[Federal Register Volume 66, Number 212 (Thursday, November 1, 2001)]
[Notices]
[Pages 55216-55218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27440]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25246; 812-12652]


Citizens Funds, et al; Notice of Application

October 26, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION:  Notice of application for an order under section (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.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
them to enter into and materially amend subadvisory agreements without 
shareholder approval.

Applicants: Citizens Funds (the ``Trust'') and Citizens Advisers, Inc. 
(the ``Adviser'').

Filing Dates: The application was filed on October 2, 2001 and amended 
on October 24, 2001.

Hearing or Notification of Hearing: An order granting the requested 
relief 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 November 20, 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, John L. Shields, President, Citizens Advisers, 
Inc., 230 Commerce Way, Portsmouth, NH 03801.

FOR FURTHER INFORMATION CONTACT: Jaea, F. Hahn, Senior Counsel (202) 
942-0614, or Nadya B. Royblat, Assistant Director (202) 942-0564 
(Office of Investment Regulation, Division of Investment Management).

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, NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. The Trust is a Massachusetts business trust registered under the 
Act as an opened management investment company. The Trust currently has 
eight separate series (each a ``Fund'', and collectively, the 
``Funds'').\1\ The Adviser, a New Hampshire corporation, is registered 
as an investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'').
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    \1\ The applicants request that any relief granted pursuant to 
the application also apply to future series of the Trust and any 
other registered open-end management investment company or series 
thereof advised by the Adviser or a person controlling, controlled 
by, or under common control with the Adviser that operates in 
substantially the same manner as the Trust with respect to the 
Adviser/Subadviser structure and complies with the terms and 
conditions of the application. (together, ``Future Funds'', included 
in the term ``Funds''). No fund will contain in its name the name of 
any Subadviser, as defined below.
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    2. The Trust has entered into an investment advisory agreement with 
the Adviser with respect to each of the Funds (the ``Advisory 
Agreement''). The Adviser manages the assets of the Funds and performs 
various administrative

[[Page 55217]]

