[Federal Register Volume 66, Number 163 (Wednesday, August 22, 2001)]
[Notices]
[Pages 44183-44185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21119]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IA-1969; File No. 803-152]


Artisan Partners Limited Partnership; et al.; Notice of 
Application

August 16, 2001.
AGENCY: Securities and Exchange Commission (the ``SEC'').

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

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APPLICANTS: Artisan Partners Limited Partnership (``APLP'') and Hirtle 
Callaghan Trust (``Trust'').

RELEVANT ADVISERS ACT SECTIONS: Exemption requested under section 206A 
of the Advisers Act from section 205 of the Advisers Act and Advisers 
Act rule 205-1.

SUMMARY OF APPLICATION: Applicants request an order permitting APLP to 
charge a performance fee based on the performance of that portion of a 
Trust portfolio managed by APLP (``APLP Account''). Applicants further 
request that the order permit them to compute the performance-related 
portion of the fee using changes in the APLP Account's gross asset 
value rather than net asset value.

FILING DATES: The application was filed on August 3, 2000, and amended 
on July 9, 2001 and August 1, 2001.

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 copies of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on September 10, 
2001, 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549-
0609. Applicants, Artisan Partners Limited Partnership, 1000 North 
Water Street, Milwaukee, Wisconsin 53202; Hirtle Callaghan Trust, 575 
Swedesford Road, Wayne, Pennsylvania 19087.

FOR FURTHER INFORMATION CONTACT: Sarah B. Ackerson, Senior Special 
Counsel, at (202) 942-4780, or Jennifer L. Sawin, Assistant Director, 
at (202) 942-0719 (Division of Investment Management, Office of 
Investment Adviser Regulation).

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

Applicants' Representations

    1. APLP is an investment adviser registered under the Advisers Act. 
The Trust is an open-end management investment company registered under 
the Investment Company Act of 1940. The Trust was organized by Hirtle, 
Callaghan & Co. (``Hirtle Callaghan''), an investment adviser 
registered under the Advisers Act. The Trust is a series company that 
currently consists of several separate investment portfolios. Shares of 
the Trust are available only to clients of Hirtle Callaghan or clients 
of financial intermediaries, such as investment advisers, that are 
acting in a fiduciary capacity with investment discretion and that have 
established relationships with Hirtle Callaghan.
    2. Hirtle Callaghan serves as a ``manager of managers'' for the 
Trust. Pursuant to its agreement with the Trust, Hirtle Callaghan is 
not authorized to exercise investment discretion with respect to the 
Trust's assets. Hirtle Callaghan is responsible for monitoring the 
overall investment performance of the Trust's portfolios and the 
performance of the portfolio managers that manage the Trust's 
portfolios. Hirtle Callaghan may also from time to time recommend that 
the Trust's Board of Trustee (the ``Board'') retain additional 
portfolio managers or terminate existing portfolio managers. Authority 
to select new portfolio managers and reallocate assets among the 
portfolio managers, however, resides with the Trust's Board.
    3. APLP and Capital Guardian Trust Company (``Cap Guardian'') 
provide portfolio management services to the International Equity 
Portfolio (``Portfolio''), one series of the Trust. Pursuant to a 
portfolio management agreement, APLP provides portfolio management 
services for a portion of the Portfolio's assets that the Trust's Board 
allocates to APLP (``APLP Account''). Each of APLP and Cap Guardian 
manages a separate portion of the Portfolio, each acting as though it 
were advising a separate investment company. Percentage limitations on 
investments are applied to each portion of the Portfolio without regard 
to investments in the other adviser's portion of the Portfolio. Each 
adviser receives information about portfolio positions from the Trust 
or its custodian that generally contains only information about the 
portion of the Portfolio assigned to it and not about the positions 
held by the Portfolio as a whole. Each adviser generally is responsible 
for preparing reports to the Trust and the Board only with respect to 
its discrete portion of the Portfolio.
    4. APLP is not affiliated with Hirtle Callaghan, the Trust, or Cap 
Guardian (except to the extent such affiliation may exist because APLP 
serves as an investment adviser to the Portfolio). APLP's services to 
the Trust are limited to investment selection for the APLP Account, 
placement of transactions for execution and certain compliance 
functions directly related to such services. APLP does not act as a 
distributor or sponsor for the Trust or Portfolio. No member of the 
Trust's Board is affiliated with APLP. APLP currently receives a fee at 
the annual rate of 0.40 percent of the average daily net assets of the 
APLP Account, payable monthly.
    5. On June 8, 1999 the Trust's Board approved an amendment to the 
portfolio management agreement between APLP and the Trust under which 
the existing fee structure would be replaced with a fee structure that 
includes a performance component. On July 23, 1999 the shareholders of 
the Portfolio approved the amendment to the agreement.\1\
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    \1\ The proxy statement associated with this shareholder meeting 
specifically informed shareholders that, if approved by the 
shareholders, the proposed fee would not become effective until 
receipt of assurances from the SEC that calculating the fee as 
proposed would not be viewed as inconsistent with the Advisers Act, 
and that there could be no guarantee that the SEC would give such 
assurances.

