

[Federal Register: May 3, 2006 (Volume 71, Number 85)]
[Notices]               
[Page 26130-26132]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my06-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27304; 812-13113]

 
Forum Funds, et al.; Notice of Application

April 26, 2006.
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.

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    Summary of the Application: Applicants request an order that would 
permit them to enter into and materially amend subadvisory agreements 
without shareholder approval and would grant relief from certain 
disclosure requirements.
    Applicants: Forum Funds (``Trust''), and Brown Investment Advisory 
Incorporated (``Advisor'').
    Filing Dates: The application was filed on July 29, 2004, and 
amended on February 13, 2006 and April 25, 2006.
    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 May 22, 2006 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: Anthony C.J. 
Nuland, Seward & Kissel LLP, 1200 G Street, NW., Washington, DC 20005.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Janet M. Grossnickle, Branch Chief, at (202) 551-
6821 (Office of Investment Company Regulation, Division of Investment 
Management).

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, 100 F Street, NE., Washington, DC 
20549-0104 (telephone (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 currently 
is comprised of twenty-eight series (``Funds''), each with a separate 
investment objective, policy, and restrictions.\1\ The Advisor, a 
Maryland corporation, is registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act'') and serves as 
investment adviser to nine of the existing Funds (``Series'') pursuant 
to investment advisory agreements (``Advisory Agreements''). Each 
Advisory Agreement has been approved by the Trust's board of trustees 
(the ``Board''),\2\ 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 Advisor (``Independent Trustees''), as well as by the 
shareholders of each Series.
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    \1\ Applicants also request relief with respect to future series 
of the Trust and any other existing or future registered open-end 
management investment company or series thereof that: (a) Is advised 
by the Advisor or an entity controlling, controlled by, or under 
common control with the Advisor; (b) uses the multi-manager 
structure as described in the application; and (c) complies with the 
terms and conditions of the application (included in the term 
``Series''). The only existing registered open-end management 
investment company that currently intends to rely on the requested 
order is named as an applicant. All references to the term 
``Advisor'' herein include (a) the Advisor or its successor in 
interest (limited to any entity resulting from a reorganization of 
the Advisor into another jurisdiction or a change in the type of 
business organization), and (b) an entity controlling, controlled 
by, or under common control with the Advisor. If the name of any 
Series contains the name of a Subadvisor (as defined below), the 
name of the Advisor will precede the name of the Subadvisor.
    \2\ With respect to a Series not part of the Trust, the term 
``Board'' refers to the board of directors/trustees of the relevant 
Series.
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    2. Applicants propose to establish a program in which the Advisor, 
in its capacity as investment adviser to each Series, oversees the 
portfolio management of a Series by its subadvisers (each, a 
``Subadvisor''). The Advisor would provide overall investment 
management services to each Series, including Subadvisor monitoring and 
evaluation and would be responsible for recommending the hiring, 
termination and replacement of Subadvisors to the Board. All 
subadvisory agreements (``Subadvisory Agreements'') will be approved by 
the Board, including a majority of the Independent Trustees. Under each 
Subadvisory Agreement, the Subadvisor would determine which securities 
will be purchased and sold for a Series' investment portfolio or for a 
portion of the portfolio. Each Subadvisor will be registered under the 
Advisers Act and paid by the Advisor out of the fee it receives from 
the Series under its Advisory Agreement. Applicants request an order to 
permit the Advisor, subject to Board approval, to enter into and 
materially amend Subadvisory Agreements without obtaining shareholder 
approval. The requested relief will not extend to any Subadvisor that 
is an affiliated person, as defined in section 2(a)(3) of the Act, of a 
Series or of the Advisor, other than by reason of serving as a 
Subadvisor to one or more of the Series (``Affiliated Subadvisor'').
    3. Applicants also request an exemption from the various disclosure 
provisions described below that may require a Series to disclose fees 
paid by the Advisor to each Subadvisor. An exemption is requested to 
permit each Series, in the event that a Series has more than one 
Subadvisor, to disclose (both as a dollar amount and as a percentage of 
a Series' net assets): (a) The aggregate fees paid to the Advisor and 
Affiliated Subadvisors; and (b) aggregate fees paid to Subadvisors 
other than Affiliated Subadvisors (``Aggregate Fee Disclosure''). For 
any Series that employs an Affiliated Subadvisor, the Series will 
provide separate disclosure of any fees paid to such Affiliated 
Subadvisor.

