[Federal Register Volume 78, Number 33 (Tuesday, February 19, 2013)]
[Notices]
[Pages 11702-11705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03686]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30381; File No. 812-14027]
AdvisorShares Investments, LLC and AdvisorShares Trust; Notice of
Application
February 12, 2013.
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 from certain
disclosure requirements.
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SUMMARY: Summary of Application: Applicants request an order that would
permit them to enter into and materially amend subadvisory agreements
without shareholder approval and would grant relief from certain
disclosure requirements.
Applicants: AdvisorShares Investments, LLC (the ``Advisor'') and
AdvisorShares Trust (the ``Trust'').
DATES: Filing Dates: The application was filed on April 16, 2012, and
amended on October 11, 2012 and February 6, 2013.
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 March 8, 2013, 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 who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants:
AdvisorShares Investments, LLC, 2 Bethesda Metro Center, Suite 1330,
Bethesda, MD 20814.
FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at
(202) 551-6873, or Mary Kay Frech, Branch Chief, at (202) 551-6821
(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 via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is organized as a Delaware statutory trust and is
registered under the Act as an open-end management investment company.
The Trust currently offers 18 series (each, a ``Fund'') and may offer
additional Funds in the future.\1\ Each existing Fund operates as an
actively-managed exchange-traded fund in reliance on previously-granted
exemptive orders.\2\
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\1\ Applicants also request relief with respect to future Funds
and any other existing or future registered open-end management
investment company or series thereof that (a) is advised by the
Advisor or an entity controlling, controlled by, or under common
control with the Advisor or its successors (each such entity
included in the term ``Advisor''); (b) uses the multi-manager
structure described in the application; and (c) complies with the
terms and conditions of the application (included in the term
``Funds''). Every existing entity that currently intends to rely on
the requested order is named as an applicant. For purposes of the
requested order, ``successor'' is limited to an entity or entities
that result from a reorganization into another jurisdiction or a
change in the type of business organization. If the name of any Fund
contains the name of a Sub-Advisor (as defined below), the name of
the Advisor, or a trademark or trade name that is owned by the
Advisor, will precede the name of the Sub-Advisor.
\2\ AdvisorShares Investments, LLC and AdvisorShares Trust,
Investment Company Act Release Nos. 29264 (May 6, 2010) (notice) and
29291 (May 28, 2010) (order); and AdvisorShares Investments, LLC and
AdvisorShares Trust, Investment Company Act Release Nos. 28568 (Dec.
23, 2008) (notice) and 28822 (Jul. 20, 2009) (order).
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2. The Advisor, a Delaware limited liability company, is registered
as an investment adviser under the Investment Advisers Act of 1940 (the
``Advisers Act''). The Advisor serves as the investment adviser to each
of the Funds pursuant to an investment advisory agreement with the
Trust, with respect to each Fund (the ``Investment Advisory
Agreement''). The Investment Advisory Agreement was approved by the
Trust's board of trustees (the ``Board''),\3\ including a majority of
the trustees who are not ``interested persons,'' as defined in section
2(a)(19) of the Act (the ``Independent Trustees''), and by the initial
shareholder of each Fund in the manner required by sections 15(a) and
15(c) of the Act and rule 18f-2 under the Act.
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\3\ The term ``Board'' also includes the board of trustees or
directors of a future Trust and future Fund, if different.
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3. Under the terms of the Investment Advisory Agreement, the
Advisor, subject to the oversight of the Board, manages the investment
operations and determines the composition of the portfolio of each
Fund, including the purchase, retention and disposition of the
securities and other instruments held by the Fund, in accordance with
the investment objectives and policies of the Fund. For its services to
each Fund, the Advisor receives a fee from that Fund as specified in
the Investment Advisory Agreement computed as a percentage of the
Fund's average daily net assets. The Investment Advisory Agreement also
permits the Advisor, subject to the approval of the Board, including a
majority of the Independent Trustees, and the shareholders of the
applicable Fund (if required by applicable law), to engage one or more
unaffiliated investment sub-advisers (``Sub-Advisors'') to manage all
or a portion of the assets of any Fund. The Advisor has entered into
subadvisory agreements (``Sub-Advisory Agreements'') with various Sub-
Advisors to provide investment advisory services to the Funds.\4\ Each
Sub-Advisor is, and each future Sub-Advisor will be, an ``investment
adviser'' as defined in section 2(a)(20)(B) of the Act, as well as
registered as an investment adviser under the Advisers Act. The Advisor
will evaluate, select and recommend Sub-Advisors to the Board, monitor
and evaluate each Sub-Advisor's investment program, and review each
Fund's compliance with its investment objective, policies and
restrictions. The Advisor also will recommend to the Board whether Sub-
Advisory Agreements should be renewed, modified or terminated. The
Advisor currently compensates each Sub-Advisor out of the fee paid by a
Fund to the Advisor under the Investment Advisory Agreement. However,
applicants note that future arrangements with one or more Sub-Advisors
may be implemented whereby a Fund compensates a Sub-Advisor directly.
