[Federal Register Volume 68, Number 237 (Wednesday, December 10, 2003)]
[Notices]
[Pages 68961-68963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30577]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26284; 812-12898]


AIP Alternative Strategies Funds, et al.; Notice of Application

 December 4, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 15(a) of 
the Act and rule 18f-2 under the Act, as well as certain disclosure 
requirements.

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Summary of Application: Applicants request an order that would permit 
them to enter into and materially amend sub-advisory agreements without 
shareholder approval and would grant relief from certain disclosure 
requirements.

Applicants:  AIP Alternative Strategies Funds (``AIS'') and Alternative 
Investment Partners LLC (``Manager'').

Filing Dates: The application was filed on October 22, 2002, and 
amended on November 14, 2003, and December 4, 2003.

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 December 29, 2003, and should be accompanied by proof of 
service on the 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Thomas R. 
Westle, Esq., Blank Rome LLP, 405 Lexington Avenue, 24th Floor, New 
York, NY 10174.

FOR FURTHER INFORMATION CONTACT: Marc R. Ponchione, Senior Counsel, at 
(202) 942-7927, or Annette Capretta, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. AIS is a Delaware business trust registered under the Act as an 
open-end management investment company. AIS is organized as a series 
investment company and has one series, Alpha Strategies I (``Alpha 
Strategies'').\1\ The Manager is registered as an investment adviser 
under the Investment Advisers Act of 1940 (``Advisers Act'') and serves 
as investment adviser to Alpha Strategies pursuant to an investment 
advisory agreement (``Investment Advisory Agreement''). The Investment 
Advisory Agreement has been approved by AIS' board of trustees (the 
``Board''), including a majority of the trustees who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act, of 
AIS (``Independent Trustees''), as well as by Alpha Strategies' 
shareholders.
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    \1\ The Applicants request that any relief granted pursuant to 
the application also apply to any future series of AIS and any other 
registered open-end management investment companies and their series 
that (a) Are advised by the Manager or any entity controlling, 
controlled by, or under common control with the Manager; (b) use the 
manager/sub-adviser structure described in the application; and (c) 
comply with the terms and conditions in the application (each, a 
``Series,'' and together with Alpha Strategies, the ``Series''). AIS 
is the only existing registered investment company that currently 
intends to rely on the order. If the name of any Series contains the 
name of a Sub-Adviser (as defined below), the name of the Manager 
will appear before the name of the Sub-Adviser.
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    2. Under the terms of the Investment Advisory Agreement, the 
Manager provides investment advisory services to Alpha Strategies, 
supervises the investment program for Alpha Strategies, and has the 
authority, subject to Board approval, to enter into separate investment 
sub-advisory agreements (``Sub-Advisory Agreements'') with one or more 
sub-advisers (``Sub-Advisers''). The Manager monitors and evaluates the 
Sub-Advisers and recommends to the Board their hiring, retention or 
termination.\2\ Sub-Advisers recommended to the Board by the Manager 
are selected and approved by the Board, including a majority of the 
Independent Trustees. Each Sub-Adviser would have discretionary 
authority to invest the portion of a Series' assets assigned to it. The 
Manager compensates each Sub-Adviser out of the fees paid to the 
Manager under the Investment Advisory Agreement.
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    \2\ The Manager's recommendations are based, in part, on 
research provided by Trust Advisors, LLC (the ``Research 
Consultant''), an investment adviser registered under the Advisers 
Act and an affiliated person of the Manager. Pursuant to an 
agreement entered into between the Research Consultant, the Manager, 
and AIS, on behalf of Alpha Strategies (``Research Consultant 
Agreement''), the Research Consultant provides the Manager with 
research and information on Sub-Advisers, and receives a fee from 
the Manager out of the fees paid by the Series to the Manager.
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    3. Applicants request an order to permit the Manager, subject to 
Board approval, to enter into and materially amend Sub-Advisory 
Agreements without obtaining shareholder approval. The requested relief 
will not extend to the Research Consultant or to any Sub-Adviser that 
is an affiliated person, as defined in section 2(a)(3) of the Act, of 
AIS or the Manager, other than by reason of serving as a Sub-Adviser to 
one or more of the Series (``Affiliated Sub-Adviser'').
    4. Applicants also request an exemption from the various disclosure 
provisions described below that may require a Series to disclose fees 
paid by the Manager to each Sub-Adviser. An exemption is requested to 
permit each Series to disclose (as both a dollar amount and as a 
percentage of each Series' net assets): (a) the aggregate fees paid to 
the Manager and Affiliated Sub-Advisers; and (b) aggregate fees paid to 
Sub-Advisers other than Affiliated Sub-Advisers (``Aggregate Fee 
Disclosure''). For any Series that employs an Affiliated Sub-Adviser, 
the Series will provide separate disclosure of any fees paid to the 
Affiliated Sub-Adviser. Each Series also will provide separate 
disclosure of any fees paid to the Research Consultant.

