[Federal Register Volume 67, Number 22 (Friday, February 1, 2002)]
[Pages 5013-5015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2458]



[Release No. IC-25402; 812-12200]

Memorial Funds and Memorial Investment Advisors, Inc.; Notice of 

January 25, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order 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:  Memorial Funds (the ``Trust'') and Memorial 
Investment Advisors, Inc. (the ``Adviser'') (together, ``Applicants'') 
request an order that would permit applicants to enter into and 
materially amend subadvisory agreements without shareholder approval 
and grant relief from certain disclosure requirements.

Filing Dates:  The application was filed on July 24, 2000, and amended 
on January 22, 2002.

Hearing or Notification of Hearing: An order granting the requested 
relief 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 February 19, 2002, 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, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609; Applicants, c/o Anthony C.J. Nuland, Esq., Seward & Kissel, 
LLP, 1200 G Street NW., Washington, DC 20005.

FOR FURTHER INFORMATION CONTACT: Lidian Pereira, Senior Counsel, at 
(202) 942-0524, or Mary Kay Frech, Branch Chief, at (202) 942-0564, 
Division of Investment Management, Office of Investment Company 

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the

[[Page 5014]]

Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102, telephone 202-942-8090.

Applicants' Representations

    1. The Trust, a Delaware business trust, is registered under the 
Act as an open-end management investment company. The Trust currently 
is composed of four series (each a ``Fund,'' collectively, the 
``Funds'').\1\ Each Fund has its own investment objectives, policies 
and restrictions.

    \1\ Applicants request that any relief granted pursuant to the 
application also apply to future series of the Trust, and any other 
registered open-end management investment company and its series 
that: (a) Are advised by the Adviser or any entity controlling, 
controlled by, or under common control with the Adviser; (b) use the 
multi-manager structure described in the application; and (c) comply 
with the terms and conditions in the application (``Future Funds,'' 
included in the term ``Funds''). All entities that currently intend 
to rely on the requested relief are named as applicants. If the name 
of any Fund contains the name of a Subadviser, it will be preceded 
by the name of the Adviser.

    2. The Adviser, registered under the Investment Advisers Act of 
1940 (``Advisers Act''), serves as investment adviser to the Funds 
pursuant to an investment advisory agreement with the Trust (``Advisory 
Agreement''), which was approved by the board of trustees of the Trust 
(``Board''), including a majority of the trustees who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act 
(``Independent Trustees''), and by each Fund's shareholders. Under the 
terms of the Advisory Agreement, the Adviser provides investment 
advisory services for each Fund and may hire one or more subadvisers 
(``Subadvisers'') to exercise day-to-day investment discretion over the 
assets of the Fund pursuant to separate investment advisory agreements 
(``Subadvisory Agreements''). All current and future Subadvisers will 
be registered under the Advisers Act. Subadvisers are recommended to 
the Board by the Adviser and selected and approved by the Board, 
including a majority of the Independent Trustees. The Adviser 
compensates each Subadviser out of the fees paid to the Adviser by the 
applicable Fund.
    3. The Adviser monitors the Funds and the Subadvisers and makes 
recommendations to the Board regarding allocation, and reallocation, of 
assets between Subadvisers and is responsible for recommending the 
hiring, termination and replacement of Subadvisers. The Adviser 
recommends Subadvisers based on a number of factors used to evaluate 
their skills in managing assets pursuant to particular investment 
    4. Applicants request relief to permit the Adviser, subject to the 
oversight of the Board, to enter into and materially amend Subadvisory 
Agreements without shareholder approval. The requested relief will not 
extend to a Subadviser that is an affiliated person, as defined in 
section 2(a)(3) of the Act, of the Trust or the Adviser, other than by 
reason of serving as a Subadviser to one or more of the Funds (an 
``Affiliated Subadviser'').
    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require each Fund to disclose fees 
paid by the Adviser to the Subadvisers. The Trust will disclose for 
each Fund (both as a dollar amount and as a percentage of a Fund's net 
assets) (a) aggregate fees paid to the Adviser and Affiliated 
Subadvisers; and (b) aggregate fees paid to Subadvisers other than 
Affiliated Subadvisers (``Aggregate Fee Disclosure''). For any Fund 
that employs an Affiliated Subadviser, the Fund will provide separate 
disclosure of any subadvisory fees paid to the Affiliated Subadviser.

