[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 15978-15982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05759]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30416; File No. 812-14076]
Blackstone Alternative Investment Funds, et al.; Notice of
Application
March 7, 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 of Application: Applicants request an order that would
permit them to enter into and materially amend subadvisory agreements
with Wholly-Owned Sub-Advisors (as defined below) and non-affiliated
sub-advisors without shareholder approval and would grant relief from
certain disclosure requirements.
Applicants: Blackstone Alternative Investment Funds (the ``Trust'')
and Blackstone Alternative Asset Management L.P. (``BAAM'').
[[Page 15979]]
Filing Dates: The application was filed on September 12, 2012, and
amended on January 17, 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 April 1, 2013, 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants,
345 Park Avenue, 28th Floor, New York, NY 10154.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at
(202) 551-6876, 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 Massachusetts business trust and is
registered under the Act as an open-end management investment company.
The Trust may offer one or more series of shares (each, a ``Series'')
with its own distinct investment objectives, policies and
restrictions.\1\ Each Series has, or will have, as its investment
adviser, BAAM, or another investment adviser controlling, controlled by
or under common control with BAAM or its successors (each, an
``Advisor'').\2\ BAAM, a Delaware limited partnership, is an indirect,
wholly-owned subsidiary of The Blackstone Group L.P. (``Blackstone'').
Blackstone is an alternative asset management and financial services
company that specializes in private equity, real estate and credit and
marketable alternative investment strategies, as well as financial
advisory services, such as mergers and acquisitions, restructurings and
reorganizations, and private placements.\3\
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\1\ The Trust currently consists of a single Series, the
Blackstone Alternative Multi-Manager Fund.
\2\ Each Advisor is, or will be, registered as an investment
adviser under the Investment Advisers Act of 1940 (``Advisers
Act''). For purposes of the requested order, ``successor'' is
limited to an entity that results from a reorganization into another
jurisdiction or a change in the type of business organization.
\3\ Applicants request that the relief apply to applicants, as
well as to any future Series and any other existing or future
registered open-end management investment company or series thereof
that is advised by an Advisor, uses the multi-manager structure
described in the application, and complies with the terms and
conditions of the application (``Subadvised Series''). All
registered open-end investment companies that currently intend to
rely on the requested order are named as applicants. Any entity that
relies on the requested order will do so only in accordance with the
terms and conditions contained in the application. If the name of
any Subadvised Series contains the name of a Sub-Advisor (as defined
below), the name of the Advisor that serves as the primary adviser
to the Subadvised Series, or a trademark or trade name that is owned
by or publicly used to identify that Advisor, will precede the name
of the Sub-Advisor.
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2. An Advisor will serve as the investment adviser to each Series
pursuant to an investment advisory agreement with the Trust
(``Investment Management Agreement''). The Investment Management
Agreement will be approved by the board of trustees of the Trust
(``Board''),\4\ including a majority of the members of the Board who
are not ``interested persons,'' as defined in section 2(a)(19) of the
Act, of the Series or the Advisor (``Independent Board Members'') and
by the shareholders of the relevant Series as required by sections
15(a) and 15(c) of the Act and rule 18f-2 thereunder. The terms of
these Investment Management Agreements will comply with section 15(a)
of the Act.
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\4\ The term ``Board'' also includes the board of trustees or
directors of a future Subadvised Series.
