[Federal Register Volume 63, Number 219 (Friday, November 13, 1998)]
[Notices]
[Pages 63515-63516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30406]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23527; 812-11346]
Fundamental Funds, Inc., et al.; Notice of Application
November 6, 1998.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section 15(a)
of the Act.
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SUMMARY OF THE APPLICATION: The requested order would permit the
implementation, without prior shareholder approval, of new investment
advisory agreements (``Interim Agreements'') for a period beginning on
the date the requested order is issued (``Order Date'') and continuing
through the date the Interim Agreements are approved or disapproved by
the shareholders of certain registered investment companies, but in no
event longer than 120 days from the Order Date (``Interim Period'').
The order also would permit the payment of all fees earned under the
Interim Agreements following shareholder approval.
APPLICANTS: Fundamental Funds, Inc. (``Fundamental Funds''),
Fundamental Fixed-Income Fund (``Fixed-Income Fund''), The California
Muni Fund (``Muni Fund,'' together with Fundamental Funds and Fixed-
Income Fund, the ``Funds''), and Cornerstone Equity Advisors, Inc.
(``Cornerstone'').
FILING DATES: The application was filed on October 8, 1998. Applicants
have agreed to file an amendment during the notice period, the
substance of which is reflected in this notice.
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 November 27, 1998, 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, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Funds, 67 Wall Street, New York,
NY 10005. Cornerstone, 67 Wall Street, New York, NY 10005.
FOR FURTHER INFORMATION CONTACT:
Kathleen L. Knisely, Staff Attorney, at (202) 942-0517, or Nadya B.
Roytblat, Assistant Director, 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 fee at the
Commission's Public Reference Branch, 450 Fifth Street, N.W.,
Washington, D.C. 20549 (tel. 202-942-8090).
Applicants' Representations
1. The Funds are registered under the Act as open-end management
investment companies. Fundamental Funds, a Maryland corporation, is
organized as a series investment company and currently offers a single
portfolio. Fixed-Income Fund, a Massachusetts business trust, is
organized as a series company and currently offers three portfolios.
Muni Fund, a Massachusetts business trust, offers a single portfolio.
Cornerstone is registered as an investment adviser under the Investment
Advisers Act of 1940.
2. On May 31, 1998, the boards of directors of the Funds
(``Boards''), including a majority of directors who are not
``interested persons'' under section 2(a)(19) of the Act, decided not
to renew the Funds' investment advisory agreement with Fundamental
Portfolio Advisors, Inc. (``FPA Agreements''). Instead, the Boards
entered into an interim investment advisory agreement with Tocqueville
Asset Management L.P. (``Tocqueville'') in reliance upon rule 15a-4
under the Act. Tocqueville's selection was made pending approval by the
Funds' shareholders of an agreement and plan of reorganization
(``Tocqueville Reorganization'') whereby assets of each of the Funds
would be transferred to a separate newly-created series of The
Tocqueville Trust. In August 1998, the Boards decided to abandon the
plans for the Tocqueville Reorganization and pursue other investment
management arrangements.
3. On September 25, 1998, in accordance with section 15(c) of the
Act, the Boards approved the Interim Agreements with Cornerstone
pending its approval as successor adviser to the Funds and voted to
recommend that the Interim Agreements be submitted to Funds'
shareholders for approval.\1\ Applicants anticipate that the Funds will
distribute the proxy materials to the Funds' sharholders in November,
1998 and hold the shareholder meeting no later than January 26, 1999.
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\1\ Each Board consisted solely of two disinterested director.
Each Board currently consists of a single disinterested director.
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4. Applicants request an exemption to permit: (1) the
implementation prior to obtaining shareholder approval, of the Interim
Agreements for a period beginning on the Order Date and continuing
through the date the Interim
[[Page 63516]]
Agreements are approved or disapproved by the shareholders of the
Funds, but in no event longer than 120 days from the Order Date; and
(ii) Cornerstone to receive, upon approval of the Interim Agreements by
the Funds' shareholders, any and all fees earned under the Interim
Agreements during the Interim Period. Applicants state that the Interim
Agreements will be the same as the FPA Agreements that had been
approved by the Funds' shareholders, except with respect to the
parties, the effective and termination dates, and the inclusion of
escrow arrangements described below.