duties for the Trust. The Advisory Agreement has been approved by 
shareholders of each of the Funds and by the Trust's board of trustees 
(the ``Board''), including a majority of the Board members who are not 
``interested persons'' of the Trust, the Adviser or any Subadviser 
within the meaning of section 2(a)(19) of the Act (the ``Independent 
Trustees''). The Adviser has engaged subadvisers (``Subadvisers'') to 
handle the day-to-day portfolio management of certain of the Funds. 
Each Subadviser performs services pursuant to a written subadvisory 
agreement with the Trust and the Adviser (``Subadvisory Agreement''). 
Each Subadvisor Agreement allows the Subadviser discretionary authority 
to invest all (or the portion assigned to it) of the assets of a 
particular Fund, subject to general supervision by the Adviser and the 
Board. Each of the existing Subadvisers is registered as an investment 
adviser under the Advisers Act. Future Subadvisers will be registered 
or exempt from registration under the Advisers Act. For its services 
under the Advisory Agreement, the Adviser receives management fees at 
annual rates based on a percentage of the applicable Fund's average net 
assets.
    3. The Adviser continuously evaluates the performance of each 
Subadviser, recommends to the Board the appointment of new Subadvisers 
as circumstances warrant, and negotiates and renegotiates the terms of 
the Subadviser Agreements, including the subadvisory fees, with the 
Subadvisers. Each Subadviser is recommended by the Adviser based on a 
number of factors, and selected and approved by the Board, including a 
majority of the Independent Trustees. For their services under the 
Subadvisory Agreements, each of the Subadvisers receives a subadvisory 
fee from the Adviser. The Subadvisers are not compensated directly by 
the Funds, but by the adviser out of the fee the Adviser receives from 
the Funds.
    4. Applicants request an order to permit the Trust and the Adviser 
to enter into new or amended Subadvisory Agreements with Subadvisers 
without such agreements being approved by the shareholders of the 
applicable Fund. The requested relief will not extend to a Subadviser 
that is an ``affiliated person'' (as defined in section 2(a)(3) of the 
Act) of the Trust or the Adviser, other than by reason of serving as a 
Subadviser to one of the Funds (``Affiliated Subadviser''). None of the 
current Subadvisers is an 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 that has been 
approved by the vote of a majority of the outstanding voting securities 
of the company. Rule 18f-2 under the Act provides that individual 
series funds must each company with the contract approval requirements 
of section 15(a) of the Act.
    2. 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 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 request an exemption under section 6(c) of the Act from 
section 15(a) of the Act and rule 18f-2 thereunder to the extent 
necessary to permit them to enter into Subadvisory Agreements with 
Subadvisers, amend existing Subadvisory Agreements with Subadvisers, 
and approve new Subadvisory Agreement with an existing Subadviser that 
has been terminated as a result of an ``assignment,'' in each case 
without such Subadvisory Agreement being approved by shareholders of 
the applicable Fund or Future Fund.
    3. Applicants assert that the shareholders are relying on the 
Adviser's experience to select one or more Subadvisers best suited to 
achieve a Fund's desired investment objectives. Applicants assert that, 
from the prospective of the investor, the role of the Subadvisers is 
comparable to that of individual portfolio managers employed by other 
investment advisory firms. Applicants contend that requiring 
shareholder approval of each Subadvisory Agreement would impose costs 
and unnecessary 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 fully subject 
to section 15(a) of the Act and rule 18f-2 under the Act, including the 
requirements for shareholder approval.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Before a Fund may rely on the order requested in the 
application, 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, within the meaning of the Act, or by its 
initial shareholder, provided that, in the case of approval by the 
initial shareholder, the pertinent Fund's shareholders will purchase 
shares on the basis of a prospectus containing the disclosure 
contemplated by condition 2 below.
    2. The Fund's prospectus will disclose the existence, substance and 
effect of any order granted pursuant to the application. In addition, 
the Funds will hold themselves out as employing the management 
structure described in the application. The prospectus with respect to 
each Fund will prominently disclose that the Adviser has ultimate 
responsibility (subject to oversight by the Board) to oversee the 
Subadvisers and recommend their hiring, termination and replacement.
    3. The Adviser will provide general management services to each of 
the Funds relying on the requested order, including overall supervisory 
responsibility for the general management and investment of each Fund's 
assets, and subject to the review and approval by the Board, will, as 
necessary: (a) Set each Fund's overall investment strategies; (b) 
select Subadvisers; (c) when appropriate, allocate and reallocate each 
Funds' assets among Subadvisers; (d) monitor and evaluate Subadviser 
performance; and (e) oversee Subadviser compliance with the investment 
objectives, policies and restrictions of the applicable Fund by, among 
other things, implementing procedures reasonably to ensure compliance.
    4. At all times, a majority of the Board will be persons who are 
Independent Trustees, and the nomination of new or additional 
Independent Trustees will be placed within the discretion of the then 
existing Independent Trustees.
    5. Neither the Adviser nor the Trust will enter into a Subadvisory 
Agreement with any Affiliated Subadviser without such Subadvisory 
Agreement, including the compensation to be paid thereunder, being 
approval by the shareholders of the applicable Fund.
    6. When a Subadviser change is proposed for a Fund with an 
Affiliated Subadviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
minutes of the meetings of the Board, that such change is in the best 
interests of the applicable Fund and its shareholders and does not 
involve a conflict of interest from which the Adviser or the Affiliated 
Subadviser derives an inappropriate advantage.

[[Page 55218]]

    7. No director, trustee or officer of the Trust or director or 
officer of the Adviser will own directly or indirectly (other than 
through a pooled investment vehicle that is not controlled by the 
director, trustee or officer) any interest in a Subadviser except for 
ownership of (a) interest in the Adviser or any entity that controls, 
is controlled by, or is under common control with the Adviser; or (b) 
less than 1% of the outstanding securities of any class of equity or 
debt of a publicly-traded company that is either a Subadviser or an 
entity that controls, is controlled by, or is under common control with 
a Subadviser.
     8. Within 90 days of the hiring of any new Subadviser, the Adviser 
will furnish the shareholders of the applicable Fund all the 
information that would have been included in a proxy statement. Such 
information will include any changes in such information caused by the 
addition of a new Subadviser. To meet this obligation, the Adviser will 
provide the shareholders of the applicable Funds with an information 
statement meeting the requirements of Regulation 14C and Schedule 14C 
under the Securities Exchange Act of 1934, as well as the requirements 
of Item 22 of Schedule 14A under that Act.

    For that Commission, by the Division of Investment Management, 
under delegated authority.


Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27440 Filed 10-31-01; 8:45 am]
BILLING CODE 8010-01-M