[Federal Register Volume 66, Number 168 (Wednesday, August 29, 2001)]
[Notices]
[Pages 45707-45709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21738]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25134; 812-11880]


Commonfund Institutional Funds, et al.; Notice of Application

August 23, 2001.
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.

-----------------------------------------------------------------------

SUMMARY: Applicants 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.

APPLICANTS: Commonfund Institutional Funds (the ``Company'') and 
Commonfund Asset Management Company, Inc. (`` COMANCO'').

FILING DATES: The application was filed on December 13, 1999 and 
amended on July 19, 2001.

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 September 17, 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 who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, c/o Timothy

[[Page 45708]]

W. Levin, Esq., Morgan, Lewis & Bockius LLP, 1701 Market Street, 
Philadelphia, PA 19103.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel, 
at (202) 942-0714, or Janet M. Grossnickle, 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, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. The Company, a Delaware business trust, is registered under the 
Act as an open-end management investment company. The Company currently 
offers eight series (together the ``Funds,'' and each a ``Fund''). Each 
Fund has its own investment objectives, policies and restrictions. 
COMANCO, registered under the Investment Advisers Act of 1940 
(``Advisers Act''), serves as the investment adviser to each Fund 
pursuant to an investment advisory agreement with the Company 
(``Advisory Agreement'') that was approved by the board of directors of 
the Company (the ``Board''), including a majority of the directors who 
are not ``interested persons,'' as defined in section 2(a)(19) of the 
Act (``Independent Directors''), and the sole shareholder of each 
Fund.\1\
---------------------------------------------------------------------------

    \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 COMANCO or any entity 
controlling, controlled by, or under common control with COMANCO, 
and (b) use the multi-manager structure described in the application 
(``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 Company is the only existing investment company 
that currently intends to rely on the order. In the name of any Fund 
contains the name of a Sub-Adviser, the Fund's name will also 
contain the name Commonfund, COMANCO or the name of the entity 
controlling, controlled by, or under common control with COMANCO 
that serves as the primary adviser to such Fund.
---------------------------------------------------------------------------

    2. Under the terms of the Advisory Agreement. COMANCO serves as 
investment adviser to each Fund and provides investment sub-adviser 
selection, monitoring and asset allocation services to the Funds and 
may hire one or more sub-advisers (``Sub-Adviser'') to exercise day-to-
day investment discretion over all or a portion of the assets of a Fund 
pursuant to separate investment sub-advisory agreements. In its 
capacity as investment adviser, COMANCO is required (a) to perform due 
diligence on prospective Sub-Advisers; (b) to communicate performance 
targets and evaluations to Sub-Advisers; (c) to supervise compliance 
with each Fund's investment objectives and policies; and (d) to 
recommend to the Board whether sub-advisory agreements should be 
renewed, modified or terminated. Each Sub-Adviser is or will be either 
registered or exempt from registration under the Advisers Act. Sub-
Advisers are recommended to the Board by COMANCO and selected and 
approved by the Board, including a majority of the Independent 
Directors. Each Sub-adviser's free is paid by COMANCO out of the 
management fee received by COMANCO from the respective Fund.
    3. COMANCO will recommend and, if the Board, including a majority 
of the Independent Directors, approves the recommendations monitor for 
the Fund one or more Sub-Advisers that follow a range of investment 
styles. The Board will rely upon COMANCO to monitor the Sub-Advisers' 
performance and their compliance with a Fund's investment objectives 
and policies, and to recommend the hiring and or termination of Sub-
Advisers. In using a manager of managers approach, COMANCO believes 
that the likelihood of outperformance is increased through the use of 
multiple Sub-Advisers in appropriate cases because underperformance by 
a single Sub-Adviser would not necessarily result in overall 
underperformance. The Funds currently use 24 Sub-Advisers.
    4. Applicants request relief to permit COMANCO, subject to the 
Board's approval, 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, of a Fund or COMANCO, other than by reason 
of serving as a Sub-Adviser to one or more of the Funds (an 
``Affiliated Manager'').
    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Funds to disclose the 
fees paid by COMANCO to the Sub Advisers. An exemption is requested to 
permit a Fund to disclose (as both a dollar amount and as a percentage 
of a Fund's net assets): (a) aggregate fees paid to COMANCO and any 
Affiliated Managers; and (b) aggregate fees paid to Sub-Advisers other 
than Affiliated Managers (``Aggregate Fees''). If a Fund employs an 
Affiliated Manager, the Fund will provide separate disclosure of any 
fees paid to the Affiliated Manager.