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3. Under the terms of each Investment Management Agreement, the
Advisor, subject to the supervision of the Board, will provide
continuous investment management of the assets of each Series. The
Advisor will periodically review a Series' investment policies and
strategies, and based on the need of a particular Series may recommend
changes to the investment policies and strategies of the Series for
consideration by the Board. For its services to each Series under the
applicable Investment Management Agreement, the Advisor will receive an
investment management fee from that Series based on either the average
net assets of that Series or that Series' investment performance over a
particular period compared to a benchmark. Each Investment Management
Agreement will provide that the Advisor may, subject to the approval of
the Board, including a majority of the Independent Board Members, and
the shareholders of the applicable Subadvised Series (if required),
delegate portfolio management responsibilities of all or a portion of
the assets of a Subadvised Series to one or more Sub-Advisors.\5\
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\5\ A ``Sub-Advisor'' is (a) an indirect or direct ``wholly-
owned subsidiary'' (as such term is defined in the Act) of the
Advisor for that Series; (b) a sister company of the Advisor for
that Series that is an indirect or direct ``wholly-owned
subsidiary'' (as such term is defined in the Act) of the same
company that, indirectly or directly, wholly owns the Advisor (each
of (a) and (b), a ``Wholly-Owned Sub-Advisor'' and collectively, the
``Wholly-Owned Sub-Advisors''), or (c) an investment sub-advisor for
that Series that is not an ``affiliated person'' (as such term is
defined in section 2(a)(3) of the Act) of the Series or the Advisor,
except to the extent that an affiliation arises solely because the
sub-advisor serves as a sub-advisor to a Series (each, a ``Non-
Affiliated Sub-Advisor'').
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4. Applicants request an order to permit the Advisor, subject to
the approval of the Board, including a majority of the Independent
Board Members, to, without obtaining shareholder approval: (i) Select
Sub-Advisors to manage all or a portion of the assets of a Series and
enter into Sub-Advisory Agreements (as defined below) with the Sub-
Advisors, and (ii) materially amend Sub-Advisory Agreements with the
Sub-Advisors.\6\ The requested relief will not extend to any sub-
advisor, other than a Wholly-Owned Sub-Advisor, who is an affiliated
person, as defined in section 2(a)(3) of the Act, of the Subadvised
Series or of the Advisor, other than by reason of serving as a sub-
advisor to one or more of the Subadvised Series (``Affiliated Sub-
Advisor'').
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\6\ Shareholder approval will continue to be required for any
other sub-advisor change (not otherwise permitted by rule or other
action of the Commission or staff) and material amendments to an
existing Sub-Advisory Agreement with any sub-advisor other than a
Non-Affiliated Sub-Advisor or a Wholly-Owned Sub-Advisor (all such
changes referred to as ``Ineligible Sub-Advisor Changes'').
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5. Pursuant to each Investment Management Agreement, the Advisor
will have overall responsibility for the management and investment of
the assets of each Subadvised Series. These responsibilities will
include recommending the removal or replacement of Sub-Advisors,
determining the portion of that Subadvised Series' assets to be managed
by any given Sub-Advisor and reallocating those assets as necessary
from time to time.
6. The Advisor may enter into sub-advisory agreements with various
Sub-Advisors (``Sub-Advisory Agreements'')
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to provide investment management services to the Subadvised Series. The
terms of each Sub-Advisory Agreement will comply fully with the
requirements of section 15(a) of the Act and will be approved by the
Board, including a majority of the Independent Board Members and the
shareholders of the Subadvised Series, in accordance with sections
15(a) and 15(c) of the Act and rule 18f-2 thereunder. The Sub-Advisors,
subject to the supervision of the Advisor and oversight of the Board,
will determine the securities and other investments to be purchased or
sold by a Subadvised Series and place orders with brokers or dealers
that they select. The Advisor will compensate each Sub-Advisor out of
the fee paid to the Advisor under the relevant Investment Management
Agreement.
7. Subadvised Series 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 Subadvised Series, that Subadvised Series will send its
shareholders either a Multi-manager Notice or a Multi-manager Notice
and Multi-manager Information Statement;) \7\ and (b) the Subadvised
Series will make the Multi-manager Information Statement available on
the website 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 website for at least 90 days. In the circumstances described
in the application, a proxy solicitation to approve the appointment of
new Sub-Advisors provides no more meaningful information to
shareholders than the proposed Multi-manager Information Statement.
