[Federal Register Volume 79, Number 208 (Tuesday, October 28, 2014)]
[Notices]
[Pages 64235-64237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25549]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 31302; 812-14332]
Angel Oak Funds Trust and Angel Oak Capital Advisors, LLC; Notice
of Application
October 22, 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.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order that would permit
them to enter into and materially amend sub-advisory agreements (``Sub-
Advisory Agreements'') without shareholder approval and that would
grant relief from certain disclosure requirements.
Applicants: Angel Oak Funds Trust (the ``Trust'') and Angel Oak Capital
Advisors, LLC (the ``Adviser'').
Filing Dates: The application was filed July 15, 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 November 17, 2014, 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: Secretary, U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090. Applicants, One Buckhead Plaza,
3060 Peachtree Road NW., Suite 500, Atlanta, GA 30305.
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 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, a Delaware statutory trust, is registered under the
Act as an open-end management investment company. The Trust is
organized as a series trust and currently consists of one series.\1\
---------------------------------------------------------------------------
\1\ Applicants request relief with respect to any existing and
any future series of the Trust or any other registered open-end
management company that: (a) Is advised by the Adviser or its
successor or by a person controlling, controlled by, or under common
control with the Adviser or its successor (each, also an
``Adviser''); (b) uses the manager of managers structure described
in the application (``Manager of Managers Structure''); and (c)
complies with the terms and conditions of the requested order (any
such series, a ``Fund'' and collectively, the ``Funds''). The only
existing registered open-end management investment company that
currently intends to rely on the requested order is named as an
applicant, and the only series that currently intends to rely on the
requested order as a Fund is the Angel Oak Flexible Income Fund
(``Initial Fund''). 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. If the name of any Fund contains the name of
a Sub-Adviser (as defined below), that name will be preceded by the
name of the Adviser.
---------------------------------------------------------------------------
2. The Adviser is a limited liability company organized under
Delaware law. The Adviser is, and any future Adviser will be,
registered as an investment adviser under the Investment Advisers Act
of 1940 (``Advisers Act''). The Adviser will serve as the investment
adviser to the Initial Fund pursuant to an investment advisory
agreement with the Trust (the ``Advisory Agreement'').\2\ The Advisory
Agreement was or will have been approved by a Fund'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, the Fund, or the Adviser (``Independent Trustees''), and by
the Fund's shareholders in the manner required by sections 15(a) and
15(c) of the Act and rule 18f-2 under the Act. The terms of the
Advisory Agreement will comply with section 15(a) of the Act.
Applicants are not seeking any exemption from the provisions of the Act
with respect to the Advisory Agreement.
---------------------------------------------------------------------------
\2\ ``Advisory Agreement'' includes advisory agreements with an
Adviser for the Initial Fund and any future Funds.
---------------------------------------------------------------------------
3. Under the terms of the Advisory Agreement, the Adviser will
provide a Fund with overall investment management services and will
continuously review, supervise and administer each Fund's investment
program, subject to the supervision of, and policies established by the
Board. For the investment management services it will provide to a
Fund, the Adviser will receive the fee specified in the Advisory
Agreement from that Fund based on the average daily net assets of the
Fund.
4. The Advisory Agreement will permit the Adviser, subject to the
approval of the Board, to delegate certain responsibilities to one or
more sub-advisers (``Sub-Advisers'').\3\ The Adviser currently intends
to delegate certain day-to-day portfolio management responsibilities
for all or a portion of the assets of a Fund to one or more Sub-
Advisers, subject to the approval of the Board. The Adviser will
evaluate, allocate assets to, and oversee the Sub-Advisers, and will
make recommendations about their hiring, termination and replacement to
the Board, at all times subject to the authority of the Board. The
Adviser will compensate the Sub-Advisers out of the advisory fee paid
by the Funds to the Adviser under the Advisory Agreement.
---------------------------------------------------------------------------
\3\ Each Sub-Adviser will be an investment adviser as defined in
section 2(a)(20) of the Act and registered, or not subject to
registration, under the Advisers Act.
---------------------------------------------------------------------------
5. Applicants request an order to permit the Adviser, subject to
Board approval, to select certain Sub-Advisers to manage all or a
portion of the assets of a Fund or Funds pursuant to a Sub-Advisory
Agreement, and materially amend existing Sub-Advisory Agreements
without obtaining shareholder approval. 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 the Trust, a Fund, or the Adviser, other
than by reason of serving as a sub-adviser to one or more of the Funds
(``Affiliated Sub-Adviser'').
[[Page 64236]]
6. Applicants also request an order exempting the Funds from
certain disclosure provisions described below that may require the
Funds to disclose fees paid by the Adviser to each Sub-Adviser.
Applicants seek an order to permit a Fund to disclose (as both a dollar
amount and a percentage of the Fund's net assets): (a) The aggregate
fees paid to the Adviser and any Affiliated Sub-Adviser; and (b) the
aggregate fees paid to Sub-Advisers other than Affiliated Sub-Advisers
(collectively, ``Aggregate Fee Disclosure''). Any Fund that employs an
Affiliated Sub-Adviser will provide separate disclosure of any fees
paid to the Affiliated Sub-Adviser.
