[Federal Register Volume 67, Number 103 (Wednesday, May 29, 2002)]
[Notices]
[Pages 37462-37463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13341]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25591; 812-12346]


USAA Mutual Fund, Inc., et al.; Notice of Application

May 22, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an exemption under section 6(c) of 
the Investment Company Act of 1940 (``Act'') 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 to permit them to 
enter into and materially amend subadvisory agreements without 
shareholder approval.

APPLICANTS: USAA Mutual Fund, Inc. (``Company''), and USAA Investment 
Management Company (``IMCO'').

FILING DATES: The application was filed on November 30, 2000, and 
amended on May 21, 2002.

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 a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on June 17, 2002, 
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 Fifth Street, NW., Washington, DC 20549-
0609. Applicants, 9800 Fredericksburg Road, A-O3-W, San Antonio, Texas 
78288.

FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel, at 
(202) 942-0611, or Mary Kay Frech, 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 SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, 
DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. The Company is a Maryland corporation registered under the Act 
as an open-end management investment company. The Company currently is 
comprised of eighteen series (each, a ``Portfolio,'' and together, the 
``Portfolios''), each with its own investment objectives, policies, and 
restrictions.\1\ IMCO serves as the investment adviser to the 
Portfolios and is registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act''). IMCO is a wholly 
owned indirect subsidiary of United Services Automobile Association, a 
diversified financial services institution.
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    \1\ The Applicants request that any relief granted pursuant to 
the application apply to each existing and future Portfolio of the 
Company and each existing and future series (included in the Term 
``Portfolios'') of any other existing or futured registered open-end 
management investment company that: (a) Is advised by IMCO or any 
entity controlling, controlled by, or under common control with IMCO 
(any such entity together with IMCO, the ``Manager''); (b) is 
managed in a manner consistent with the application; and (c) 
complies with the terms and conditions in the application (together 
with the Company, a ``Fund''). The Company is the only existing 
registered open-end management investment company that currently 
intends to rely on the requested order. If the name of any Portfolio 
contains the name of any Sub-Adviser (as defined below), the Sub-
Adviser's name will be preceded by the name of the Manager.
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    2. The Company, on behalf of each Portfolio, has entered into 
investment advisory or investment management agreements with IMCO 
(collectively, the ``Management Agreements'') that were approved by the 
Company's board of directors (``Board''), including a majority of the 
directors who are not ``interested persons,'' as defined in section 
2(a)(19) of the Act, of the Company or the Manager (``Independent 
Directors''), and each Portfolio's shareholders.
    3. The Management Agreements permit the Manager to enter into 
separate investment advisory agreements (``Sub-Advisory Agreements'') 
with sub-advisers (``Sub-Advisers'') to whom the Manager may delegate 
responsibility for providing investment advice and making investment 
decisions for a Portfolio. The Manager monitors and evaluates the Sub-
Advisers and recommends to the Board their hiring, termination, and 
replacement. EachSub-Adviser is, or will be, an investment adviser 
registered, or exempt from registration, under the Advisers Act. The 
Manager compensates the Sub-Advisers out of the fees paid to the 
Manager by the Portfolio. Applicants request relief to permit the 
Manager to enter into and materially amend Sub-Advisory Agreements 
without obtaining shareholder approval. The requested relief will not 
extend to any Sub-Adviser that is an affiliated person, as defined in 
section 2(a)(3) of the Act, of a Fund or the Manager, other than by 
reason of serving as a Sub-Adviser to one or more of the Portfolios 
(``Affiliated

[[Page 37463]]

Sub-Adviser''). None of the current Sub-Advisers is an 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 under a written contract that has been 
approved by a majority of the investment 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 the 
matter if the Act requires shareholder approval.
    2. Section 6(c) of the Act authorizes the SEC to exempt persons or 
transactions from the provisions of the Act, or from any rule 
thereunder, to the extent that the exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policies and 
provisions of the Act. Applicants state that the requested relief meets 
this standard for the reasons discussed below.
    3. Applicants assert that the Portfolio's shareholders rely on the 
Manager to select the Sub-Advisers best suited to achieve a Portfolio's 
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 each 
Sub-Advisory Agreement would impose costs and unnecessary delays on the 
Portfolios, and may preclude the Manager from acting promptly in a 
manner considered advisable by the Board. Applicants also note that the 
Management Agreements will remain 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 any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Portfolio may rely on the requested order, the 
operation of the Portfolio as described in the application will be 
approved by the vote of a majority of the Portfolio's outstanding 
voting securities, as defined in the Act, or in the case of a Portfolio 
whose public shareholders purchased shares on the basis of a prospectus 
containing the disclosure contemplated by condition 2, by the initial 
shareholder(s) before the shares of such Portfolio are offered to the 
public.
    2. Each Portfolio relying on the requested order will disclose in 
its prospectus the existence, substance, and effect of any order 
granted pursuant to the application. In addition, each Portfolio 
relying on the requested order will hold itself out to the public as 
employing the management structure described in the application. The 
prospectus with respect to each such Portfolio will prominently 
disclose that the Manager has the ultimate responsibility (subject to 
oversight by the Board) to oversee the Sub-Advisers and recommend their 
hiring, termination, and replacement.
    3. The Manager will provide general management and administrative 
services to each Fund and its Portfolios, including overall supervisory 
responsibility for the general management and investment of each 
Portfolio's assets, and, subject to review and approval by the Board, 
will: (i) Set each Portfolio's overall investment strategies; (ii) 
evaluate, select and recommend Sub-Advisers to manage all or part of a 
Portfolio's assets; (iii) when appropriate, allocate and reallocate a 
Portfolio's assets among multiple Sub-Advisers; (iv) monitor and 
evaluate the performance of Sub-Advisers; and (v) implement procedures 
reasonable designed to ensure that the Sub-Advisers comply with the 
relevant Portfolio's investment objectives, policies and restrictions.
    4. At all times, a majority of the Board will be Independent 
Directors, and the nomination of new or additional Independent 
Directors will be at the discretion of the then-existing Independent 
Directors.
    5. The Manager 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 applicablePortfolio.
    6. When a Sub-Adviser change is proposed for a Portfolio with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
IndependentDirectors, will make a separate finding, reflected in the 
minutes of the meeting of the Board, that such change is in the best 
interests of the Portfolio and its shareholders and does not involve a 
conflict of interest from which the Manager or the Affiliated Sub-
Adviser derives an inappropriate advantage.
    7. No director or officer of a Fund or director or officer of the 
Manager 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: (i) Ownership of interests in the Manager 
or any entity that controls, is controlled by, or is under common 
control with the Manager, or (ii) 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.
    8. Within 90 days of the hiring of any new Sub-Adviser, the Manager 
will furnish shareholders all information about the new Sub-Adviser 
that would be included in a proxy statement. Such information will 
include any change in such disclosure caused by the addition of a new 
Sub-Adviser. To meet this condition, the Manager will provide 
shareholders with an information statement meeting the requirements of 
Regulation 14C, Schedule 14C, and Item 22 of Schedule 14A under the 
Securities Exchange Act of 1934.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-13341 Filed 5-28-02; 8:45 am]
BILLING CODE 8010-01-P