[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Notices]
[Pages 75392-75395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29499]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30819; 812-13825]
American Beacon Funds, et al.; Notice of Application
December 5, 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 without
shareholder approval and would grant relief from certain disclosure
requirements. The order would supersede a prior order (``Prior
Order'').\1\
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\1\ Investment Company Act Rel. Nos. 21995 (May 30, 1996)
(notice) and 22040 (Jun. 25, 1996) (order).
Applicants: American Beacon Funds and American Beacon Select Funds
(collectively, the ``Trusts'') and American Beacon Advisors, Inc.
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(``American Beacon'' and collectively, ``Applicants'').
DATES: Filing Dates: The application was filed on September 20, 2010,
and amended on December 10, 2012, March 13, 2013 and November 1, 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 December 27, 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:
4151 Amon Carter Blvd., MD 2450, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at
(202) 551-6811, or Daniele Marchesani, Branch Chief, at (202) 551-6821
(Division of Investment Management, Chief Counsel's Office).
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. Each Trust is organized as a Massachusetts business trust and is
registered under the Act as an open-end management investment company.
The Trusts currently offer separate series (each a ``Fund''), each of
which has its own investment objectives, policies and restrictions.\2\
A Manager registered as an investment adviser under the Investment
Advisers Act of 1940 (``Advisers Act'') will serve as the investment
adviser to each Fund pursuant to a separate investment management
agreement (each a ``Management Agreement'' and collectively, the
``Management Agreements'') with the Fund. Each Management Agreement was
or will be approved by each respective Fund's shareholders and the
relevant Trust's 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 the Trust or the Manager
(``Independent Trustees''). The terms of each Management Agreement
comply with sections 15(a) and 15(c) of the Act and
[[Page 75393]]
rule 18f-2 under the Act. Applicants are not seeking any exemptions
from the provisions of the Act with respect to the Management
Agreements.
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\2\ All existing registered investment companies that currently
intend to rely on the order are named as Applicants. Applicants
request relief with respect to the existing and future Funds of the
Trusts and any other existing or future registered open-end
management investment company or series thereof that: (a) Is advised
by American Beacon or any entity controlling, controlled by, or
under common control with American Beacon (each, a ``Manager'') or
its successors; (b) uses the manager of managers structure described
in the application; and (c) complies with the terms and conditions
of the application (each a ``Sub-Advised Fund'' and collectively,
the ``Sub-Advised Funds''). 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 Sub-Advised Fund contains
the name of a Sub-Adviser (as defined below), the name of the
Manager that serves as the primary adviser to the Sub-Advised Fund
will precede the name of the Sub-Adviser.
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2. Under the terms of each Management Agreement, the Manager,
subject to the oversight of the Board, has the primary responsibility
for the management of the Funds in accordance with each Fund's
investment objective, policies and restrictions. For its services to
each Fund, the Manager receives a management fee from that Fund as
specified in the applicable Management Agreement. The terms of each
Management Agreement also permit the Manager, subject to the approval
of the relevant Board, including a majority of the Independent
Trustees, and the shareholders of the applicable Fund (if required by
applicable law), to delegate portfolio management responsibilities of
all or a portion of the Fund to one or more sub-advisers (``Sub-
Advisers''). The Manager has entered into sub-advisory agreements
(``Sub-Advisory Agreements'') with various Sub-Advisers to provide
investment advisory services to the Subadvised Funds.\3\ Each Sub-
Adviser is, and each future Sub-Adviser will be, an investment adviser
as defined in section 2(a)(20) of the Act as well as registered, or not
subject to registration, with the Commission as an ``investment
adviser'' under the Advisers Act. The Manager evaluates, allocates
assets to and oversees the Sub-Advisers, and makes recommendations
about their hiring, termination and replacement to the relevant Board,
at all times subject to the authority of the relevant Board.
