disclosure of 
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the 
Securities Exchange Act of 1934 (the ``Exchange act''). Items 
22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9) of Schedule 14A, 
taken together, require a proxy statement for a shareholder meeting at 
which the advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fees,'' a description of ``the terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and proposed fees and the difference between the 
two fees.
    4. Form N-SAR is the semi-annual report filed with the Commission 
by registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
their investment advisers, including the Sub-Advisers.
    5. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b), and (c) of Regulation S-X require 
that investment companies include in their financial statements 
information about investment advisory fees.
    6. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction or any classes of persons, 
securities, or transactions from any provision of the Act, or from any 
rule thereunder, if such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Applicants believe that the requested relief meets this standard for 
the reasons discussed below.
    7. Applicants assert that the investors are relying on the 
Adviser's experience to select one or more Sub-Advisers best suited to 
achieve a Fund's desired investment objectives. Applicants assert that, 
from the perspective of the investor, the role of the Sub-Advisers is 
comparable to that of individual portfolio managers employed by other 
investment advisory firms. Applicants contend that requiring 
shareholder approval of Sub-Advisory Agreements may impose unnecessary 
costs and delays on the Funds, and may preclude the Adviser from acting 
promptly in a manner considered advisable by the Board. Applicants note 
that the Advisory Agreement will remain subject to section 15(a) of the 
Act and rule 18f-2 under the Act.
    8. Applicants assert that some Sub-Advisers use a ``posted'' rate 
schedule to set their fees. Applicants state that the Adviser may not 
be able to negotiate below ``posted'' fee rates with Sub-Advisers if 
each Sub-Adviser's fees are required to be disclosed. Applicants submit 
that the nondisclosure of the individual Sub-Adviser's fees is in the 
best interest of the Funds and their shareholders, where the disclosure 
of such fees would increase costs to shareholders without an offsetting 
benefit to the Funds and their shareholders.

Applicants' Conditions

    Applidcants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Fund may rely on the order, the operation of the Fund 
in the manner described in the application will be approved by a 
majority of the outstanding voting securities of the Fund, as defined 
in the Act, or in the case of a 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 
before offering shares of such Fund to the public.
    2. The Trust will disclose in its prospectus(es) the existence, 
substance and effect of any order granted pursuant to the application. 
In addition, each Fund relying on the requested order will hold itself 
out to the public as employing the management structure described in 
the application. The prospectus will prominently disclose that the 
Adviser has the ultimate responsibility (subject to oversight by the 
Board) to oversee the Sub-advisers and recommend their hiring, 
termination, and replacement.
    3. At all times, a majority of the Board will be Independent 
Trustees, and the nomination of new or additional Independent Trustees 
will be at the discretion of the then-existing Independent Trustees.
    4. The Adviser will not enter into a Sub-Advisory Agreement with 
any Affiliated Sub-Adviser without that agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Fund.
    5. When a change in Sub-Adviser is proposed for a Fund with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
Fund's Board minutes, that the change is in the best interests of the 
Fund and its shareholders and does not involve a conflict of interest 
from which the Adviser or the Affiliated Sub-Adviser derives an 
inappropriate advantage.
    6. Within 90 days of the hiring of any new Sub-Adviser, 
shareholders will be furnished all information about a new Sub-Adviser 
that would be contained in a proxy statement, except as modified to 
permit Aggregate Fee Disclosure. This information will include 
Aggregate Fee Disclosure and any change in such disclosure caused by 
the addition of a new Sub-Adviser. The Adviser will meet this condition 
by providing shareholders, within 90 days of the

[[Page 3507]]

hiring of a Sub-Adviser, an information statement meeting the 
requirements of Regulation 14C, Schedule 14C, and Item 22 of Schedule 
14A under the Exchange Act, except as modified by the order to permit 
Aggregate Fee Disclosure.
    7. The Adviser will provide management services to each Fund 
relying on the requested order, including overall supervisory 
responsibility for the general management and investment of the Fund's 
assets, and, subject to review and approval by the Board; will: (a) set 
the Fund's overall investment strategies; (b) evaluate, select and 
recommend Sub-Advisers to manage all or a part of the Fund's assets; 
(c) when appropriate, allocate and reallocate the Fund's assets among 
multiple Sub-Advisers; (d) monitor and evaluate the investment 
performance of Sub-Advisers; and (e) ensure that the Sub-Advisers 
comply with the Fund's investment objectives, policies, and 
restrictions by, among other things, implementing procedures reasonably 
designed to ensure compliance.
    8. No Trustee or officer of the Trust, or director of officer of 
Wachovia who participates directly in Wachovia's investment advisory 
activities (including the management or administration of the Trust) or 
otherwise is able to influence the selection of Sub-Advisers, will own 
directly or indirectly (other than through a pooled investment vehicle 
that is not controlled by such person) any interest in a Sub-Adviser 
except for (a) ownership of interests in (i) Wachovia or an entity that 
controls, is controlled by, or is under common control with Wachovia or 
(ii) Federated or an entity that controls, is controlled by, or is 
under common control with Federated; or (b) ownership of less than 1% 
of the outstanding securities of any class of equity or debt of a 
publicly-traded company that is either a Sub-Adviser or an entity that 
controls, is controlled by, or is under common control with a Sub-
Adviser.
    9. The Trust will disclose in its registration statement the 
Aggregate Fee Disclosure.
    10. Independent counsel knowledgeable about the Act and the duties 
of Independent Trustees will be engaged to represent the Independent 
Trustees. The selection of such counsel will be within the discretion 
of the Independent Trustees.
    11. With respect to the Funds relying on the relief requested, the 
Adviser will provide the Board, no less frequently than quarterly, with 
information about the Adviser's profitability on a per Fund basis. This 
information will reflect the impact on the profitability of the hiring 
or termination of any Sub-Adviser during the applicable quarter.
    12. Whenever a Sub-Adviser is hired or terminated, the Adviser will 
provide the Board with information showing the expected impact on the 
Adviser's profitability.
    For the Commission, by the Division of Investment Management, under 
delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-1472 Filed 1-20-00; 8:45 am]
BILLING CODE 8010-01-M