Applicants state that each Board would comply with the requirements of
sections 15(a) and 15(c) of the Act before entering into or amending
Sub-Advisory Agreements.
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\7\ 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 (except as modified to permit Aggregate Fee
Disclosure (as defined below); (b) inform shareholders that the
Multi-manager Information Statement is available on a website; (c)
provide the website address; (d) state the time period during which
the Multi-manager Information Statement will remain available on
that website; (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 Subadvised Series.
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 order to permit Aggregate Fee Disclosure. Multi-
manager Information Statements will be filed with the Commission via
the EDGAR system.
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8. Applicants also request an order exempting the Subadvised Series
from certain disclosure obligations that may require each Subadvised
Series to disclose fees paid by the Advisor to each Sub-Advisor.
Applicants seek relief to permit each Subadvised Series to disclose (as
a dollar amount and a percentage of the Subadvised Series' net assets):
(a) The aggregate fees paid to the Advisor and any Wholly-Owned Sub-
Advisors; (b) the aggregate fees paid to Non-Affiliated Sub-Advisors;
and (c) the fee paid to each Affiliated Sub-Advisor (collectively, the
``Aggregate Fee Disclosure'').
Applicants' Legal Analysis
1. Section 15(a) of the Act states, in 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, which
contract, whether with such registered company or with an investment
adviser of such registered company, has been approved by the vote of a
majority of the outstanding voting securities of such registered
company.'' 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 a registered
investment company to disclose in its statement of additional
information the method of computing the ``advisory fee payable'' by the
investment company, including the total dollar amounts that the
investment company ``paid to the adviser (aggregated with amounts paid
to affiliated advisers, if any), and any advisers who are not
affiliated persons of the adviser, under the investment advisory
contract for the last three fiscal years.''
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 fee,'' 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 by order
upon application may conditionally or unconditionally 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.
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 in the best position to achieve the Subadvised Series'
investment objective. Applicants assert that, from the perspective of
the shareholder, the role of the Sub-Advisors is substantially
equivalent to the role of the individual portfolio managers employed by
an investment adviser to a traditional investment company. Applicants
believe that permitting the Advisor to perform the duties for which the
shareholders of the Subadvised Series are paying the Advisor--the
selection, supervision and evaluation of the Sub-Advisors--without
incurring unnecessary delays or expenses is appropriate in the interest
of the Subadvised Series' shareholders and will allow such Subadvised
Series to operate more efficiently. Applicants state that each
Investment Management Agreement will continue to be fully subject to
section 15(a) of the Act and rule 18f-2 under the Act and approved by
the Board, including a majority of the Independent Board Members, in
the manner required by sections 15(a) and 15(c) of the Act. Applicants
are not seeking an exemption with respect to the Investment Management
Agreements.
7. Applicants assert that disclosure of the individual fees that
the Advisor
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would pay to the Sub-Advisors of Subadvised Series that operate under
the multi-manager structure described in the application would not
serve any meaningful purpose. Applicants contend that the primary
reasons for requiring disclosure of individual fees paid to Sub-
Advisors are to inform shareholders of expenses to be charged by a
particular Subadvised Series and to enable shareholders to compare the
fees to those of other comparable investment companies. Applicants
believe that the requested relief satisfies these objectives because
the advisory fee paid to the Advisor will be fully disclosed and,
therefore, shareholders will know what the Subadvised Series' fees and
expenses are and will be able to compare the advisory fees a Subadvised
Series is charged to those of other investment companies. Applicants
assert that the requested disclosure relief would benefit shareholders
of the Subadvised Series 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 relief
requested to use Aggregate Fee Disclosure will encourage Sub-Advisors
to negotiate lower subadvisory fees with the Advisor if the lower fees
are not required to be made public.