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\3\ As of the date of the application, the Manager had allocated
investment responsibility for each Sub-Advised Fund as follows: (a)
American Beacon Acadian Emerging Markets Managed Volatility Fund--
Acadian Asset Management LLC; (b) American Beacon Balanced Fund--the
Manager, Barrow, Hanley, Mewhinney & Strauss, LLC (``Barrow''),
Brandywine Global Investment Management, LLC (``Brandywine''), and
Hotchkis and Wiley Capital Management, LLC (``Hotchkis''); (c)
American Beacon Bridgeway Large Cap Value Fund--Bridgeway Capital
Management, Inc.; (d) American Beacon Earnest Partners Emerging
Markets Equity Fund--EARNEST Partners, LLC; (e) American Beacon
Emerging Markets Fund--Brandes Investment Partners, LP, Morgan
Stanley Investment Management Inc., and The Boston Company Asset
Management, LLC (``TBCAM''); (f) American Beacon Flexible Bond
Fund--Brandywine, GAM International Management, Ltd., and Pacific
Investment Management Company LLC; (g) American Beacon High Yield
Bond Fund--Franklin Advisers, Inc., Logan Circle Partners, L.P., and
PENN Capital Management Company, Inc.; (h) American Beacon Holland
Large Cap Growth Fund--Holland Capital Management, LLC; (i) American
Beacon Intermediate Bond Fund--the Manager and Barrow; (j) American
Beacon International Equity Fund--Causeway Capital Management LLC,
Lazard Asset Management LLC, and Templeton Investment Counsel, LLC;
(k) American Beacon Large Cap Value Fund--Barrow, Brandywine,
Hotchkis and Massachusetts Financial Services, Co.; (l) American
Beacon Mid-Cap Value Fund--Barrow, Lee Munder Capital Group, LLC,
and Pzena Investment Management, LLC; (m) American Beacon Retirement
Income and Appreciation Fund--the Manager and Calamos Advisors, LLC;
(n) American Beacon SGA Global Growth Fund--Sustainable Growth
Advisers, LP; (o) American Beacon SiM High Yield Opportunities
Fund--Strategic Income Management, LLC; (p) American Beacon Small
Cap Value Fund--Barrow, Brandywine, Dreman Value Management, LLC,
Hotchkis, Opus Capital Group, LLC and TBCAM; (q) American Beacon
Small Cap Value II Fund--Dean Capital Management, LLC; Fox Asset
Management LLC, and Signia Capital Management, LLC; (r) American
Beacon Stephens Mid-Cap Growth Fund--Stephens Investment Management
Group, LLC (``SIMG''); (s) American Beacon Small Cap Growth Fund--
SIMG; (t) American Beacon The London Company Income Equity Fund--The
London Company of Virginia, LLC; (u) American Beacon Treasury
Inflation Protected Securities Fund--NISA Investment Advisors, LLC
and Standish Mellon Asset Management Company, LLC; (v) American
Beacon Zebra Global Equity Fund--Zebra Capital Management, LLC
(``Zebra'') and (w) American Beacon Zebra Small Cap Equity Fund--
Zebra.
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3. Under each Management Agreement, the Manager receives a
management fee (``Management Fee'') from each Fund. Currently, with
respect to certain Sub-Advised Funds, the Management Fee is comprised
of two components which are (a) a fee for the Manager, and (b) the
applicable subadvisory compensation (``Two Component Management Fee'').
