

[Federal Register: November 8, 2006 (Volume 71, Number 216)]
[Notices]               
[Page 65552-65554]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no06-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27544; 812-13266]

 
Fidelity Management & Research Company, et al.; Notice of 
Application

November 2, 2006.
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, as well as certain disclosure 
requirements.

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    Summary of 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: Fidelity Management & Research Company (``FMR''), 
Strategic Advisers, Inc. (``Strategic''), Fidelity Rutland Square Trust 
II (``Rutland II''), Fidelity Rutland Square Trust III (``Rutland 
III''), Fidelity Rutland Square Trust IV (``Rutland IV''), and Fidelity 
Commonwealth Trust II (``Commonwealth,'' collectively with Rutland II, 
Rutland III, and Rutland IV, the ``Trusts'').
    Filing Dates: The application was filed on March 6, 2006, and 
amended on June 1, 2006, and October 9, 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 November 27, 2006, 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 may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants, 82 Devonshire Street, 
Boston MA 02109.

FOR FURTHER INFORMATION CONTACT: Christine Y. Greenlees, Senior 
Counsel, at (202) 551-6879, or Janet M. Grossnickle, Branch Chief, 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 at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-0102 (telephone (202) 551-5850).

Applicants' Representations

    1. Each Trust is a Delaware statutory trust and, prior to relying 
on the requested order, will be registered under the Act as an open-end 
management investment company. Each Trust will consist of one or more 
Portfolios (as defined below).\1\ Strategic and FMR are investment 
advisers registered under the Investment Advisers Act of 1940 (the 
``Advisers Act''). Any other Manager relying on the requested order 
will be an investment adviser registered under the Advisers Act. 
Strategic and FMR are wholly-owned direct subsidiaries of FMR Corp., a 
Delaware corporation. It is currently anticipated that Strategic will 
serve as the Manager to each Portfolio.\2\
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    \1\ Applicants also request relief with respect to any 
investment adviser controlling, controlled by or under common 
control with FMR (individually or collectively, the ``Manager'') and 
any current or future series of the Trusts that: (a) is advised by 
the Manager; (b) uses the manager of managers structure described in 
the application; and (c) complies with the terms and conditions of 
the application (each such series, a ``Portfolio''). All existing 
Trusts that currently intend to rely on the requested order are 
named as applicants. If the name of any Portfolio contains the name 
of a Sub-Adviser (as defined below), the name of the Manager will 
precede the name of the Sub-Adviser.
    \2\ Applicants request that the requested order apply to the 
Trusts' and any Portfolio's successors in interest. A successor in 
interest is limited to entities that result from a reorganization 
into another jurisdiction or a change in the type of business 
organization.
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    2. The Manager will serve as investment adviser to each Portfolio 
pursuant to an investment management agreement between the Manager and 
the Trust, on behalf of the Portfolio (the ``Advisory Agreement''). The 
Advisory Agreement will be approved by the shareholders of the 
Portfolio and by the applicable board of trustees or directors (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 Portfolio or the Manager (the ``Disinterested 
Trustees'').
    3. Under the terms of the Advisory Agreement, the Manager will be 
responsible for providing a program of continuous investment management 
to each Portfolio in accordance with the investment objective, policies 
and limitations of the Portfolio. The Advisory Agreement also 
authorizes the Manager, subject to Board approval, to enter into 
investment sub-advisory agreements (``Sub-Advisory Agreements'') with 
one or more sub-advisers (``Sub-Advisers''). Each Sub-Adviser will be 
registered as an investment adviser under the Advisers Act. The Manager 
will monitor and evaluate the Sub-Advisers and recommend to the Board 
their hiring, retention or termination. Sub-Advisers recommended to the 
Board by the Manager will be selected and approved by the Board, 
including a majority of the Disinterested Trustees. Each Sub-Adviser 
will have discretionary authority to invest all or a portion of the 
assets of the Portfolio it serves. The Manager will compensate each 
Sub-Adviser out of the fees paid to the

[[Page 65553]]

