Document ID: SEC-2014-1379-0001
Agency: sec
Document Type: Notice
Title: Applications: Principal Funds, Inc., et al.
Posted Date: 2014-08-15T04:00Z

[Federal Register Volume 79, Number 158 (Friday, August 15, 2014)]
[Notices]
[Pages 48258-48262]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19338]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31203; File No. 812-14138]

Principal Funds, Inc., et al.; Notice of Application

August 11, 2014.
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: Summary of Application: Applicants request an order that would 
amend and supersede a prior order (the ``Non-Affiliated Sub-Adviser 
Order'') \1\ that permits them to enter into and materially amend 
subadvisory agreements for certain multi-managed funds with non-
affiliated sub-advisers without shareholder approval and grants relief 
from certain disclosure requirements. The requested order would permit 
applicants to enter into, and amend, such agreements with Wholly-Owned 
Sub-Advisers (as defined below) and non-affiliated sub-advisers without 
shareholder approval.
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    \1\ Principal Management Corporation, et al., Investment Company 
Act Release Nos. 23613 (Dec. 21, 1998) (notice) and 23655 (Jan. 19, 
1999) (order).
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    Applicants: Principal Funds, Inc. (``PFI'') and Principal Variable 
Contracts Funds, Inc. (``PVC'', each an ``Investment Company'' and 
collectively, the ``Investment Companies''), and Principal Management 
Corporation (``PMC'').

DATES: Filing Dates: The application was filed on March 27, 2013, and 
amended on June 3, 2013, November 15, 2013, April 10, 2014 and July 30, 
2014.
    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 September 5, 2014 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, The Principal 
Financial Group, Des Moines, Iowa 50392-0300.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's Office).

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. Each Investment Company is a Maryland corporation which is 
registered with the Commission as an open-end management investment 
company under the Act. Each Investment Company offers multiple series 
of shares (``Series'') with its own

[[Page 48259]]

