

[Federal Register: December 9, 2005 (Volume 70, Number 236)]
[Notices]               
[Page 73315-73317]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09de05-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27177; 812-13173]

 
Firsthand Funds and Firsthand Capital Management, Inc.; Notice of 
Application

December 2, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application 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 and certain disclosure 
requirements.

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    Summary of the Application: The requested order would permit 
certain registered open-end management investment companies to enter 
into and materially amend subadvisory agreements without shareholder 
approval and would grant relief from certain disclosure requirements.
    Applicants: Firsthand Funds (the ``Trust'') and Firsthand Capital 
Management, Inc. (the ``Adviser'').
    Filing Date: The application was filed on March 9, 2005 and amended 
on November 22, 2005.
    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, 2005, 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 may request notification by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE, Washington, DC 20549-9303. Applicants, c/o Wendell M. 
Faria, Esq., Paul, Hastings, Janofsky & Walker LLP, 875 15th Street, 
Washington, DC 20005.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel, 
at (202) 551-6868, or Nadya B. Roytblat, Assistant Director, at (202) 
551-6821 (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 from 
the Commission's Public Reference Branch, 100 F Street, NE, Washington, 
DC 20549-0102 (telephone (202) 551-5850).

Applicants' Representations

    1. The Trust, a Delaware statutory trust, is registered under the 
Act as an open-end management investment company. The Trust currently 
offers five series (each a ``Fund,'' and collectively, the ``Funds''), 
each of which has its own investment objectives, policies and 
restrictions.\1\ The Adviser, registered under the Investment Advisers 
Act of 1940 (``Advisers Act''), serves as investment adviser to each 
Fund pursuant to an investment advisory agreement with the Trust 
(``Advisory Agreement''), that was approved by the board of trustees of 
the Trust (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 Adviser (``Independent Trustees''), and the 
shareholders of each applicable Fund.
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    \1\ Applicants also request relief with respect to future Funds 
of the Trust and any other existing or future registered open-end 
management investment company or series thereof that: (a) Is advised 
by the Adviser or a person controlling, controlled by or under 
common control with the Adviser; (b) uses the management structure 
described in this application; and (c) complies with the terms and 
conditions of this application (included in the term ``Funds''). The 
only existing registered open-end management investment company that 
currently intends to rely on the requested order is named as an 
applicant. If the name of any Fund contains the name of a Subadviser 
(as defined below), the name of the Adviser or the name of the 
entity controlling, controlled by, or under common control with the 
Adviser that serves as the primary adviser to the Fund will precede 
the name of the Subadviser.
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    2. Under the terms of the Advisory Agreement, the Adviser provides 
investment advisory services to each Fund, supervises the investment 
program for each Fund, and has the authority, subject to Board 
approval, to enter into investment subadvisory agreements 
(``Subadvisory Agreements'') with one or more subadvisers 
(``Subadvisers''). Currently, the Funds do not have any Subadvisers. 
Each Subadviser will be registered under the Advisers Act. The Adviser 
will monitor

[[Page 73316]]

and evaluate the Subadvisers and recommend to the Board their hiring, 
retention or termination. Subadvisers recommended to the Board by the 
Adviser will be selected and approved by the Board, including a 
majority of the Independent Directors. Each Subadviser will have 
discretionary authority to invest the assets or a portion of the assets 
of a particular Fund. The Adviser will compensate each Subadviser out 
of the fees paid to the Adviser under the Advisory Agreement.
    3. Applicants request relief to permit the Adviser, subject to 
Board approval, 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'').
    4. Applicants also request an exemption from the various disclosure 
provisions described below that may require a Fund to disclose fees 
paid by the Adviser to each Subadviser. An exemption is requested to 
permit the Trust to disclose for each Fund (as both a dollar amount and 
as a percentage of each Fund's net assets): (a) The aggregate fees paid 
to the Adviser and any Affiliated Subadvisers; and (b) the 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 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 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 company affected by a matter must approve such 
matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 14(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 (``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. 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 and to the extent that such 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 believe that their 
requested relief meets this standard for the reasons discussed below.
    7. Applicants state that the Funds' shareholders will rely on the 
Adviser and the Board to select the Subadvisers best suited to achieve 
a Fund's investment objectives. Applicants assert that, from the 
perspective of the investor, the role of the Subadvisers is comparable 
to that of individual portfolio managers employed by traditional 
investment advisory firms. Applicants contend that requiring 
shareholder approval of Subadvisory Agreements would impose unnecessary 
costs and delays on the Funds and may preclude the prompt replacement 
of a Subadviser when considered advisable by the Board and the Adviser. 
Applicants also note that the Advisory Agreement will remain subject to 
the shareholder approval requirements in section 15(a) of the Act and 
rule18f-2 under the Act.
    8. Applicants assert that some Subadvisers use a ``posted'' rate 
schedule to set their fees. Applicants state that while Subadvisers are 
willing to negotiate fees that are lower than those posted on the 
schedule, they are reluctant to do so where the fees are disclosed to 
other prospective and existing customers. Applicants submit that the 
requested relief will benefit Fund shareholders because it would 
improve the Adviser's ability to negotiate the fees paid to the 
Subadvisers.

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 
management 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 Subadvisers and 
recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of a new Subadviser, the affected 
Fund shareholders will be furnished all information about the new 
Subadviser that would be included in a proxy statement, except as 
modified to permit Aggregate Fee Disclosure. This information will 
include Aggregate Fee Disclosure and any change in such disclosure 
caused by the addition of the new Subadviser. To meet this obligation, 
the Fund will provide shareholders within 90 days of the hiring of a 
new Subadviser with an information statement meeting the requirements 
of Regulation 14C, Schedule 14C and Item 22 of Schedule 14A under the 
1934 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 that agreement, including the 
compensation to be paid thereunder, being approved

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by the shareholders of the applicable Fund.
    5. Each Fund will comply with the fund governance standards set 
forth in rule 0-1(a)(7) under the Act by the compliance date for the 
rule (``Compliance Date''). Prior to the Compliance Date, a majority of 
the 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 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 Subadviser derives an 
inappropriate advantage.
    7. Independent 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. The 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 Subadviser during the 
applicable quarter.
    9. Whenever a Subadviser 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 each 
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: (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) when appropriate, allocate and 
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 each 
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 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 
Aggregate Fee Disclosure.
    13. The requested order will expire on the effective date of rule 
15a-5 under the Act, if adopted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-23844 Filed 12-8-05; 8:45 am]

BILLING CODE 8010-01-P
