Investment Company Act of 1940: Exemption applications— New Covenant Funds et al.,

[Federal Register: January 6, 2000 (Volume 65, Number 4)]


[Page 795-797]

From the Federal Register Online via GPO Access []



[Investment Company Act Release No. 24227; 812-11670]

New Covenant Funds and New Covenant Trust Company, N.A.; Notice of Application

December 29, 1999. 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 (the ``Act'') for an exemption from section 15(a) of the Act and rule 18f-2 under the Act.

SUMMARY OF APPLICATION: The requested order would permit applicants, New Covenant Funds (the ``Investment Company'') and New Covenant Trust Company, N.A. (the ``Adviser''), to enter into and materially amend subadvisory agreements without obtaining shareholder approval.

FILING DATES: The application was filedby July 2, 1999, and amended on November 8, 1999. Applicants have agreed to file an amendment during the notice period, the substance of which is reflected in this notice.

HEARING OF 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 January 24, 2000, 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, Commission, 450 Fifth Street, NW., Washington, DC 20549-0609; Applicants, 200 East 12th Street, Jeffersonville, Indiana 47130.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at (202) 942-0574 or George J. Zornada, Branch Chief, at (202) 942-0564, (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 for a fee at the Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 20549-0102 (202) 942-8090).

Applicants' Representations

  1. The Investment Company, a Delaware business trust, is registered under the Act as an open-end management investment company. The Investment Company offers shares in four separate series: New Covenant Growth Fund, New Covenant Balanced Growth Fund, New Covenant Income Fund, and New Covenant Balanced Income Fund (the ``Funds''), each with its own distinct investment objectives, policies, and restrictions.\1\

    \1\ Applicants also request relief for (a) any series of the Investment Company organized in the future (``Future Series''), and (b) any registered open-end management investment companies or series of those companies advised in the future by the Adviser or a person controlling, controlled by, or under common control (within the meaning of section 2(a)(9) of the Act) with the Adviser that uses the adviser/subadviser structure described in the application and complies with the terms and conditions of the application (together with Future Series, ``Future Funds''). Each existing registered open-end management investment company that currently intends to rely on the application is named as an applicant. (p. 5)

    [[Page 796]]

  2. The Adviser is not required to be registered as an investment adviser under the Investment Advisers Act of 1940 (the ``Advisers Act''). The Advisers serves an investment adviser to each Fund pursuant to an investment management agreement between the Adviser and the Investment Company (``Investment Management Agreement''). The Investment Management Agreement has been approved by the initial shareholder of each Fund and by a majority of the Investment Company's board of trustees (``Board''), including a majority of the trustees who are not ``interested persons'' (as defined in section 2(a)(19) of the Act) (the ``Independent Trustees'').

  3. Under the Investment Management Agreement, the Adviser, subject to Board oversight, provides general management of the Funds' operations. The Advisers seeks to enhance performance and reduce market risk by allocating management of the assets of certain of the Funds among multiple specialist subadvisers (``Subadvisers''). Under investment subadvisory agreements (``Investment Subadvisory Agreements''), the specific investment decisions for each Fund are made by one or more Subadvisers, each of whom has discretionary authority to invest all or a portion of the assets of a particular Fund, subject to general supervision by the Adviser and the Board. Currently, the Adviser employees eight Subadvisers, each of which is registered under the Advisers Act. Any future Subadviser will be registered under the Advisers Act or will be exempt from registration. The Adviser monitors the performance of each Fund and each Subadviser and will recommend that the Board employee or terminate particular Subadvisers to achieve the overall investment objectives of a particular Fund. The Adviser pays the Subadvisers' fees out of the fees the Adviser receives from the Funds. The Adviser selects Subadvisers for the Funds based on the continuing quantitative and qualitative evaluation of their skills and proven abilities in managing assets pursuant to a particular investment style.

  4. Applicants request relief to permit the Adviser to enter into and materially amend Investment Subadvisory Agreements without obtaining 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 Investment Company or the Adviser, other than by reason of serving as a Subadviser to one or more of the Funds (an ``Affiliated Subadviser''). None of the current Subadvisers is an Affiliated Subadviser.