For these Sub-Advised Funds, the Manager collects the fees from each
Sub-Advised Fund and pays such fees to the applicable Sub-Advisers. For
certain other Sub-Advised Funds, currently the Manager receives a one
component Management Fee (``Unitary Management Fee'') and pays
subadvisory compensation from the Management Fee. With respect to
certain other Sub-Advised Funds, the Management Fee is comprised solely
of a fee for the Manager and those Sub-Advised Funds each pays the sub-
advisory compensation directly to the Sub-Adviser pursuant to a Sub-
Advisory Agreement among the Sub-Adviser, the Manager and the Fund
(``Tri-Party Sub-Advisory Agreement''). In the future, new Funds will
compensate Sub-Advisers pursuant to either a Tri-Party Sub-Advisory
Agreement or a Unitary Management Fee arrangement.\4\
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\4\ Promptly after the issuance of the requested order, the
Manager intends to use its reasonable best efforts to cause the
Board and each applicable Sub-Adviser that receives payment from the
Manager pursuant to a Two Component Management Fee to agree to enter
into a Tri-Party Sub-Advisory Agreement under which each such Sub-
Adviser would be paid directly by such Fund as well as to make a
corresponding change to the Management Agreement to eliminate the
Two Component Management Fee. The changes will not result in any
change in the nature or level of the actual investment advisory
services provided to each Sub-Advised Fund or in any increase in the
total management and advisory fees payable by a Sub-Advised Fund.
Applicants will not rely on the relief requested from section 15(a)
of the Act until the Board has approved all such changes.
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4. Applicants request an order to permit the Manager, subject to
Board approval, to select certain Sub-Advisers 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 order would supersede the Prior
Order. The requested relief will not extend to any Sub-Adviser that is
an affiliated person, as defined in section 2(a)(3) of the Act, of a
Trust, a Fund or the Manager, other than by reason of serving as a Sub-
Adviser to a Fund (``Affiliated Sub-Adviser'').
5. Applicants also request an order exempting the Sub-Advised Funds
from certain disclosure provisions described below that may require the
Applicants to disclose fees paid by the Manager or a Sub-Advised Fund
to each Sub-Adviser. Applicants seek an order to permit each Sub-
Advised Fund to disclose (as a dollar amount and a percentage of each
Sub-Advised Fund's net assets): (a) The aggregate fees paid to the
Manager and any Affiliated Sub-Advisers; and (b) the aggregate fees
paid to Sub-Advisers other than Affiliated Sub-Advisers (collectively,
the ``Aggregate Fee Disclosure''). A Subadvised Fund that employs an
Affiliated Sub-Adviser will provide separate disclosure of any fees
paid to the Affiliated Sub-Adviser.
6. A Sub-Advised Fund will inform shareholders of the hiring of a
new Sub-Adviser pursuant to the following procedures (``Modified Notice
and Access Procedures''): (a) Within 90 days after a new Sub-Adviser is
hired for any Sub-Advised Fund, that Sub-Advised Fund will send its
shareholders either a Multi-manager Notice or a Multi-manager Notice
and Information Statement; \5\ and (b) the Sub-Advised
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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-Adviser; (b) inform the 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 Sub-Advised 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 an 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 Manager,
subject to the review and approval of the Board, to select the Sub-
Advisers who have distinguished themselves through successful
performance in the particular market sectors in which the Sub-Advised
Funds invest. Applicants assert that, from the perspective of the
shareholder, the role of the Sub-Adviser is substantially equivalent to
the role of the individual portfolio managers employed by an investment
adviser to a traditional investment company. Applicants state that
without the delay inherent in holding shareholder meetings, a Sub-
Advised Fund will be able to act more quickly and with less expense to
hire a Sub-Adviser regardless of the number of Sub-Advisers employed by
the Sub-Advised Fund and materially amend a Sub-Advisory Agreement when
the Board and the Manager believe that the appointment of a Sub-Adviser
or the amendment of a Sub-Advisory Agreement would benefit the Sub-
Advised Fund. Applicants note that each Management Agreement and any
Sub-Advisory Agreement with an Affiliated Sub-Adviser (if any) will
remain 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 Sub-Advised Funds because it would improve
the Manager's ability to negotiate the fees paid to Sub-Advisers.