8. For the reasons discussed above, applicants submit that the
requested relief meets the standards for relief under section 6(c) of
the Act. Applicants state that the operation of the Subadvised Series
in the manner described in the application must be approved by
shareholders of a Subadvised Series before that Subadvised Series may
rely on the requested relief. In addition, applicants state that the
proposed conditions to the requested relief are designed to address any
potential conflicts of interest, including any posed by the use of
Wholly-owned Sub-Advisors, and provide that shareholders are informed
when new Sub-Advisors are hired. Applicants assert that conditions 6,
7, 10 and 11 are designed to provide the Board with sufficient
independence and the resources and information it needs to monitor and
address any conflicts of interest with affiliated persons of the
Advisor, including Wholly-Owned Sub-Advisors. Applicants state that,
accordingly, they believe the requested relief 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' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Before a Subadvised Series may rely on the order requested in
the application, the operation of the Subadvised Series in the manner
described in the application, including the hiring of Wholly-Owned Sub-
Advisors, will be, or has been, approved by a majority of the
Subadvised Series' outstanding voting securities as defined in the Act,
or, in the case of a new Subadvised Series whose public shareholders
purchase shares on the basis of a prospectus containing the disclosure
contemplated by condition 2 below, by the sole initial shareholder
before offering the Subadvised Series' shares to the public.
2. The prospectus for each Subadvised Series will disclose the
existence, substance, and effect of any order granted pursuant to the
application. Each Subadvised Series will hold itself out to the public
as employing the multi-manager structure described in the application.
Each prospectus will prominently disclose that the Advisor has the
ultimate responsibility, subject to oversight by the Board, to oversee
the Sub-Advisors and recommend their hiring, termination and
replacement.
3. The Advisor will provide general management services to a
Subadvised Series, including overall supervisory responsibility for the
general management and investment of the Subadvised Series' assets.
Subject to review and approval of the Board, the Advisor will (a) set a
Subadvised Series' overall investment strategies, (b) evaluate, select,
and recommend Sub-Advisors to manage all or a portion of a Subadvised
Series' assets, and (c) implement procedures reasonably designed to
ensure that Sub-Advisors comply with a Subadvised Series' investment
objective, policies and restrictions. Subject to review by the Board,
the Advisor will (a) when appropriate, allocate and reallocate a
Subadvised Series' assets among multiple Sub-Advisors; and (b) monitor
and evaluate the performance of Sub-Advisors.
4. A Subadvised Series will not make any Ineligible Sub-Advisor
Changes without the approval of the shareholders of the applicable
Subadvised Series.
5. Subadvised Series 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.
6. At all times, at least a majority of the Board will be
Independent Board Members, and the selection and nomination of new or
additional Independent Board Members will be placed within the
discretion of the then-existing Independent Board Members.
7. Independent Legal Counsel, as defined in rule 0-1(a)(6) under
the Act, will be engaged to represent the Independent Board Members.
The selection of such counsel will be within the discretion of the
then-existing Independent Board Members.
8. The Advisor will provide the Board, no less frequently than
quarterly, with information about the profitability of the Advisor on a
per Subadvised Series basis. The information will reflect the impact on
profitability of the hiring or termination of any sub-advisor during
the applicable quarter.
9. 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.
10. Whenever a sub-advisor change is proposed for a Subadvised
Series with an Affiliated Sub-Advisor or a Wholly-Owned Sub-Advisor,
the Board, including a majority of the Independent Board Members, will
make a separate finding, reflected in the Board minutes, that such
change is in the best interests of the Subadvised Series and its
shareholders, and does not involve a conflict of interest from which
the Advisor or the Affiliated Sub-Advisor or Wholly-Owned Sub-Advisor
derives an inappropriate advantage.
11. No Board member or officer of a Subadvised Series, or director,
manager, 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 ownership of
interests in the Advisor or any entity, other than a Wholly-Owned Sub-
Advisor, that controls, is controlled by, or is under common control
with the Advisor.
12. Each Subadvised Series will disclose the Aggregate Fee
Disclosure in its registration statement.
13. 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.
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For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05759 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P