    Applicants' Legal Analysis

  5. 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 approved by a majority of the investment company's outstanding voting shares. 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.

  6. Section 6(c) of the Act provides that the Commission may exempt persons or transactions from the provisions of the Act, or from any rule thereunder, to the extent that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policies and provisions of the Act. Applicants request an exemption under section 6(c) of the Act from section 15(a) of the Act and rule 18f-2 under the Act to permit them to enter into and materially amend Investment Subadvisory Agreements without shareholder approval.

  7. Applicants assert that a Fund's investors rely on the Adviser for investment management services and submit that the role of the Subadvisers, from the perspective of the investor, is comparable to that of the individual portfolio advisers employed by other advisory firms. Applicants contend that requiring shareholder approval of the Investment Subadvisory Agreements would increase the Investment Company's expenses and delay the prompt implementation of actions considered advisable by the Board. Applicants note that the Investment Management Agreement will continue to be fully subject to section 15 of the Act and rule 18f-2 thereunder.

    Applicants' Conditions

    Applicants agree that any order granting the requested relief will be subject to the following conditions:

  8. Before a Fund or a Future Fund may rely on the order requested in the application, the operation of the Fund or a Future Fund in the manner described in the application will be approved by a majority of the Fund's or Future Fund's outstanding voting securities, as defined in the Act, or, in the case of a Fund or Future Fund whose public shareholders purchased shares on the basis of a prospectus containing the disclosure contemplated by condition 2 below, by the sole initial shareholder(s) before offering shares of such Fund or Future Fund to the public.

  9. Any Fund or Future 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, any such Fund will hold itself out to the public as employing the ``Subadviser'' structure described in the application. The prospectus with respect to the Funds and any Future Fund 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.

  10. The Adviser will provide general management services to the Investment Company and the Funds, including overall supervisory responsibility for the general management and investment of each Fund, and, subject to review and approval by the Board will (i) set each Fund's overall investment strategies; (ii) evaluate, select, and recommend Subadvisers to manage all or a part of Fund's assets; (iii) when appropriate, allocate and reallocate a Fund's assets among Subadvisers; (iv) monitor and evaluate the performance of Subadvisers; and (v) implement procedure reasonably designed to ensure that the Subadvisers comply with the relevant Fund's investment objective, policies, and restrictions.

  11. At all times, a majority of the 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.

  12. Neither the Investment Company nor the Adviser will enter into Investment Subadvisory Agreements on behalf of the Funds with any Affiliated Subadviser without such agreement, including the compensation to be paid thereunder, being approved by the shareholders of the applicable Fund.

  13. When a change of Subadviser is proposed for a Fund with an Affiliated Subadviser, the Board, including a majority of the Independent Trustees, will make a separate finding, reflected in the minutes of meetings of the Board that any change of Subadviser is in the best interest of the Fund and its shareholders, and does not involve a conflict of interest from which the Adviser or Affiliated Subadviser derives an inappropriate advantage.

    [[Page 797]]

  14. No trustee or officer of the Investment Company 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 ownership of interests in the Adviser or any entity that controls, is controlled by, or is under common control with the Adviser, 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 Subadviser of an entity that controls, is controlled by, or is under common control with a Subadviser.

  15. Within 90 days of the hiring of any new Subadviser, shareholders will be furnished all information about the new Subadviser that would be contained in a proxy statement, including any change in such disclosure caused by the addition of the new Subadviser. Each Fund will meet this condition by providing shareholders with an information statement meeting the requirements of Regulation 14C, Schedule 14C, and Item 22 of Schedule 14A under the Securities Exchange Act of 1934 within 90 days of the hiring of a Subadviser.

    For the Commission, by the Division of Investment Management, under delegated authority. Margaret H. McFarland, Deputy Secretary.

    [FR Doc. 00-231Filed1-5-00; 8:45 am]

    BILLING CODE 8010-01-M

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