5. Fees earned under the Interim Agreements during the Interim
Period will be maintained in an interest-bearing escrow account with an
unaffiliated bank acting as escrow agent. The escrow agent will release
the amounts held in the escrow account (including any interest earned):
(i) to Cornerstone, only upon approval of the Interim Agreements by the
shareholders of the relevant Fund; or (ii) to the relevant Fund, in the
absence of approval by its shareholders. Before amounts are released
from the escrow account, the Boards will be notified.
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in pertinent part, that it
shall be unlawful for any person to serve or act as investment adviser
of a registered investment company except pursuant to a written
contract that has been approved by the vote of a majority of the
outstanding voting securities of the registered investment company.
Applicants state that, as a result of the timing of Cornerstone's
selection as the new investment adviser, the Funds were unable to
solicit shareholder approval of the Interim Agreements.
2. Rule 15a-4 under the Act provides, in pertinent part, that if an
investment advisor contract with a registered investment company is
terminated by assignment, the adviser may continue to serve for 120
days under a written contract that has not been approved by the
company's shareholders, provided that: (i) the new contract is approved
by that company's board of directors (including a majority of non-
interested directors); and (i) the compensation to be paid under the
new contract does not exceed the compensation that would have been paid
under the contract most recently approved the company's shareholders.
Applicants state that they already have relied on rule 15a-4 for a 120
day period and therefore require a Commission order for the Interim
Period.
3. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction from any provision of the Act, if
and to the extent that 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 states that the requested relief meets this standard.
4. Applicants represent that the Interim Agreements will have the
same terms and conditions as the FPA Agreements, except for the
parties, dates of commencement and termination and the inclusion of
escrow arrangements. Applicants also assert that each Fund will
receive, during the Interim Period, the same investment advisory
services, provided in substantially the same manner and at the same fee
levels, and by personnel having substantially equivalent
Qualifications, as it received under the FPA Agreements. Applicants
state that, in the event there is any material change in the personnel
providing material services, Cornerstone will apprise and consult the
Boards to assure that the Boards are satisfied that the services
provided by Cornerstone will not be diminished in scope or quality.
5. Applicants also state that the Boards diligently discharged
their responsibilities by closely examining and reviewing numerous
possibilities for management of the Funds during the period that the
Funds relied on rule 15a-4. In light of various business
considerations, operational issues, and due diligence issues, the
selection of a new interim investment adviser was time-consuming.
Applicants state, however, that the Boards conducted this search in a
timely and efficient manner.
6. Applicants contend that to deprive Cornerstone of its fees for
the Interim Period would be an unduly harsh and unreasonable penalty.
Applicants note that the fees payable to Cornerstone under the Interim
Agreements will not be released to Cornerstone by the escrow agent
without the approval of the Funds' shareholders.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. The Interim Agreements will have substantially identical terms
and conditions as the FPA Agreements except for the parties, dates of
commencement and termination and escrow provisions.
2. Fees earned by Cornerstone in respect of the Interim Agreements
during the Interim Period will be paid into an interest-bearing escrow
account with an unaffiliated escrow agent, and amounts in the account
(including interest earned on such paid fees) will be paid (a) to
Cornerstone only upon approval of the related Fund shareholder, or (b)
to the Funds, in the absence of such approval by the shareholders of
the Funds.
3. Each Fund will hold a meeting of shareholders to vote on
approval of the Interim Agreements on or before the 120th day following
the Order Date.
4. Cornerstone will pay the cost of soliciting shareholder approval
of the Interim Agreements.
5. Cornerstone will take all appropriate steps so that the scope
and quality of advisory and other services provided to the Funds under
the Interim Agreements will be at least equivalent, in the judgment of
the Boards, to the scope and quality of services that were provided
under the FPA Agreements. If personnel providing material services
during the Interim Period change materially. Cornerstone will apprise
and consult the Boards to assure that the Boards are satisfied that the
services provided will not be diminished in scope or quality.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30406 Filed 11-2-98; 8:45 am]
BILLING CODE 8010-01-M
