[Federal Register Volume 74, Number 182 (Tuesday, September 22, 2009)]
[Notices]
[Pages 48324-48327]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-22686]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28900; File No. 812-13516-01]


Grail Advisors LLC and Grail Advisors ETF Trust; Notice of 
Application

September 14, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application 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, including an actively-managed 
open-end exchange traded fund, 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: Grail Advisors LLC (``Manager'') and Grail Advisors ETF 
Trust (``Trust'').

[[Page 48325]]

    Filing Dates: The application was filed on April 10, 2008, and 
amended on May 15, 2009, and September 14, 2009.
    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 October 7, 2009 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, c/o Mr. William M. 
Thomas, Grail Advisors, LLC, One Ferry Building, Suite 255, San 
Francisco, CA 94111.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at 
(202) 551-6811, or Michael W. Mundt, 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 via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Trust is organized as a Delaware statutory trust and is 
registered under the Act as an open-end management investment company. 
The Trust operates as an actively-managed exchange traded open-end fund 
(``ETF'') in reliance on an exemptive order.\1\ The Trust currently has 
two initial funds (``Initial Funds''); additional funds (together with 
the Initial Funds, the ``Funds'') may be added in the future. Each Fund 
has its own investment objective(s), policies and restrictions.
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    \1\ Grail Advisors, LLC and Grail Advisors' Alpha ETF Trust, 
Investment Company Act Rel. Nos. 28571 (Dec. 23, 2008) (notice) and 
28604 (Jan. 16, 2009) (order).
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    2. The Manager, a Delaware limited liability company, is registered 
as an investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act''). The Manager is a majority-owned subsidiary of Grail 
Partners LLC. The Manager serves as the investment adviser to the 
Initial Funds and will serve as investment adviser to any other Fund. 
The Manager has an investment advisory agreement with the Trust for the 
Initial Funds (an ``Investment Advisory Agreement'') 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 (the ``Independent Board Members''), and the 
shareholders of each Fund.\2\
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    \2\ Applicants also request relief with respect to future Funds 
and any other existing or future registered open-end management 
investment company or series thereof that: (a) Is advised by the 
Manager or any person controlling, controlled by, or under common 
control with the Manager (included in the term ``Manager''); (b) 
uses the management structure described in the application; and (c) 
complies with the terms and conditions contained in the application 
(included in the term ``Funds''). The Trust is the only existing 
investment company that currently intends to rely on the requested 
order. If the name of any Fund contains the name of a Sub-Adviser 
(as defined below), the name of the Manager, including the legal 
name of the Manager and/or any ``doing business as'' or business 
unit names used by the Manager, will precede the name of the Sub-
Adviser.
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    3. Under the Investment Advisory Agreement, the Manager is 
responsible for providing a program of continuous investment management 
to each Fund in accordance with the investment objective, policies and 
limitations of the Fund. The Investment Advisory Agreement permits the 
Manager to enter into separate advisory agreements (``Sub-Advisory 
Agreements'') with sub-advisers (``Sub-Advisers''). Each Sub-Adviser 
is, and any future Sub-Adviser will be, registered as an investment 
adviser under the Advisers Act. The specific investment decisions for 
each Fund are made by the Manager based on purchase and sale 
recommendations from one or more Sub-Advisers selected by the Manager 
to focus on all or a portion of the assets of the Fund or, at the 
discretion of the Manager, by the Sub-Advisers themselves with respect 
to the portion of any Fund portfolio allocated to them, subject to the 
general supervision by the Manager and the Board. The Manager will 
select Sub-Advisers based on an evaluation of the Sub-Adviser's 
performance, the Sub-Adviser's fees and services in relation to other 
investment advisers performing similar services, the nature of the 
advice provided by the Sub-Adviser and the Sub-Adviser's reputation in 
the investment community. Sub-Advisers must be approved by the Board, 
including a majority of the Independent Board Members. The Manager will 
monitor and evaluate the performance of Sub-Advisers and recommend to 
the Board their hiring, termination and replacement. The Manager will 
compensate each Sub-Adviser out of the advisory fees paid to the 
Manager by the Fund.
    4. Applicants request an order to permit the Manager, subject to 
Board approval, to enter into and materially amend Subadvisory 
Agreements without obtaining shareholder approval. The requested relief 
will not extend to any Sub-Adviser who is an affiliated person, as 
defined in section 2(a)(3) of the Act, of a Fund, the Trust or the 
Manager, other than by reason of serving as a Sub-Adviser to one or 
more of the Funds (``Affiliated Sub-Adviser'').
    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Funds to disclose fees 
paid by the Manager to the Sub-Advisers. An exemption is requested to 
permit a Fund to disclose (both as a dollar amount and as a percentage 
of the Fund'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''). Any Fund that employs an Affiliated Sub-
Adviser will provide separate disclosure of any fees paid to the 
Affiliated Sub-Adviser.
    6. Applicants state that the requested relief is unusual insofar as 
the requested order seeks relief for an ETF. However, applicants 
believe that operations of the Funds under the requested order address 
the concerns historically considered by the Commission when granting 
identical relief to mutual funds. Applicants believe that similar to 
shareholders of a mutual fund who may ``vote with their feet'' by 
redeeming their individual shares at net asset value (``NAV'') if they 
do not approve of a change in sub-adviser or sub-advisory agreement, 
Fund shareholders will be able to sell shares in the secondary market 
at negotiated prices that closely track the relevant Fund's NAV if they 
do not approve of a change. Applicants state that the Funds will rely 
on the same delivery mechanisms currently used by certain mutual funds 
to ensure that shareholders who purchase shares in the secondary market 
receive a prospectus and all of the information that would have been 
provided in a proxy statement, except for the modifications discussed 
below, in an information statement. Applicants note that the requested 
relief is not broader in scope than the relief previously granted to 
mutual funds.

