

[Federal Register: May 10, 2007 (Volume 72, Number 90)]
[Notices]               
[Page 26657-26659]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10my07-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27818; 812-13268]

 
First American Investment Funds, Inc., et al.; Notice of 
Application

May 4, 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: First American Investment Funds, Inc. (``FAIF'') and FAF 
Advisors, Inc. (``Adviser'').

Filing Dates: The application was filed on March 8, 2006, and amended 
on May 1, 2007.

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 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, 800 Nicollet Mall, 
Minneapolis, MN 55402.

FOR FURTHER INFORMATION CONTACT: Lewis B. Reich, Senior Counsel, at 
(202) 551-6919, 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. FAIF is organized as a Maryland corporation and is registered 
under the Act as an open-end management investment company. FAIF 
currently offers its shares in 39 series, each with its own investment 
objectives, restrictions and policies. Two of these series, the 
International Fund and the International Select Fund (collectively, the 
``International Funds'') will operate under a manager of managers 
structure. Applicants also request relief for any other existing or 
future series of FAIF that is advised by the Adviser or by an entity 
that controls, is controlled by, or is under common control with the 
Adviser, uses the manager of managers investment management approach, 
and complies with the terms and conditions of the application (such 
series, together with the International Funds, the ``Funds'').\1\
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    \1\ All existing entities that currently intend to rely on the 
order are named as applicants. If the name of any Fund contains the 
name of a Money Manager (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 Money Manager.
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    2. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act'') and serves as 
investment adviser to the International Funds pursuant to an investment 
advisory agreement (``Advisory Agreement'') with each Fund. The 
Advisory Agreement between the Adviser and FAIF, acting on behalf of 
the International Funds, was approved by the shareholders of the 
International Fund and the initial shareholder of the International 
Select Fund and by the Board of each International Fund, including a 
majority of the directors who are not ``interested persons'' as defined 
in section 2(a)(19) of the Act (``Independent Directors''), of the 
International Funds.
    3. Under the terms of the Advisory Agreements, the Adviser will 
provide

[[Page 26658]]

general investment management services to each Fund, including overall 
supervisory responsibility for the general management and investment of 
the Fund's assets, and have the authority, subject to Board approval, 
to enter into investment subadvisory agreements (``Investment 
Subadvisory Agreements'') with one or more subadvisers (``Money 
Managers''). Each Money Manager will be registered under the Advisers 
Act. The Adviser will evaluate, allocate assets to and oversee the 
Money Managers and recommend to the Board their hiring, retention or 
termination. Money Managers recommended to the Board by the Adviser are 
selected and approved by the Board, including a majority of the 
Independent Directors. Each Money Manager will have discretionary 
authority to invest the assets or a portion of the assets of the 
applicable Fund. The Adviser will compensate each Money Manager out of 
the fees paid to the Adviser under the Advisory Agreement.
    4. Applicants request an order that would permit the Adviser to 
select and hire Money Managers and materially amend Investment 
Subadvisory Agreements without obtaining shareholder approval. The 
requested relief will not extend to any Money Manager that is an 
affiliated person, as defined in section 2(a)(3) of the Act, of a Fund 
or the Adviser, other than by reason of serving as a Money Manager to 
one or more of the Funds (``Affiliated Money Manager'').
    5. Applicants also request an exemption from various disclosure 
provisions described below that may require a Fund to disclose fees 
paid by the Adviser to each Money Manager. An exemption is requested to 
permit a Fund to disclose (as both a dollar amount and as a percentage 
of the Fund's net assets): (a) The aggregate fees paid to the Adviser 
and any Affiliated Money Managers; and (b) the aggregate fees paid to 
Money Managers other than Affiliated Money Managers (collectively, 
``Aggregate Fee Disclosure''). For any Fund that employs an Affiliated 
Money Manager, the Fund will provide separate disclosure of any fees 
paid to the Affiliated Money Manager.

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 an 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 Money Managers.
    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 of a Fund rely on the 
Adviser to select one or more Money Managers which have the appropriate 
skills and experience to manage the assets of the Fund. Applicants 
assert that, from the perspective of an investor in a Fund, the role of 
the Money Managers is substantially equivalent to that of the 
individual portfolio managers employed by traditional investment 
company advisory firms. Applicants state that requiring shareholder 
approval of each Investment Subadvisory Agreement would impose costs 
and unnecessary delays on the Funds, and may preclude the Adviser from 
acting promptly in a manner considered advisable by the Board. 
Applicants note that the Advisory Agreement and any Investment 
Subadvisory Agreement with an Affiliated Money Manager will remain 
subject to section 15(a) of the Act and rule 18f-2 under the Act.
    8. Applicants assert that some Money Managers use a ``posted'' rate 
schedule to set their fees. Applicants state that while Money Managers 
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 would allow the Adviser to negotiate more effectively 
with each individual Money 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 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 Money Managers and 
recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of a new Money Manager, the 
affected Fund shareholders will be furnished all information about the 
new Money Manager that would be included in a proxy statement, except 
as modified by the order to permit Aggregate Fee Disclosure. This 
information will include Aggregate Fee Disclosure and

[[Page 26659]]

any change in such disclosure caused by the addition of the new Money 
Manager. To meet this obligation, the Fund will provide shareholders 
within 90 days of the hiring of a new Money Manager 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 an Investment Subadvisory 
Agreement with any Affiliated Money Manager without that agreement, 
including the compensation to be paid thereunder, being approved by 
Fund shareholders.
    5. At all times, at least a majority of the Board will be 
Independent Directors, and the nomination of new or additional 
Independent Directors will be at the discretion of the then existing 
Independent Directors.
    6. When a Money Manager change is proposed for a Fund with an 
Affiliated Money Manager, the Board, including a majority of the 
Independent Directors, 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 Money Manager 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 Independent Directors. The 
selection of such counsel will be within the discretion of the then 
existing Independent Directors.
    8. Whenever a Money Manager is hired or terminated, the Adviser 
will provide the Board with information showing the expected impact on 
the profitability of the Adviser.
    9. The Adviser will provide general investment 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 Money 
Managers to manage all or a part of a Fund's assets, (c) when 
appropriate, allocate and reallocate a Fund's assets among multiple 
Money Managers, (d) monitor and evaluate the performance of Money 
Managers, and (e) implement procedures reasonably designed to ensure 
that the Money Managers comply with each Fund's investment objective, 
policies and restrictions.
    10. No director or officer of a Fund, 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 Money Manager, 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 Money Manager or an entity that 
controls, is controlled by or is under common control with a Money 
Manager.
    11. Each Fund will disclose in its registration statement the 
Aggregate Fee Disclosure.
    12. The requested order will expire on the effective date of Rule 
15a-5 under the Act, if adopted.
    13. 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 Money Manager during 
the applicable quarter.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-9001 Filed 5-9-07; 8:45 am]

BILLING CODE 8010-01-P