Applicants state that the Adviser may be able to negotiate rates that
are below a Sub-Adviser's ``posted'' amounts, if the Adviser is not
required to disclose the Sub-Advisers' fees to the public. Applicants
submit that the requested relief will encourage Sub-Advisers to
negotiate lower subadvisory fees with the Adviser 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:
1. Before a Sub-Advised Fund may rely on the order requested in the
application, the operation of the Sub-Advised Fund in the manner
described in the application will be approved by a majority of the Sub-
Advised Fund's outstanding voting securities as defined in the Act or,
in the case of a Sub-Advised Fund whose public shareholders purchase
shares on the basis of a prospectus containing the disclosure
contemplated by condition 2 below, by the sole initial shareholder(s)
before such Sub-Advised Fund's shares are offered to the public.
2. The prospectuses for each Sub-Advised Fund will disclose the
existence, substance, and effect of any order granted pursuant to the
application. In addition, each Sub-Advised Fund will hold itself out to
the public as employing the manager-of-managers structure described in
the application. The prospectus will prominently disclose that the
Manager has ultimate responsibility, subject to oversight by the
applicable Board, to oversee the Sub-Advisers and recommend their
hiring, termination, and replacement.
3. The Manager will provide general management services to each
Sub-Advised Fund, including overall supervisory responsibility for the
general management and investment of each Sub-Advised Fund's assets
and, subject to the review and approval of the applicable Board, will:
(a) Set each Sub-Advised Fund's overall investment strategies; (b)
evaluate, select and recommend Sub-Advisers to manage all or a part of
each Sub-Advised Fund's assets; (c) allocate and, when appropriate,
reallocate the assets of each Sub-Advised Fund among Sub-Advisers; (d)
monitor and evaluate the performance of the Sub-Advisers; and (e)
implement procedures reasonably designed to ensure that the Sub-
Advisers comply with each Sub-Advised Fund's investment objective,
policies and restrictions.
4. At all times, at least a majority of each Board will be
Independent Trustees, and the nomination of new or additional
Independent Trustees will be placed within the discretion of the then-
existing Independent Trustees.
5. The Manager will not enter into a Sub-Advisory Agreement with
any Affiliated Sub-Adviser without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Sub-Advised Fund.
6. Whenever a Sub-Adviser change is proposed for a Sub-Advised Fund
with an Affiliated Sub-Adviser, 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
the Sub-Advised Fund and its shareholders, and does not involve a
conflict of interest from which the Manager or Affiliated Sub-Adviser
derives an inappropriate advantage.
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7. No trustee or officer of a Sub-Advised Fund or director or
officer of the Manager, will own directly or indirectly (other than
through a pooled investment vehicle that is not controlled by such
person), any interest in a Sub-Adviser except for ownership of
interests in the Manager or any entity that controls, is controlled by
or is under common control with the Manager; 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 Sub-Adviser
or an entity that controls, is controlled by or is under common control
with a Sub-Adviser.
8. Sub-Advised Funds will inform shareholders of the hiring of a
new Sub-Adviser in reliance on the order within 90 days after the
hiring of the new Sub-Adviser pursuant to the Modified Notice and
Access Procedures.
9. In the event the Commission adopts a rule under the Act
providing substantially similar relief to that in the order requested
in the application, the requested order will expire on the effective
date of that rule.
10. 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.
11. Whenever a Sub-Adviser is hired or terminated, the Manager will
provide the Board with information showing the expected impact on the
profitability of the Manager.
12. The Manager will provide the Board, no less frequently than
quarterly, with information about the profitability of the Manager on a
per Sub-Advised Fund basis. The information will reflect the impact on
profitability of the hiring or termination of any Sub-Adviser during
the applicable quarter.
13. Each Sub-Advised Fund will disclose in its registration
statement the Aggregate Fee Disclosure.
14. Any changes to a Sub-Advisory Agreement that would result in an
increase in the total management and advisory fees payable by a Sub-
Advised Fund will be required to be approved by the shareholders of the
Sub-Advised Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29499 Filed 12-10-13; 8:45 am]
BILLING CODE 8011-01-P