[Federal Register Volume 64, Number 157 (Monday, August 16, 1999)]
[Notices]
[Pages 44560-44562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21191]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23940; 812-11382]
The Chapman Funds, Inc., et al.; Notice of Application
August 10, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order 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
[[Page 44561]]
the Act and certain disclosure requirements.
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SUMMARY OF APPLICATION: The requested order would permit applicants,
The Chapman Funds, Inc. (``Company'') and Chapman Capital Management
(``CCM''), to hire subadvisers and materially amend subadvisory
agreements without shareholder approval, and grant relief from certain
disclosure requirements.
FILING DATES: The application was filed on October 29, 1998, and was
amended on April 14, 1999. 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 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
September 7, 1999, 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, N.W., Washington,
D.C. 20549-0609; Applicants, World Trade Center-Baltimore, 28th Floor,
401 East Pratt Street, Baltimore, Maryland 21202.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at
(202) 942-0574 or Michael W. Mundt, 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, N.W.,
Washington, D.C. 20549-0102 (telephone (202) 942-8090).
Applicants' Representations
1. The Company is organized as a Maryland corporation and
registered under the Act as an open-end management investment company
which offers shares in seven series (collectively, the ``Funds''), each
of which has its own investment objectives, policies, and
restrictions.\1\ CCM is registered under the Investment Advisers Act of
1940 (``Advisers Act'') and is a subsidiary of Chapman Capital
Management Holdings, Inc. CCM serves as the investment adviser to each
Fund pursuant to advisory agreements between CCM and the Company
(``Advisory Agreements'').
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\1\ Applicants request that the relief also apply to all
subsequently registered open-end management investment companies
that in the future are advised by CCM or any entity controlling,
controlled by, or under common control with CCM and that use the
multi-manager structure described in this application (``Future
Companies''), and to any series of the Company or Future Companies
that may be created in the future. Applicants state that all
registered open-end management investment companies that currently
intend to rely on the requested order are named as applicants, and
any Future Company that relies on the order will comply with the
terms and conditions contained in the application.
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2. For certain Funds (``Multi-Manager Funds''), CCM will seek to
enhance performance and reduce market risk by allocating Fund assets
among one or more subadvisers (``Subadvisers'').\2\ Each Subadviser is
registered as an investment adviser under the Advisers Act. For the
Multi-Manager Funds, CCM will monitor the performance of both the total
Fund portfolio and the portion of the total Fund portfolio allocated to
each Subadviser and will reallocate Fund assets among Subadvisers, or
recommend to the Company's board of directors (``Board'') that the Fund
employ or terminate particular Subadvisers. Under agreements between
CCM and the Subadvisers (``Sub-Advisory Agreements''), the specific
investment decisions for each Multi-Manager Fund will be made by
Subadvisers subject to the general supervision of CCM and the Board.
The Funds pay investment advisory fees to CCM, and CCM will pay
Subadvisers out of its fees.
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\2\ On behalf of DEM Multi-Manager Equity Fund and DEM Multi-
Manager Bond Fund, CCM currently intends to enter into Sub-Advisory
Agreements with twelve Subadvisers and four Subadvisers,
respectively.
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3. Applicants request an exemption from section 15(a) of the Act
and rule 18f-2 under the Act to permit Subadvisers approved by the
Board to serve as Subadvisers for the Multi-Manager Funds, without the
necessity of obtaining shareholder approval. Shareholder approval would
continue to be required for any Subadviser that is an ``affiliated
person,'' as defined in section 2(a)(3) of the Act, of the Company or
CCM, other than by reason of serving as a Subadviser to one or more of
the Multi-Manager Funds (an ``Affiliated Subadviser'').
4. Applicants also request an exemption from the various disclosure
provisions described below that may require the Multi-Manager Funds to
disclose the fees paid by CCM to the Subadvisers. For each Fund, the
Company will disclose the following (both as a dollar amount and as a
percentage of the Fund's net assets): (1) Aggregate fees paid to CCM
and any Affiliated Subadvisers; and (2) aggregate fees paid to
Subadvisers other than Affiliated Subadvisers (``Limited Fee
Disclosure''). For any fund that employs an Affiliated Subadviser, the
Fund will provide separate disclosure of any fees paid to such
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 approved by a
majority of the investment company's outstanding voting shares. Rule
18f-2 under the Act provides that each series of class of stock in a
series company affected by a matter must approve the matter if the Act
requires shareholder approval.
2. Form N1-A is the registration statement used by open-end
investment companies. Items 3, 6(a)(1)(ii), and 15(a)(3) of Form N-1A
(and items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A prior to the
amendments effective June 1, 1998) require disclosure of the method and
amount of the investment adviser's compensation.
3. Form N-14 is the registration statement form for business
combinations involving open-end management investment companies. Item 3
of Form N-14 requires a fee table that shows current fees for the
registrant and the company being acquired, and pro forma fees, if
different, for the registrant after giving effect to the transaction.