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[[Page 44184]]

    6. Under the proposed fee arrangement, APLP would receive an 
initial fee at the annual rate of 0.40 percent of the average daily net 
assets of the APLP Account, payable quarterly, for each of the first 
three quarters following the date on which the proposed fee arrangement 
becomes effective. At the end of the fourth quarter, APLP would begin 
to receive a base fee, payable quarterly, at an annual rate of 0.40 
percent of the average daily net assets of the APLP Account. The base 
fee would be increased or decreased by a Performance Component. The 
Performance Component would equal 25 percent of the amount by which the 
gross performance of the APLP Account, during the 12 months immediately 
preceding the calculation date, exceeded or underperformed the sum of 
(i) the total return of the Morgan Stanley Capital International 
Europe, Australasia, Far East Index (``Index'') plus (ii) 40 basis 
points. Gross performance does not give effect to the Portfolio's 
expenses, but does reflect the effect (i.e., reducing performance) of 
all applicable brokerage and transaction costs. The maximum annual fee 
payable for any 12 month period would not exceed 80 basis points, and 
there is no minimum fee. If the APLP underperforms the index by at 
least 120 basis points, APLP could receive no fee for a given 
period.\2\ However, APLP's fee can never be less than zero.
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    \2\ If application of the Performance Component to the first 
four quarters would result in an annual fee at a rate lower than 40 
basis points, the amount of any excess fee paid for the first year 
would be credited to the Portfolio in subsequent quarters before 
additional fee amounts would be payable to APLP. If the portfolio 
management agreement between the Trust and APLP is terminated, the 
Trust would not recoup any outstanding excess fees that had been 
paid in previous quarters.
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Applicants' Legal Analysis