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\4\ Currently, the Advisor has entered into Sub-Advisory
Agreements with the following Sub-Advisors: Accuvest Global
Advisors, WCM Investment Management, Cambria Investment Management,
L.P., Peritus I Asset Management, LLC, Ranger Alternative
Management, L.P., Madrona Funds, LLC, American Wealth Management,
Trim Tabs Asset Management, LLC, Rockledge Advisors, LLC, Your
Source Financial, PLC, Baldwin Brothers Inc., Community Capital
Management Inc., First Affirmative Financial Network LLC, Reynders,
McVeigh Capital Management, LLC, Commerce Asset Management, LLC,
Partnervest Advisory Services, LLC, Pring Turner Capital Group,
Newfleet Asset Management, LLC, and Treesdale Partners LLC.
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4. Applicants request an order to permit the Funds, subject to
Board approval, to engage Sub-Advisors to manage all or a portion of
the assets of a Fund pursuant to a Sub-Advisory Agreement and
materially amend Sub-Advisory Agreements without obtaining shareholder
approval. The requested relief will not extend to any Sub-Advisor that
is an affiliated person, as defined in section 2(a)(3) of the Act, of a
Fund or the Advisor, other than by reason of serving as Sub-Advisor to
a Fund (``Affiliated Sub-Advisor'').
5. Applicants also request an order exempting each Fund from
certain disclosure provisions described below that may require the
Funds to disclose fees paid by the Advisor or a Fund to each Sub-
Advisor. Applicants seek an order to permit each Fund to disclose (as a
dollar amount and a percentage of
[[Page 11704]]
a Fund's net assets) only: (a) the aggregate fees paid to the Advisor
and any Affiliated Sub-Advisors; and (b) the aggregate fees paid to
Sub-Advisors other than Affiliated Sub-Advisors (collectively, the
``Aggregate Fee Disclosure''). A Fund that employs an Affiliated Sub-
Advisor will provide separate disclosure of any fees paid to the
Affiliated Sub-Advisor.
6. The Funds will inform shareholders of the hiring of a new Sub-
Advisor pursuant to the following procedures (``Modified Notice and
Access Procedures''): (a) within 90 days after a new Sub-Advisor is
hired for any Fund, that Fund will send its shareholders either a
Multi-manager Notice or a Multi-manager Notice and Multi-manager
Information Statement; \5\ and (b) the Fund will make the Multi-manager
Information Statement available on the Web site identified in the
Multi-manager Notice no later than when the Multi-manager Notice (or
Multi-manager Notice and Multi-manager Information Statement) is first
sent to shareholders, and will maintain it on that Web site for at
least 90 days.
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\5\ A ``Multi-manager Notice'' will be modeled on a Notice of
Internet Availability as defined in rule 14a-16 under the Securities
Exchange Act of 1934 (``Exchange Act''), and specifically will,
among other things: (a) Summarize the relevant information regarding
the new Sub-Advisor; (b) inform shareholders that the Multi-manager
Information Statement is available on a Web site; (c) provide the
Web site address; (d) state the time period during which the Multi-
manager Information Statement will remain available on that Web
site; (e) provide instructions for accessing and printing the Multi-
manager Information Statement; and (f) instruct the shareholder that
a paper or email copy of the Multi manager Information Statement may
be obtained, without charge, by contacting the Funds.
A ``Multi-manager Information Statement'' will meet the
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule
14A under the Exchange Act for an information statement, except as
modified by the requested order to permit Aggregate Fee Disclosure.
Multi-manager Information Statements will be filed electronically
with the Commission via the EDGAR system.
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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 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 investment company affected by a matter must
approve that matter if the Act requires shareholder approval.
2. Form N-1A is the registration statement used by open-end
investment companies. Item 19(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 a registered investment company to comply with Schedule 14A under
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. Regulation S-X sets forth the requirements for financial
statements required to be included as part of a registered investment
company's registration statement and shareholder reports filed with the
Commission. Sections 6-07(2)(a), (b) and (c) of Regulation S-X require
a registered investment company to include in its financial statement
information about the investment advisory fees.
5. 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 the requested relief meets this standard for
the reasons discussed below.