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 under a written contract that has been 
approved by a majority of the investment company's outstanding voting 
securities. Rule 18f-2 under the Act provides that each series or class 
of stock in a series company affected by a matter must approve the 
matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 15(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 
Securities Exchange Act of 1934 (``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. Form N-SAR is the semi-annual report filed with the Commission 
by registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
their investment advisers, including the Subadvisers.
    5. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the 
Commission. Sections 6-07(2) (a), (b), and (c) of Regulation S-X 
require that investment companies include in their financial statements 
information about investment advisory fees.
    6. 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 provision 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 believe that their requested relief meets this standard 
for the reasons discussed below.
    7. Applicants assert that by investing in a Fund, shareholders, in 
effect, will hire the Adviser to manage the Fund's assets by selecting 
and monitoring Subadvisers rather than by hiring its own employees to 
manage assets directly. Applicants state that investors will purchase 
Fund shares to gain access to the Adviser's expertise in overseeing 
Subadvisers. Applicants further assert that the requested relief will 
reduce Fund expenses and permit the Funds to operate more efficiently. 
Applicants note that the Advisory Agreement will remain subject to the 
shareholder approval requirements of section 15(a) of the Act and rule 
18f-2 under the Act.
    8. Applicants assert that some Subadvisers charge their customers 
for advisory services according to a ``posted'' rate schedule. 
Applicants state that while Subadvisers are willing to negotiate fees 
lower than those posted in the schedule, particularly with large 
institutional clients, they are reluctant to do so where the fees are 
disclosed to other prospective and existing customers. Applicants 
submit that the relief will encourage Subadvisers to negotiate lower 
advisory fees with the Adviser, the benefits of which are likely to be 
passed on to shareholders.

[[Page 5015]]

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 requested order, the operation of 
the Fund in the manner described in the application will be approved by 
a majority of the outstanding voting securities of the Fund, as defined 
in the Act, or in the case of a Fund whose public shareholders 
purchased shares on the basis of a prospectus containing the disclosure 
contemplated by condition 2 below, by the initial shareholders prior to 
offering shares of the Fund to the public.
    2. Any Fund relying on the requested relief will disclose in its 
prospectus the existence, substance, and effect of any order granted 
pursuant to the application. In addition, each Fund relying on the 
requested order will hold itself out to the public as employing the 
management structure described in the application. The prospectus will 
prominently disclose that the Adviser has the ultimate responsibility 
(subject to oversight by the Board) to oversee the Subadvisers and 
recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of any new Subadviser, shareholders 
of the relevant Fund will be furnished all information about the 
Subadviser that would be contained in a proxy statement, except as 
modified by the order to permit Aggregate Fee Disclosure. This 
information will include Aggregate Fee Disclosure and any change in 
such disclosure caused by the addition of a new Subadviser. The Adviser 
will meet this condition by providing shareholders, within 90 days of 
the hiring of a Subadviser, an information statement meeting the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the Exchange Act, except as modified by the order to permit 
Aggregate Fee Disclosure.
    4. The Adviser will not enter into a Subadvisory Agreement with any 
Affiliated Subadviser without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Fund.
    5. At all times, a majority of the Trust's Board will be 
Independent Trustees, and the nomination of new or additional 
Independent Trustees will be at the discretion of the then existing 
Independent Trustees.
    6. When a Subadviser change is proposed for a Fund with an 
Affiliated Subadviser, the Trust's Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
Trust's Board minutes, that the 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 Subadviser derives an 
inappropriate advantage.
    7. Independent counsel knowledgeable about the Act and the duties 
of Independent Trustees will be engaged to represent the Trust's 
Independent Trustees. The selection of such counsel will be within the 
discretion of the Independent Trustees.
    8. The Adviser will provide the Trust's Board, no less frequently 
than quarterly, with information about the Adviser's profitability for 
each Fund relying on the relief requested in the application. The 
information will reflect the impact on profitability of the hiring or 
termination of Subadvisers during the applicable quarter.
    9. Whenever a Subadviser to a particular Fund is hired or 
terminated, the Adviser will provide the Trust's Board with information 
showing the expected impact on the Adviser's profitability.
    10. The Adviser will provide general management services to the 
Trust and the Funds, including overall supervisory responsibility for 
the general management and investment of each Fund's securities 
portfolio, and, subject to review and approval by the Board, will (a) 
set each Fund's overall investment strategies, (b) evaluate, select and 
recommend Subadvisers to manage all or a part of a Fund's assets, (c) 
allocate and, when appropriate, reallocate a Fund's assets among 
multiple Subadvisers, (d) monitor and evaluate the performance of 
Subadvisers, and (e) implement procedures reasonably designed to ensure 
that the Subadvisers comply with the relevant Fund's investment 
objective, policies and restrictions.
    11. No trustee or officer of the Trust or director or officer of 
the Adviser will own directly or indirectly (other than through a 
pooled investment vehicle that is not controlled by any such person) 
any interest in a Subadviser, except for: (a) Ownership of interests in 
the Adviser or any entity that controls, is controlled by, or is under 
common control with the Adviser; 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 Subadviser or an entity that controls, 
is controlled by or is under common control with a Subadviser.
    12. Each Fund will disclose in its registration statement the 
respective Aggregate Fee Disclosure.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2458 Filed 1-31-02; 8:45 am]