    1. Section 205(a)(1) of the Advisers Act generally prohibits an 
investment adviser from entering into any investment advisory agreement 
that provides for compensation to the adviser on the basis of a share 
of capital gains or capital appreciation of a client's account.
    2. Section 205(b) of the Advisers act provides a limited exception 
to this prohibition, permitting an adviser to charge a registered 
investment company and certain other entities a fee that increases and 
decreases ``proportionately with the investment performance of the 
investment company or fund over a specified period in relation to the 
investment record of an appropriate index of securities prices or such 
other measure of investment performance as the [SEC] by rule, 
regulation or order may specify.''
    3. Rule 205-1 requires that the investment performance of an 
investment company be computed based on the change in the net (of all 
expenses and fees) asset value per share of the investment company.
    4. Applicants request exemptive relief from section 205 and rule 
205-1 to permit them to charge the proposed fee (i) applying the 
proposed fee only to the APLP Account and not to the Portfolio as a 
whole, and (ii) computing the Performance Component measured by the 
change in the APLP Account's gross asset value, rather than the change 
in the net asset value of the APLP Account.
    5. Applicants state that Congress, in adopting and amending section 
205 of the Advisers Act, and the SEC, in adopting rule 205-1, put into 
place safeguards designed to ensure that investment advisers would not 
take advantage of advisory clients.
    6. Applicants assert that the SEC required that performance fees be 
calculated based on the net asset value of the investment company's 
shares to prevent a situation where an adviser could earn a performance 
fee even though investment company shareholders did not derive any 
benefit from the adviser's performance after the deduction of fees and 
expenses.
    7. Applicants state that, unlike traditional performance fee 
arrangements, APLP would not receive the Performance Component of its 
fee unless its management of the APLP Account has resulted in 
performance in excess of the Index performance plus a ``performance 
hurdle'' equal to the 40 basis point base fee. Applicants assert that 
increasing the performance of the Index by the 40 basis point hurdle 
would have an effect similar to deducting APLP's fees. In the event the 
base fee changes, the performance hurdle also would be changed so that 
the maximum total fee would be twice the base fee and the minimum would 
remain zero, so that the fee would continue to have the potential to 
increase and decrease proportionately. Applicants state that since the 
fee structure contains a performance hurdle, the Portfolio's 
shareholders will have protections similar to those contemplated by the 
net asset value requirement of rule 205-1.
    8. Applicants state that Congress concern, in enacting the 
safeguards of section 205, came about because the vast majority of 
investment advisers exercised a high level of control over the 
structuring of the advisory relationship. Applicants state that the 
proposed fee, however, was negotiated actively at arm's length between 
the parties. Applicants state that APLP has little, if any, influence 
over the overall management of the Trust or the Portfolio beyond stock 
selection, and does not control the Portfolio or the Trust. Management 
functions of the Trust and the Portfolio reside in the Trust's Board. 
The Trust is directly and fully responsible for supervising the Trust's 
service providers and monitoring expenses of each of the Trust's 
portfolios. The Trust's Board is responsible for allocating the assets 
of the several portfolios among the portfolio managers. Neither APLP 
nor its affiliates sponsored or organized the Trust, nor serves as a 
distributor or principal underwriter of the Trust. APLP and its 
affiliates do not own any shares issued by the Trust. No officer, 
director, or employee of APLP, or of its affiliates, serves as an 
executive officer or director of the Trust. Neither APLP nor any of its 
affiliates is an affiliated person of Hirtle Callaghan or any other 
person who consults or provides investment advice with respect to the 
Trust's advisory relationships (except to the extent that such 
affiliation may exist by reason of APLP serving as investment adviser 
to the Trust).
    9. Applicants argue that the proposed fee arrangement satisfies the 
purpose of rule 205-1 because it was negotiated at arm's length between 
the parties and the Trust does not need the protections afforded by 
calculating a performance fee based on met assets. Applicants assert 
that the proposed fee arrangement is therefore consistent with the 
underlying policies of section 205 and rule 205-1 under the Advisers 
Act because it is appropriate in the public interest and consistent 
with the protection of investors and the purposes intended by the 
policies and provisions of the Advisers Act.

Applicant's Conditions

    1. If the base fee changes, the performance fee will be adjusted to 
equal the base fee rate.
    2. To the extent APLP relies on the requested order with respect to 
advisory arrangements with other investment companies that it advises, 
these arrangements will meet the following requirements: (i) The 
investment advisory fee will be negotiated between APLP and the 
investment company or its primary investment adviser; (ii) the fee 
structure will contain a performance hurdle that is, at all times, no 
lower than the base fee; (iii) neither APLP nor any of its affiliates 
will serve as distributor or sponsor of the investment

[[Page 44185]]

company; (iv) no member of the board of the investment company will be 
affiliated with APLP or its affiliates; (v) neither APLP nor any of its 
affiliates will organize the investment company; and (vi) neither APLP 
nor any of its affiliates will be an affiliated person of any primary 
adviser to the investment company or of any other person who consults 
or provides advice with respect to the investment company's advisory 
relationships (except to the extent that APLP may be affiliated with 
another portfolio manager by virtue of the fact that APLP or the 
affiliate serves as a portfolio manager to the investment company or to 
another investment company).

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-21119 Filed 8-21-01; 8:45 am]
BILLING CODE 8010-01-M