[[Page 48326]]

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 a 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 investment company affected by a matter must 
approve the 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\
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    \3\ Form N-1A was recently amended by the Commission, effective 
March 31, 2009, and Item 14(a)(3) should be read to refer to Item 
19(a)(3) for each Fund when that Fund begins using the revised form.
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    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 (``Exchange 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 seek the same relief previously granted to mutual 
funds, and believe that the requested relief is equally appropriate for 
ETFs. Applicants state that the requested relief meets the necessary 
standards for the reasons discussed below.
    7. Applicants assert that the shareholders rely on the Manager to 
select and monitor the Sub-Advisers best suited to achieve a Fund's 
investment objectives. Applicants contend that, from the perspective of 
the investor, the role of the Sub-Advisers is comparable to that of 
individual portfolio managers employed by traditional investment 
advisory firms. Applicants state that requiring shareholder approval of 
each Sub-Advisory Agreement would impose costs and unnecessary delays 
on the Funds, and may preclude the Manager from acting promptly in a 
manner considered advisable by the Board. Applicants note that the 
Investment Advisory Agreements 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 many Sub-Advisers use a ``posted'' rate 
schedule to set their fees. Applicants state that, while Sub-Advisers 
are willing to negotiate fees lower than those posted in the schedule, 
they are reluctant to do so when the fees are disclosed to other 
prospective and existing customers. Applicants submit that the 
requested relief will encourage potential Sub-Advisers to negotiate 
lower subadvisory 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 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. Each Fund will disclose in its prospectus the existence, 
substance and effect of the order granted pursuant to the application. 
In addition, 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 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 any new Sub-Adviser, the Manager 
will furnish shareholders 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 obligation, the Fund 
will provide shareholders of the applicable Fund 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 Exchange 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.
    5. At all times, at least a majority of the Board will be 
Independent Board Members and the nomination of new or additional 
Independent Board Members will be at the discretion of the then-
existing Independent Board Members.
    6. When a change of Sub-Adviser is proposed for a Fund with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Board Members, 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 Manager or an 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, for each Fund: (a) Set the Fund's 
overall investment strategies; (b) evaluate, select and recommend Sub-
Advisers to provide purchase and sale recommendations to the Manager or 
investment advice to all or a part of the Fund's assets; (c) when 
appropriate, allocate and reallocate the Fund's assets among multiple 
Sub-Advisers; (d) monitor and evaluate the Sub-Advisers'

[[Page 48327]]

performance; and (e) implement procedures reasonably designed to ensure 
compliance by the Sub-Advisers with the Fund's investment objective, 
policies and restrictions.
    8. No director, trustee or officer of the Trust or a Fund, or 
director or officer of the Manager, will own directly or indirectly 
(other than through a pooled investment vehicle over which such person 
does not have control), 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.
    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, has been and will continue to be engaged to represent the 
Independent Board Members. The selection of such counsel will be within 
the discretion of the then-existing Independent Board Members.
    11. In the event the Commission adopts a rule under the Act 
providing substantially similar relief to that in the order requested 
in the application, the requested order will expire on the effective 
date of that rule.
    12. The Manager will provide the Board, no less frequently than 
quarterly, with information about the Manager's profitability on a per 
Fund basis. This information will reflect the impact on profitability 
of the hiring or termination of any Sub-Adviser during the applicable 
quarter.
    13. 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-22686 Filed 9-21-09; 8:45 am]
BILLING CODE 8010-01-P