4. 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''). Item 22(a)(3)(iv)
of Schedule 14A requires a proxy statement for a shareholder meeting at
which a new fee will be established or an existing fee will be
increased to include a table of the current and pro forma fees. Items
22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9), 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
[[Page 44562]]
proposed fees and the difference between the two fees.
5. 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 subadvisers.
6. 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.
7. Section 6(c) of the Act authorizes the Commission to exempt
persons or transactions from the provisions of the Act 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 believe
that their requested relief meets this standard for the reasons
discussed below.
8. Applicants assert that investors in a Multi-Manager Fund rely on
CCM to select appropriate Subadvisers. Applicants contend that the role
of the Subadvisers, from the perspective of the investor, will be
comparable to that of the individual portfolio managers employed by
other investment advisory firms. Applicants note that the Advisory
Agreements will continue to be subject to section 15 of the Act and
rule 18f-2 under the Act.
9. Applicants assert that the information provided in the Limited
Fee Disclosure will permit each investor to determine whether the fees
for investment advisory services are competitive. In addition,
applicants contend that some Subadvisers use a ``posted'' rate schedule
to set their fees and may be unwilling to serve as Subadvisers at any
rate other than their ``posted'' fee rates, unless the rates negotiated
for the Funds are not publicly disclosed. Applicants state that
requiring disclosure of Subadvisory fees would deprive CCM of its
bargaining power to negotiate lower rates.
Applicants' Conditions
Applicants agree that the order shall 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 outstanding voting securities, as defined in the Act,
of the Fund, or, in the case of a new Fund whose public shareholders
purchased shares on the basis of a prospectus containing the disclosure
contemplated by condition 2 below, by the sole initial shareholder(s)
before offering shares of such Fund to the public.
2. Any Fund 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, such Fund will hold itself
out to the public as employing the management structure described in
the application. The prospectus will prominently disclose that CCM has
ultimate responsibility to oversee Subadvisers and to recommend their
hiring, termination and replacement.
3. CCM will provide general management and administration services
to any Fund relying on the requested order, including overall
supervisory responsibility for the general management and investment of
such Fund, and subject to the review and approval of the Board will (1)
set the overall investment strategies of the Fund; (2) evaluate, select
and recommend Subadvisers; (3) allocate, and when appropriate,
reallocate, the assets of the Fund among Subadvisers; (4) monitor and
evaluate the investment performance of the Subadvisers; and (5)
implement procedures reasonably designed to ensure that the Subadvisers
comply with the investment objectives, policies, and restrictions of
the Fund.
4. At all times, a majority of the Board will be persons who are
not ``interested persons'' of the Company as defined in section
2(a)(19) of the Act (``Independent Directors''), and the nomination of
new or additional Independent Directors will be placed within the
discretion of the then existing Independent Directors.
5. CCM will not enter into a Sub-Advisory Agreement with an
Affiliated Subadviser without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Fund.
6. When a change of a Subadviser is proposed for a Fund with an
Affiliated Subadviser, the Board, including a majority of the
Independent Directors, will make a separate finding, reflected in the
Board minutes, that any such change of Subadviser is in the best
interest of the Fund and its shareholders, and does not involve a
conflict of interest from which CCM or the Affiliated Subadviser
derives an inappropriate advantage.
7. No director or officer of the Company or director or officer of
CCM will own directly or indirectly (other than through a pooled
investment vehicle that is not controlled by any such director or
officer) any interest in a Subadviser except for ownership of interests
in CCM or any entity that controls, is controlled by, or is under
common control with CCM, or ownership of less than 1% of the
outstanding securities of any class of equity or debt securities of any
publicly traded company that is either a Subadviser or controls, is
controlled by, or is under common control with a Subadviser.
8. Within ninety days of the hiring of any Subadviser, the affected
Fund will furnish its shareholders with all information about the new
Subadviser that would be included in a proxy statement, except as
modified by the order to permit Limited Fee Disclosure. Such
information will include Limited Fee Disclosure and any change in such
disclosure caused by the addition of a new Subadviser. The Fund will
meet this condition by providing shareholders, within ninety days of
the hiring of a Subadviser, with an information statement meeting the
requirements of Regulation 14C and Schedule 14C under the Exchange Act.
The information statement also will meet the requirements of Item 22 of
Schedule 14A under the Exchange Act, except as modified by the order to
permit Limited Fee Disclosure.
9. The Company will disclose in its registration statement the
Limited Fee Disclosure.
10. CCM will provide the Board, no less frequently than quarterly,
information about CCM's profitability for each Fund that relies on the
requested relief. Such information will reflect the impact on
profitability of the hiring or termination of any Subadviser during the
applicable quarter.
11. Whenever a Subadviser is hired or terminated, CCM will provide
the Board information showing the expected impact on CCM's
profitability.
12. At all times, independent counsel knowledgeable about the Act
and the duties of Independent Directors will be engaged to represent
the Independent Directors. The selection of such counsel will remain
within the discretion of the Independent Directors.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21191 Filed 8-13-99; 8:45 am]
BILLING CODE 8010-01-M