Applicant's 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 majority 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 registration 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)(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 ``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. From 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 class or classes of 
persons, securities, or transactions form 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

[[Page 45709]]

this standard for the reasons discussed below.
    7. Applicants assert that by investing in a Fund, shareholders, in 
effect, will hire COMANCO to manage the Fund's assets by selecting and 
monitoring Sub-Advisers rather than by hiring its own employees to 
manage assets directly. Applicants state that investors will purchase 
Fund shares to gain access to COMANCO's expertise in overseeing Sub-
Advisers. Applicants further assert that the requested relief will 
reduce Fund expenses and permit the Funds to operate more efficiently. 
Applicants note that the Advisory Agreement will remain subject to the 
shareholder approval requirements of section 15(a) of the Act and rule 
18f-2 under the Act.
    8. Applicants assert that many Sub-Advisers charge their customers 
for advisory services according to a ``posted'' rate schedule. 
Applicants state that while Sub-Advisers are willing to negotiate fees 
lower than those posted in the schedule, particularly with large 
institutional clients, they are reluctant to do so where the fees are 
disclosed to other prospective and existing customers. Applicants 
submit that the relief will encourage Sub-Advisers to negotiate lower 
advisory fees with COMANCO, the benefits of which are likely to be 
passed on to shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
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 Fund's outstanding voting securities, as defined in 
the Act, or, in the case of a Fund whose public shareholders purchase 
shares on the basis of a prospectus containing the disclosure 
contemplated by condition 2 below, by the sole shareholder prior to 
offering shares of the Fund to the public.
    2. Each Fund will disclose in its prospectus the existence, 
substance and effect of any order granted pursuant to this application. 
In addition, each Fund will hold itself out to the public as employing 
the ``manager of managers'' approach described in this application. The 
prospectus will prominently disclose that COMANCO has ultimate 
responsibility (subject to oversight by the Board) for the investment 
performance of a Fund due to its responsibility to oversee Sub-Advisers 
and recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of any new Sub-Adviser, COMANCO 
will furnish shareholders of the affected Fund with all of the 
information about the new Sub-Adviser that would be contained in a 
proxy statement, except as modified by the order to permit the 
disclosure of Aggregate Fees. This information will include the 
disclosure of Aggregate Fees and any change in such disclosure caused 
by the addition of a new Sub-Adviser. COMANCO will meet this condition 
by providing shareholders with an information statement meeting the 
requirements of Regulation 14C and Schedule 14C and Item 22 of Schedule 
14A under the Exchange Act, except as modified by the order to permit 
the disclosure of Aggregate Fees.
    4. COMANCO will not enter into a sub-advisory agreement with any 
Affiliated Manager without such agreement, including the compensation 
to be paid thereunder, being approved by the shareholders of the Fund.
    5. At all times, a majority of the Board will be Independent 
Directors and the nomination of new or additional Independent Directors 
will be placed within the discretion of the then-existing Independent 
Directors.
    6. When a change of Sub-Adviser is proposed for a Fund with an 
Affiliated Manager, the Board, including a majority of the Independent 
Directors, will make a separate funding, reflected in the 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 
COMANCO or the Affiliated Manager derives an inappropriate advantage.
    7. COMANCO will provide general management services to each Fund, 
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 Sub-Adviser's 
performance; and (e) implement procedures reasonably designed to ensure 
that the Sub-Advisers comply with the Fund's investment objective, 
policies, and restrictions of the Fund.
    8. No director or officer of the Company, or director or officer of 
COMANCO will own directly or indirectly (other than through a pooled 
investment vehicle over which such person does not have control) any 
interest in a Sub-Adviser except for (a) ownership of interests in 
COMANCO or an entity that controls, is controlled by or is under common 
control with COMANCO; 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.
    Each Fund will disclose in its registration statement the Aggregate 
Fees.
    10. Independent legal counsel, as defined in rule 0-1(a)(6) under 
the Act, will be engaged to represent the Independent Directors. The 
selection of such counsel will be within the discretion of the then-
existing Independent Directors.
    11. COMANCO will provide the Board, no less frequently than 
quarterly, with information about COMANCO's profitability on a per-Fund 
basis. The information will reflect the impact on profitability of the 
hiring or termination of any Sub-Adviser during the applicable quarter.
    12. Whenever a Sub-Adviser is hired or terminated, COMANCO will 
provide the Board information showing the expected impact on COMANCO's 
profitability.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21738 Filed 8-28-01; 8:45 am]
BILLING CODE 8010-01-M