[Federal Register Volume 67, Number 196 (Wednesday, October 9, 2002)]
[Notices]
[Pages 62995-62997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25676]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25762; 812-12682]


The Charles Schwab Family of Funds, et al.; Notice of Application

October 3, 2002.
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.

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

APPLICANTS: The Charles Schwab Family of Funds, Schwab Investments, 
Schwab Capital Trust, and Schwab Annuity Portfolios (collectively, the 
``Trusts'') and Charles Schwab Investment Management, Inc. (``CSIM'').

SUMMARY OF THE APPLICATION: Applicants request an order to permit them 
to enter into and materially amend sub-advisory agreements without 
shareholder approval and to grant relief from certain disclosure 
requirements.

FILING DATES: The application was filed on November 14, 2001, and 
amended on October 1, 2002.

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 October 28, 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 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, 101 Montgomery Street, San Francisco, CA 94104.

FOR FURTHER INFORMATION CONTACT: Christine Y. Greenlees, Senior 
Counsel,

[[Page 62996]]

at (202) 942-0581, 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 Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. Each Trust is organized as a Massachusetts business trust and is 
registered under the Act as an open-end management investment company. 
Each Trust currently offers multiple series, each with its own 
investment objectives, policies and restrictions. CSIM, registered 
under the Investment Advisers Act of 1940 (``Advisers Act''), serves as 
the investment adviser to certain series of the Trusts that use or may 
use the multi-manager structure described in the application (together, 
the ``Funds,'' and each a ``Fund''). CSIM has entered into an 
investment advisory agreement with each Trust (each an ``Advisory 
Agreement'' and collectively, the ``Advisory Agreements'') that was 
approved by the board of trustees of each 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 sole shareholder or shareholders 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 CSIM or any entity 
controlling, controlled by, or under common control with CSIM, 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 Trusts are the only existing investment companies 
that currently intend to rely on the order. If the name of any Fund 
contains the name of a Sub-Adviser (as defined below), the name 
Schwab, CSIM, or the name of the entity controlling, controlled by, 
or under common control with CSIM that serves as the primary adviser 
to such Fund will precede the name of the Sub-Adviser.
---------------------------------------------------------------------------

    2. Under the terms of the Advisory Agreement, CSIM 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-Advisers'') 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. 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 
CSIM and selected and approved by the Board, including a majority of 
the Independent Trustees. Each Sub-Adviser's fee is paid by CSIM out of 
the management fee received by CSIM from the respective Fund.
    3. Applicants request relief to permit CSIM, 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 CSIM, other than by reason of serving as a 
Sub-Adviser to one or more of the Funds (an ``Affiliated Sub-
Adviser'').
    4. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Funds to disclose the 
fees paid by CSIM 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 CSIM and any 
Affiliated Sub-Adviser; and (b) aggregate fees paid to Sub-Advisers 
other than Affiliated Sub-Advisers (``Aggregate Fees''). If a Fund 
employs an Affiliated Sub-Adviser, the Fund will provide separate 
disclosure of any 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 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)(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 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 believe that the requested relief meets this standard 
for the reasons discussed below.
    7. Applicants assert that by investing in a Fund, shareholders, in 
effect, will hire CSIM 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 CSIM'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

[[Page 62997]]

CSIM, the benefits of which are likely to be passed on to Fund 
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 CSIM 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, CSIM 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. CSIM will meet this condition by providing shareholders with 
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 the disclosure of Aggregate Fees.
    4. CSIM will not enter into a sub-advisory agreement with any 
Affiliated Sub-Adviser 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 
Trustees and the nomination of new or additional Independent Trustees 
will be placed within the discretion of the then-existing Independent 
Trustees.
    6. When a change of 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 
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 
CSIM or an Affiliated Sub-Adviser derives an inappropriate advantage.
    7. CSIM 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-Advisers' investment 
performance; and (e) implement procedures reasonably designed to ensure 
that the Sub-Advisers comply with the Fund's investment objective, 
policies, and restrictions.
    8. No trustee or officer of the Trusts, or director or officer of 
CSIM 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 CSIM 
or an entity that controls, is controlled by or is under common control 
with CSIM; 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. 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 Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.
    11. CSIM will provide the Board, no less frequently than quarterly, 
with information about CSIM'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, CSIM will 
provide the Board information showing the expected impact on CSIM's 
profitability.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-25676 Filed 10-8-02; 8:45 am]
BILLING CODE 8010-01-P