

[Federal Register: January 10, 2007 (Volume 72, Number 6)]
[Notices]               
[Page 1250-1252]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja07-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27653; 812-13319]

 
New River Funds and New River Advisers LLC; Notice of Application

January 3, 2007.
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: New River Funds (``Trust''), and New River Advisers LLC 
(``Manager'').

Filing Dates: The application was filed on August 1, 2006, and amended 
on December 27, 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 January 29, 2007 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 by 
writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants, c/o Doit L. Koppler 
II, New River Advisers LLC, 1881 Grove Avenue, Radford, VA 24141.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Julia Kim Gilmer, Branch Chief, at (202) 551-6871 
(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 
20549-0102 (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 
is comprised of two series (``Funds''), each with separate investment 
objectives, policies, and restrictions.\1\ The Manager, a Virginia 
limited liability company, is registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act'') and serves as 
investment manager to the Trust and each of the Funds pursuant to an 
investment management agreement (``Management Agreement''). The 
Management Agreement has been approved by the Trust'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, of 
the Trust or the Manager (``Independent Trustees''), as well as by the 
shareholders of each Fund.
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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 Manager; (b) uses the management structure as described in 
the application; and (c) complies with the terms and conditions of 
the application (included in the term ``Fund''). 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 Sub-Adviser (as defined 
below), the name of the Manager will precede the name of the Sub-
Adviser.
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    2. Under the Management Agreement, the Manager is responsible for 
providing investment advisory and administrative services to the Funds, 
subject to oversight by the Board. The Management Agreement permits the 
Manager to enter into a separate sub-advisory agreement (``Sub-Advisory 
Agreement'') with one or more sub-advisers (each, a ``Sub-Adviser'') to 
carry out the investment program of a Fund, subject to the approval of 
the Board and the shareholders of the Fund. The Adviser has entered 
into Sub-Advisory Agreements with two Sub-Advisers. Each Sub-Adviser is 
registered

[[Page 1251]]

as an investment adviser under the Advisers Act. The Manager monitors 
and evaluates the Sub-Advisers and makes recommendations to the Board, 
regarding their hiring, retention and termination. The shareholders and 
the Board, including a majority of the Independent Trustees, approve 
the Sub-Advisory Agreements. The Manager compensates each Sub-Adviser 
out of the fees paid to the Manager under the Management Agreement.
    3. Applicants request relief to permit the Manager, subject to 
Board approval, to enter into and materially amend Sub-Advisory 
Agreements for the Funds without 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 a Fund or of the 
Manager, other than by reason of serving as a Sub-Adviser to one or 
more of the Funds (``Affiliated Sub-Adviser'').
    4. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Funds to disclose the 
fees paid by the Manager to each Sub-Adviser. An exemption is requested 
to permit each Fund to disclose, both as a dollar amount and as a 
percentage of a Fund's net assets: (a) the aggregate fees paid to the 
Manager and Affiliated Sub-Advisers; and (b) the aggregate fees paid to 
Sub-Advisers other than Affiliated Sub-Advisers (``Aggregate Fee 
Disclosure''). For any Fund that employs an Affiliated Sub-Adviser, the 
Fund will provide separate disclosure of any fees paid to such 
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 Sub-Advisers.
    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 permitting the Manager to hire or change 
Sub-Advisers without incurring the unnecessary delay and expense of 
obtaining shareholder approval of each Sub-Advisory Agreement is 
appropriate in the interest of the Fund's shareholders and will allow 
each Fund to potentially operate more efficiently. Applicants assert 
that the shareholders have an expectation that the Manager will select 
the most appropriate Sub-Adviser. Applicants compare the role of Sub-
Advisers to that of individual portfolio managers employed by 
traditionally managed funds. Applicants note that the Management 
Agreements will continue to be subject to section 15(a) of the Act and 
rule 18f-2 under the Act.
    8. Applicants assert that many investment advisers charge their 
customers for advisory services according to a ``posted'' fee schedule. 
Applicants state that while investment advisers typically are willing 
to negotiate fees lower than those posted in 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 Sub-Advisers to negotiate lower sub-advisory fees with 
the Manager.

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 this application will be approved 
by a majority of the Fund's outstanding voting securities (as such term 
is defined in Section 2(a)(42) of 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 
initial shareholder(s) 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 this application. 
Each Fund relying on the order will hold itself out to the public as 
employing the manager-of-managers arrangement described in this 
application. The prospectus relating to each Fund will prominently 
disclose that its Manager has the ultimate responsibility (subject to 
oversight by the Board) to oversee Sub-Advisers and to recommend their 
hiring, termination, and replacement.
    3. Within 90 days of the hiring of a new Sub-Adviser for a Fund, 
the affected Fund'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 the Aggregate Fee Disclosure. This 
information will include Aggregate Fee Disclosure and any change in 
such disclosure caused by the addition of a new Sub-Adviser. To meet 
this condition, the Fund 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 Fund.

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    5. 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.
    6. When a Sub-Adviser change is proposed for a Fund with an 
Affiliated Sub-Adviser, 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 
such Fund 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. The Manager 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: (i) Set each Fund's overall investment 
strategies; (ii) evaluate, select and recommend Sub-Advisers to manage 
all or a part of the Fund's assets; (iii) when appropriate, allocate 
and reallocate the Fund's assets among multiple Sub-Advisers; (iv) 
monitor and evaluate the investment performance of the Sub-Advisers; 
and (v) implement procedures reasonably designed to ensure compliance 
by the Sub-Advisers with the Fund's investment objectives, policies and 
restrictions.
    8. No trustee or officer of the Trust, 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: (i) Ownership of interests in the 
Manager or any entity that controls, is controlled by, or is under 
common control with the Manager; or (ii) 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.
    9. Each Fund will disclose in its registration statement the 
Aggregate Fee Disclosure.
    10. Independent legal 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.
    11. The Manager will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Manager on a 
per-Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any Sub-Adviser during 
the applicable quarter.
    12. 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.
    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. E7-161 Filed 1-9-07; 8:45 am]

BILLING CODE 8011-01-P
