[Federal Register Volume 79, Number 58 (Wednesday, March 26, 2014)]
[Notices]
[Pages 16843-16846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-06610]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30986; File No. 812-14231]
Virtus Alternative Solutions Trust and Virtus Alternative
Investment Advisers, Inc.; Notice of Application
March 19, 2014.
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
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: Virtus Alternative Solutions Trust (``Trust'') and Virtus
Alternative Investment Advisers, Inc. (``Advisor'').
Filing Dates: The application was filed on November 5, 2013, and
amended on February 19, 2014 and March 17, 2014.
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 14, 2014, 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, U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090. Applicants, 100 Pearl Street,
Hartford, CT 06103.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel,
at (202) 551-6812, or David P. Bartels, 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 for 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 comprises three series of shares (each, a
``Series''), each of which has its own investment objectives, policies
and restrictions and may offer one or more classes of shares that are
subject to different expenses. None of the Series have yet commenced
operations.
2. The Advisor, a corporation organized under the laws of the state
of Connecticut, is registered as an investment adviser under the
Investment Advisers Act of 1940 (``Advisers Act''). The Advisor is a
wholly-owned subsidiary of Virtus Investment Partners, Inc., a publicly
traded multi-manager asset management business.
3. Applicants request an order to permit the Advisor, subject to
the approval of the Board, 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 Manager (``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,\1\ and (ii) materially amend Sub-Advisory Agreements with the
Sub-Advisors.\2\ Applicants request that the relief apply to the named
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 the Advisor or its successors, uses the
multi-manager structure described in the application, and complies with
the terms and conditions of the application (``Subadvised Series'').\3\
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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\1\ 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''). Each Sub-Advisor will be registered with
the Commission under the Investment Advisers Act of 1940 or exempt
from such registration.
\2\ Shareholder approval will continue to be required for any
other sub-advisor change (not otherwise permitted by applicable law
or by rule) 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'').
\3\ 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. 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, 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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4. Each Series has, or will have, as its investment adviser, the
Advisor or its successor. The 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 for each Series will be approved by the board of
trustees of the Trust (``Board''),\4\ including a majority of the
Independent Board Members, and by
[[Page 16844]]
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 the
Investment Management Agreement 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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5. Under the terms of the 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 each 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
Investment Management Agreement, the Advisor will receive an investment
management fee from that Series. The 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.
6. Pursuant to the Investment Management Agreement, the Advisor has
overall responsibility for the management and investment of the assets
of each Subadvised Series. These responsibilities 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.
7. The Advisor may enter into sub-advisory agreements with various
Sub-Advisors (``Sub-Advisory Agreements'') 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 have been approved by the Board, including a
majority of the Independent Board Members and the initial shareholder
of the applicable 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 will 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 Investment Management
Agreement.
8. If the requested order is granted, the 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; \5\ and (b) the Subadvised Series 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. 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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\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 (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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9. 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''). An exemption is requested to permit the
Series to include only the Aggregate Fee Disclosure. All other items
required by Sections 6-07(2)(a), (b), and (c) of Regulation S-X will be
disclosed.
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
[[Page 16845]]
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 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 such agreement, including the compensation to be paid
thereunder, being approved by 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
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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 partner,
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
(a) 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, 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.
12. Any new Sub-Advisory Agreement or any amendment to a Series'
existing Investment Management Agreement or Sub-Advisory Agreement that
directly or indirectly results in an increase in the aggregate advisory
fee rate payable by the Series will be submitted to the Series'
shareholders for approval.
13. Each Subadvised Series will disclose the Aggregate Fee
Disclosure in its registration statement.
14. 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.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06610 Filed 3-25-14; 8:45 am]
BILLING CODE 8011-01-P