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in relevant part, that 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 a 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 Securities Exchange Act of 1934 (``1934 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 under the Securities Act of 1933 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 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 Adviser,
subject to the review and approval of the Board, to select the Sub-
Advisers who are best suited to achieve each Fund's investment
objectives. Applicants assert that, from the perspective of the
shareholder, the role of the Sub-Advisers is substantially equivalent
to that of the individual portfolio managers employed by traditional
investment company advisory firms. Applicants state that requiring
shareholder approval of each Sub-Advisory Agreement would impose
unnecessary delays and expenses on the Funds and may preclude the Funds
from acting promptly when the Adviser and Board consider it appropriate
to hire Sub-Advisers or amend Sub-Advisory Agreements. Applicants note
that the Advisory Agreements and any Sub-Advisory Agreements with
Affiliated Sub-Advisers will remain subject to the shareholder approval
requirements of section 15(a) of the Act and rule 18f-2 under the Act.
7. If a new Sub-Adviser is retained in reliance on the requested
order, the applicable Fund will inform its 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 a Fund, the Fund will send its shareholders either
a Multi-manager Notice or a Multi-manager Notice and Multi-manager
Information Statement; \4\ 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. Applicants assert that a proxy solicitation to approve
the appointment of new Sub-Advisers would provide no more meaningful
information to shareholders than the proposed Multi-manager Information
Statement. Moreover, as indicated above, the applicable Board would
comply with the requirements of sections 15(a) and 15(c) of the Act
before entering into or amending Sub-Advisory Agreements.
---------------------------------------------------------------------------
\4\ A ``Multi-manager Notice'' will be modeled on a Notice of
Internet Availability as defined in rule 14a-16 under the 1934 Act,
and specifically will, among other things: (a) Summarize the
relevant information regarding the new Sub-Adviser; (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 Fund. A ``Multi-manager Information Statement''
will meet the requirements of Regulation 14C, Schedule 14C and Item
22 of Schedule 14A under the 1934 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.
---------------------------------------------------------------------------
8. Applicants assert that the requested disclosure relief will
benefit shareholders of the Funds because it will improve the Adviser'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-Adviser's fees to the public.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Before a Fund may rely on the order requested in the
application, 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
sole initial shareholder before offering the Fund's shares to the
public.
2. The prospectus for each Fund will disclose the existence,
substance, and effect of any order granted pursuant to the application.
Each 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 Adviser has ultimate responsibility
(subject to oversight by the Board) to oversee the Sub-Advisers and
recommend their hiring, termination, and replacement.
3. The Funds will inform shareholders of the hiring of a new Sub-
Adviser (other than an Affiliated Sub-
[[Page 64237]]
Adviser) within 90 days after the hiring of that new Sub-Adviser
pursuant to the Modified Notice and Access Procedures.
4. The Adviser will not enter into a Sub-Advisory Agreement with
any Affiliated Sub-Adviser without that 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 and selection of new or
additional Independent Trustees will be placed within the discretion of
the then-existing Independent Trustees.
6. When a Sub-Adviser change is proposed for a 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 Fund and its shareholders and does not involve a conflict of
interest from which the Adviser or the Affiliated Sub-Adviser derives
an inappropriate advantage.
7. 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.
8. Each Adviser will provide the Board, no less frequently than
quarterly, with information about the profitability of the Adviser on a
per-Fund basis. The information will reflect the impact on
profitability of the hiring or termination of any Sub-Adviser during
the applicable quarter.
9. Whenever a Sub-Adviser is hired or terminated, the Adviser will
provide the Board with information showing the expected impact on the
profitability of the Adviser.
10. The Adviser will provide general management services to a Fund,
including overall supervisory responsibility for the general management
and investment of the Fund's assets and, subject to review and approval
of the Board, will (i) set a Fund's overall investment strategies; (ii)
evaluate, select and recommend Sub-Advisers to manage all or part of a
Fund's assets; (iii) when appropriate, allocate and reallocate a Fund's
assets among multiple Sub-Advisers; (iv) monitor and evaluate the
performance of Sub-Advisers; and (v) implement procedures reasonably
designed to ensure that the Sub-Advisers comply with a Fund's
investment objective, policies and restrictions.
11. No trustee or officer of the Trust, or of a Fund, or director
or officer of the Adviser, 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 (i) ownership of
interests in the Adviser or any entity that controls, is controlled by,
or is under common control with the Adviser; or (ii) 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-Adviser or an entity
that controls, is controlled by, or is under common control with a Sub-
Adviser.
12. Each Fund will disclose in its registration statement the
Aggregate Fee Disclosure.
13. Any new Sub-Advisory Agreement or any amendment to an existing
Advisory Agreement or Sub-Advisory Agreement that directly or
indirectly results in an increase in the aggregate advisory fee rate
payable by the Fund will be submitted to the Fund's shareholders for
approval.
14. 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.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25549 Filed 10-27-14; 8:45 am]
BILLING CODE 8011-01-P