Manager under the Advisory Agreement.
    4. Applicants request an order to permit the Manager, subject to 
Board approval, to enter into and materially amend 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, the Portfolios or 
the Manager, other than by reason of serving as a Sub-Adviser to one or 
more Portfolios (``Affiliated Subadviser'').
    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require a Portfolio to disclose 
fees paid by the Manager to each Sub-Adviser. An exemption is requested 
to permit the Trust to disclose for each Portfolio (as both a dollar 
amount and as a percentage of the Portfolio's net assets): (a) The 
aggregate fees paid to the Manager and any Affiliated Sub-Advisers; and 
(b) the aggregate fees paid to Sub-Advisers other than Affiliated Sub-
Advisers (collectively, ``Aggregate Fee Disclosure''). If the Manager 
employs an Affiliated Sub-Adviser on behalf of a Portfolio, the Trust 
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 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 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 the shareholders are relying on the 
Manager's experience to select one or more Sub-Advisers well suited to 
achieve a Portfolio's investment objectives. Applicants assert that, 
from the perspective of the investor, the role of the Sub-Advisers is 
comparable 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 costs and unnecessary delays on the Portfolio, and may preclude 
the Manager from acting promptly in a manner considered advisable by 
the Board. Applicants note that the Advisory Agreement and any Sub-
Advisory Agreement with an Affiliated Sub-Adviser will remain subject 
to section 15(a) of the Act and rule 18f-2 under the Act.
    8. Applicants assert that some Sub-Advisers use a ``posted'' rate 
schedule to set their fees. Applicants state that while Sub-Advisers 
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 allow the Manager to negotiate more effectively 
with each Sub-Adviser.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Portfolio may rely on the order, the operation of the 
Portfolio in the manner described in the application will be approved 
by a majority of the Portfolio's outstanding voting securities, as 
defined in the Act, or, in the case of a Portfolio 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 Portfolio's shares to the public.
    2. The prospectus for the Portfolio will disclose the existence, 
substance, and effect of any order granted pursuant to the application. 
The Portfolio 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 Manager has ultimate 
responsibility (subject to oversight by the Board) to oversee the Sub-
Advisers and recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of a new Sub-Adviser, the affected 
Portfolio's shareholders will be furnished all information about the 
new Sub-Adviser 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 Sub-Adviser. To meet this obligation, 
the Portfolio will provide shareholders within 90 days of the hiring of 
a new Sub-Adviser 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 Manager 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 Portfolio.
    5. At all times, at least a majority of the Board will be 
Disinterested Trustees, and the nomination of new or additional 
Disinterested Trustees will be placed within the discretion of the 
then-existing Disinterested Trustees.
    6. When a Sub-Adviser change is proposed for a Portfolio with an 
Affiliated Sub-Adviser, the Board,

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including a majority of the Disinterested Trustees, will make a 
separate finding, reflected in the applicable Board minutes, that such 
change is in the best interests of the Portfolio and its shareholders, 
and does not involve a conflict of interest from which the Manager 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 Disinterested Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Disinterested Trustees.
    8. The Manager will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Manager on a 
per-Portfolio 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 Manager will 
provide the Board with information showing the expected impact on the 
profitability of the Manager.
    10. The Manager will provide general management services to each 
Portfolio, including overall supervisory responsibility for the general 
management and investment of the Portfolio's assets, and, subject to 
review and approval of the Board, will: (a) Set the Portfolio's overall 
investment strategies; (b) evaluate, select and recommend Sub-Advisers 
to manage all or a part of the Portfolio's assets; (c) when 
appropriate, allocate and reallocate the Portfolio's assets among 
multiple Sub-Advisers; (d) monitor and evaluate the performance of Sub-
Advisers; and (e) implement procedures reasonably designed to ensure 
that the Sub-Advisers comply with the Portfolio's investment objective, 
policies and restrictions.
    11. No trustee or officer of a Portfolio, or director or officer of 
the Manager, 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: (a) Ownership of interests in 
the Manager or any entity that controls, is controlled by, or is under 
common control with the Manager, or (b) ownership of less than 1% of 
the outstanding securities of any class of equity or debt of any 
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 Portfolio 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.
Nancy M. Morris,
Secretary.
[FR Doc. E6-18890 Filed 11-7-06; 8:45 am]

BILLING CODE 8011-01-P