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 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

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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 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.
    7. Applicants assert that by investing in a Series, shareholders 
are in effect hiring the Advisor to manage the Series' assets through 
monitoring and evaluation of Subadvisors rather than by hiring the 
Advisor's own employees to directly manage assets, and that 
shareholders will expect that the Advisor will oversee its Subadvisors 
and recommend whether to hire, terminate or replace such Subadvisors 
when deemed appropriate. Applicants believe that permitting the Advisor 
to hire Subadvisors without incurring the unnecessary delay and expense 
of obtaining shareholder approval of each Subadvisory Agreement is 
appropriate in the interest of the Series' shareholders and will allow 
each Series to potentially operate more efficiently. Applicants note 
that the Advisory Agreements will continue to be subject to section 
15(a) of the Act and rule 18f-2 under the Act.
    8. Applicants assert that, because the Advisor compensates the 
Subadvisors out of the fee it receives from each Series for advisory 
services, disclosure of the individual fees that the Advisor would pay 
to each Subadvisor in a co-subadvisory or multi-subadvisory situation 
does not serve any meaningful purpose. Applicants further assert that 
some Subadvisors use a ``posted'' rate schedule to set their fees. 
Applicants state that while Subadvisors 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 encourage 
potential Subadvisors to negotiate lower subadvisory fees with the 
Advisor, the benefits of which may be passed on to Series shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Advisor will provide general investment management services 
to each Series, including overall supervisory responsibility for the 
general management and investment of the Series' assets and, subject to 
review and approval of the Board, will: (i) Set the Series' overall 
investment strategies; (ii) evaluate, select and recommend Subadvisors 
to manage all or a portion of a Series' assets; (iii) allocate and, 
when appropriate, reallocate a Series' assets among multiple 
Subadvisors; (iv) monitor and evaluate Subadvisor performance; and (v) 
implement procedures reasonably designed to ensure that Subadvisors 
comply with the relevant Series' investment objective, policies and 
restrictions.
    2. Before a Series may rely on the order requested herein, the 
operation of the Series in the manner described in this application 
will be approved by a majority of the Series' outstanding voting 
securities as defined in the Act, or, in the case of a Series whose 
public shareholders purchase shares on the basis of a prospectus 
containing the disclosure contemplated by condition 3 below, by the 
initial shareholder before such Series' shares are offered to the 
public.
    3. The prospectus for each Series will disclose the existence, 
substance and effect of any order granted pursuant to this application. 
In addition, each Series will hold itself out to the public as 
employing the manager of managers structure described in this 
application. The prospectus will prominently disclose that the Advisor 
has ultimate responsibility, subject to oversight by the Board, to 
oversee the Subadvisors and recommend their hiring, termination, and 
replacement.
    4. Within 90 days of the hiring of any new Subadvisor, the 
shareholders of the relevant Series will be furnished all information 
about the new Subadvisor 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 a new Subadvisor. To meet this obligation, 
the Advisor will provide shareholders of the applicable Series, within 
90 days of the hiring of a new Subadvisor, 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.
    5. No trustee or officer of the Trust or a Series or director 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 Subadvisor except for: (i) ownership of 
interests in the Advisor or any entity that controls, is controlled by, 
or is under common control with the Advisor; 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 Subadvisor or an entity that 
controls, is controlled by or is under common control with a 
Subadvisor.
    6. At all times, at least 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. The Board also will satisfy the fund 
governance standards defined in rule 0-1(a)(7) under the Act.
    7. Whenever a Subadvisor change is proposed for a Series with an 
Affiliated Subadvisor, the Series' 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 Series and its shareholders and does not involve a conflict of 
interest from which the Advisor or the Affiliated Subadvisor derives an 
inappropriate advantage.
    8. Each Series in its registration statement will disclose the 
Aggregate Fee Disclosure.
    9. Independent legal counsel, as defined in rule 0-1(a)(6) under 
the Act,

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will be engaged to represent the Independent Trustees. The selection of 
such counsel will be within the discretion of the then-existing 
Independent Trustees.
    10. The Advisor will provide the Board, no less frequently than 
quarterly, with information about the Advisor's profitability on a per 
Series basis. This information will reflect the impact on profitability 
of the hiring or termination of any Subadvisor during the applicable 
quarter.
    11. Whenever a Subadvisor is hired or terminated, the Advisor will 
provide the Board with information showing the expected impact on the 
Advisor's profitability.
    12. The Advisor will not enter into a Subadvisory Agreement with 
any Affiliated Subadvisor, without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Series.
    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.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-6638 Filed 5-2-06; 8:45 am]

BILLING CODE 8010-01-P