6. Applicants assert that the shareholders expect the Advisor,
subject to the review and approval of the Board, to select the Sub-
Advisors who are best suited to achieve the Fund's investment
objective. Applicants assert that, from the perspective of the
shareholder, the role of the Sub-Advisor is substantially equivalent to
the role of the individual portfolio managers employed by traditional
investment company advisory firms. Applicants state that requiring
shareholder approval of each Subadvisory Agreement would impose
unnecessary delays and expenses on the Funds, and may preclude the Fund
from acting promptly when the Board and the Advisor believe that a
change would benefit a Fund and its shareholders. Applicants note that
the Investment Advisory Agreement and any Sub-Advisory Agreement with
an Affiliated Sub-Advisor (if any) will continue to be subject to the
shareholder approval requirements of section 15(a) of the Act and rule
18f-2 under the Act.
7. Applicants assert that the requested disclosure relief would
benefit shareholders of the Funds because it would improve the
Advisor's ability to negotiate the fees paid to Sub-Advisors.
Applicants state that the Advisor may be able to negotiate rates that
are below a Sub-Advisor's ``posted'' amounts, if the Advisor is not
required to disclose the Sub-Advisors' fees to the public. Applicants
submit that the requested relief will encourage Sub-Advisors to
negotiate lower subadvisory fees with the Advisor if the lower fees are
not required to be made public.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions: \6\
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\6\ Applicants will only comply with conditions 11, 12, 13, and
14 if they rely on the relief that would allow them to provide
Aggregate Fee Disclosure.
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1. Before a Fund may rely on the 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 initial shareholder(s) before
offering the Fund's shares to the public.
2. Each Fund that relies on the order will disclose in its
prospectus the existence, substance, and effect of the order. Each Fund
relying on the order will hold itself out to the public as utilizing
the manager of managers structure described in the application. The
prospectus will prominently disclose that the Advisor has ultimate
responsibility (subject to oversight by the Board) to oversee the Sub-
Advisors and recommend their hiring, termination, and replacement.
3. Each Fund will inform shareholders of the hiring of a new Sub-
Advisor within 90 days after the hiring of the new Sub-Advisor pursuant
to the Modified Notice and Access Procedures.
4. The Advisor will not enter into a Sub-Advisory Agreement with
any Affiliated Sub-Advisor without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Fund.
5. At all times, at least 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.
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6. Whenever a Sub-Advisor change is proposed for a Fund with an
Affiliated Sub-Advisor, the Board, including a majority of the
Independent Trustees, will make a separate finding, reflected in the
applicable Board minutes, that such change is in the best interests of
such Fund and its shareholders and does not involve a conflict of
interest from which the Advisor or an Affiliated Sub-Advisor derives an
inappropriate advantage.
7. The Advisor will provide general management services to each
Fund relying on the order, including overall supervisory responsibility
for the general management and investment of the Fund's assets and,
subject to review and approval by the Board, will: (a) set the Fund's
overall investment strategies; (b) evaluate, select and recommend Sub-
Advisors to provide purchase and sale recommendations to the Advisor or
investment advice to all or a portion of the Fund's assets; (c)
allocate and, when appropriate, reallocate the Fund's assets among
multiple Sub-Advisors; (d) monitor and evaluate the Sub-Advisors'
performance; and (e) implement procedures reasonably designed to ensure
that Sub-Advisor(s) comply with the relevant Fund's investment
objectives, policies and restrictions.
8. No trustee or officer of a Fund relying on the order or director
or officer of the Advisor will own directly or indirectly (other than
through a pooled investment vehicle that is not controlled by such
person) any interest in a Sub-Advisor except for (a) ownership of
interests in the Advisor or any entity that controls, is controlled by
or is under common control with the Advisor; 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-Advisor or an entity
that controls, is controlled by or is under common control with a Sub-
Advisor.
9. For any Fund that utilizes a Sub-Advisor and pays fees to a Sub-
Advisor directly from Fund assets, any changes to a Sub-Advisory
Agreement that would result in an increase in the total management and
advisory fees payable by that Fund will be required to be approved by
the shareholders of the Fund.
10. In the event the Commission adopts a rule under the Act
providing substantially similar relief to that requested in the
application, the requested order will expire on the effective date of
that rule.
11. Each Fund relying on the order will disclose in its
registration statement the Aggregate Fee Disclosure.
12. 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.
13. The Advisor will provide the Board, no less frequently than
quarterly, with information about the profitability of the Advisor on a
per-Fund basis for each Fund relying on the order. The information will
reflect the impact on profitability of the hiring or termination of any
Sub-Advisor during the applicable quarter.
14. Whenever a Sub-Advisor is hired or terminated, the Advisor will
provide the Board with information showing the expected impact on the
profitability of the Advisor.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03686 Filed 2-15-13; 8:45 am]
BILLING CODE 8011-01-P