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 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.

[[Page 68962]]

    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 (``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 provisions 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 state that their requested relief meets this standard 
for the reasons discussed below.
    7. Applicants assert that the shareholders are relying on the 
Manager's experience to select one or more Sub-Advisers best suited to 
achieve a Series' investment objectives. Applicants assert that, from 
the perspective of the investor, the role of the Sub-Advisers is 
comparable to that of the individual portfolio managers employed by 
traditional investment company advisory firms. Applicants state that 
requiring shareholder approval of each Sub-Advisory Agreement would 
impose costs and unnecessary delays on the Series, and may preclude the 
Manager from acting promptly in a manner considered advisable by the 
Board. Applicants note that the Investment Advisory Agreement, the 
Research Consultant Agreement, and any Sub-Advisory Agreement with an 
Affiliated Sub-Adviser will remain subject to section 15(a) of the Act 
and rule 18f-2 under the Act.
    8. Applicants assert that some Sub-Advisers use a ``posted'' rate 
schedule to set their fees. Applicants state that while Sub-Advisers 
are willing to negotiate fees that are lower than those posted on the 
schedule, they are reluctant to do so where the fees are disclosed to 
other prospective and existing customers. Applicants submit that the 
requested relief will encourage potential Sub-Advisers to negotiate 
lower sub-advisory fees with the Manager, the benefits of which are 
passed on to Series shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before any Series may rely on the requested order, the operation 
of the Series in the manner described in the application will be 
approved by a majority of the outstanding voting securities of the 
Series, as defined in the Act, or, in the case of a Series whose public 
shareholders purchased shares on the basis of a prospectus containing 
the disclosure contemplated by condition 2 below, by the sole initial 
shareholder before offering shares of the Series to the public.
    2. Each Series will disclose in its prospectus the existence, 
substance, and effect of any order granted pursuant to the application. 
In addition, each Series will hold itself out to the public as 
employing the management structure described in the application. The 
prospectus 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. Within 90 days of the hiring of any new Sub-Adviser, 
shareholders of the relevant Series will be furnished all information 
about the Sub-Adviser that would be contained in a proxy statement, 
except as modified to permit Aggregate Fee Disclosure. This information 
will include Aggregate Fee Disclosure and any change in such disclosure 
caused by the addition of a new Sub-Adviser. The Manager will meet this 
condition by providing shareholders, within 90 days of the hiring of a 
Sub-Adviser, an information statement meeting the requirements of 
Regulation 14C, Schedule 14C, and Item 22 of Schedule 14A under the 
Exchange Act, except as modified to permit Aggregate Fee Disclosure.
    4. 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 applicable Series.
    5. At all times, a majority of the Board will be Independent 
Trustees, and the nomination of new or additional Independent Trustees 
will be at the discretion of the then existing Independent Trustees.
    6. When a Sub-Adviser change is proposed for a Series with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
Board's minutes, that the change is in the best interests of the Series 
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. Independent counsel knowledgeable about the Act and the duties 
of Independent Trustees will be engaged to represent the Independent 
Trustees. The selection of such counsel will be within the discretion 
of the Independent Trustees.
    8. The Manager will provide the Board, no less frequently than 
quarterly, with information about the Manager's profitability on a per-
Series basis. The information will reflect the impact on profitability 
of the hiring or termination of any Sub-Adviser during the applicable 
quarter.
    9. Whenever a Sub-Adviser is hired or terminated, the Manager will 
provide the Board with information showing the expected impact on the 
Manager's profitability.
    10. The Manager will provide general management services to each 
Series, including overall supervisory responsibility for the general 
management and investment of each Series' portfolio securities, and, 
subject to review and approval by the Board, will: (a) Set each Series' 
overall investment strategies, (b) evaluate, select and recommend Sub-
Advisers to manage all or a part of a Series' assets, (c) allocate and, 
when appropriate, reallocate a Series' assets among multiple Sub-
Advisers; (d) monitor and evaluate the performance of Sub-Advisers, and 
(e) implement procedures reasonably designed to ensure that the Sub-
Advisers comply with the relevant

[[Page 68963]]

Series' investment objective, policies and restrictions.
    11. No trustee or officer of a Series, or member or officer of the 
Manager will own, directly or indirectly (other than through a pooled 
investment vehicle that is not controlled by any such person), any 
interest in a Sub-Adviser, except for: (a) ownership of interest in the 
Manager or any entity that controls, is controlled by, or is under 
common control with the Manager, 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.
    12. Each Series will disclose in its registration statement the 
Aggregate Fee Disclosure.
    13. The requested order will expire on the effective date of rule 
15a-5 under the Investment Company Act, if adopted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-30577 Filed 12-9-03; 8:45 am]
BILLING CODE 8010-01-P