distinct investment objective, policies and restrictions. Each Series 
has, or will have, as its investment adviser, PMC, or another 
investment adviser controlling, controlled by or under common control 
with PMC or its successors (each, an ``Adviser'' and, collectively with 
the Investment Companies, the ``Applicants'').\2\ PMC is an Iowa 
corporation and an indirect wholly-owned subsidiary of Principal 
Financial Group, Inc., the ultimate parent entity of Principal Life 
Insurance Company (``Principal Life''), an Iowa stock life insurance 
company.\3\
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    \2\ The Adviser is, and any future Adviser also will be, 
registered with the Commission as an investment adviser under the 
Investment Advisers Act of 1940, as amended (``Advisers Act''). For 
purposes of the requested order, ``successor'' is limited to an 
entity that results from a reorganization into another jurisdiction 
or a change in the type of business organization.
    \3\ Applicants request that the relief apply to the Applicants, 
as well as to any existing or future Series and any other existing 
or future registered open-end management investment company or 
series thereof, including those that serve as funding media for 
variable insurance products offered by Principal Life, its 
affiliated insurance companies and other, unaffiliated insurance 
companies, that intends to rely on the order in the future and that 
is advised by the Adviser, uses the multi-manager structure 
described in the application, and complies with the terms and 
conditions of the application (``Subadvised Series''). All 
registered open-end investment companies that currently intend to 
rely on the requested order are named as Applicants. All Series that 
currently are, or that currently intend to be, Subadvised Series are 
identified in the application. Any entity that relies on the 
requested order will do so only in accordance with the terms and 
conditions contained in the application. If the name of any 
Subadvised Series contains the name of a Sub-Adviser (as defined 
below), the name of the Adviser that serves as the primary adviser 
to the Subadvised Series, or a trademark or trade name that is owned 
by or publicly used to identify that Adviser, will precede the name 
of the Sub-Adviser.
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    2. PMC serves as the investment adviser to each Series pursuant to 
an investment advisory agreement with the applicable Investment Company 
(``Investment Management Agreement''). The Investment Management 
Agreement for each existing Series was approved by the board of 
directors of the applicable Investment Company (each a ``Board''),\4\ 
including a majority of the directors who are not ``interested 
persons'', as defined in section 2(a)(19) of the Act, of the Investment 
Company, a Series or the Adviser (``Independent Board Members'') and by 
the shareholders of that Series as required by sections 15(a) and 15(c) 
of the Act and rule 18f-2 thereunder. The terms of each Investment 
Management Agreement comply with section 15(a) of the Act. Any future 
Investment Management Agreement also will comply with section 15(a) of 
the Act and will be similarly approved.
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    \4\ The term ``Board'' also includes the board of trustees or 
directors of a future Subadvised Series.
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    3. Under the terms of each Investment Management Agreement, PMC, 
subject to the supervision of the applicable Board, provides investment 
advisory, research and statistical services, furnishes the Board a 
recommended investment program for each Series consistent with its 
investment objective, strategies, policies and restrictions, is 
authorized to implement such investment programs by placing orders for 
the purchase and sale of securities and assists the officers of the 
Investment Company regarding the general conduct of its investment 
business. PMC periodically reviews a Series' investment policies and 
strategies and based on the need of a particular Series, may recommend 
changes to the investment policies and strategies of the Series for 
consideration by the Board. For its services to each Series under the 
applicable Investment Management Agreement, PMC receives an investment 
management fee from the Series based on a percentage of the average net 
assets of the Series. The terms of each Investment Management Agreement 
permit PMC, subject to the approval of the applicable Board, including 
a majority of the Independent Board Members, and the shareholders of 
the applicable Series (if required), to delegate portfolio management 
responsibilities of all or a portion of the assets of a Subadvised 
Series to one or more sub-advisers.
    4. Pursuant to the terms of each Investment Management Agreement, 
PMC's responsibilities with respect to each such Series include: (i) 
Recommending the selection, retention, removal or replacement of sub-
advisers; (ii) determining the portion of the Series' assets to be 
managed by any given sub-adviser; and (iii) reallocating those assets 
as necessary from time to time among PMC and/or the sub-advisers 
retained for management of the assets of the Series. In addition, PMC 
monitors and reviews each sub-adviser's performance and its compliance 
with the Series' investment objective, strategies, policies and 
restrictions.
    5. PMC has entered into sub-advisory agreements with various sub-
advisers to provide investment management services to the Subadvised 
Series. The terms of each Sub-Advisory Agreement (as defined below) 
comply fully with the requirements of section 15(a) of the Act and were 
approved by the applicable Board, including a majority of the 
Independent Board Members, and, to the extent that the Non-Affiliated 
Sub-Adviser Order did not apply, the shareholders of the Subadvised 
Series in accordance with sections 15(a) and 15(c) of the Act and rule 
18f-2 thereunder. The specific investment decisions for each Subadvised 
Series will be made by the Sub-Adviser which has discretionary 
authority to invest the assets or a portion of the assets of that 
Subadvised Series, subject to the general supervision of the Adviser 
and the Board. The Adviser agrees to pay each Sub-Adviser a fee based 
generally on a percentage of the average net assets of the applicable 
Subadvised Series or portion thereof overseen by the Sub-Adviser.
    6. Applicants request an order to permit the Adviser, subject to 
the approval of the Board, including a majority of the Independent 
Board Members, to, without obtaining shareholder \5\ approval: (i) 
Select Sub-Advisers \6\ to manage all or a portion of the assets of a 
Series and enter into sub-advisory agreements with the Sub-Advisers 
(``Sub-Advisory Agreements''), and (ii) materially amend Sub-Advisory 
Agreements with the Sub-Advisers.\7\ The requested relief will not 
extend (i) to any sub-adviser, other than a Wholly-Owned Sub-Adviser, 
which is an affiliated person, as defined in section 2(a)(3) of the 
Act, of the Subadvised Series or of the Adviser, other than by reason 
of serving as a sub-adviser to one or more of the Subadvised Series; 
and (ii) to Cliffwater LLC, a non-affiliated sub-adviser of the PFI 
Global Multi-Strategy Fund which does not manage a portion of the 
assets of such Fund but provides services to PMC with respect to 
selecting, monitoring, evaluating and allocating assets among the other 
Sub-Advisers of PFI Global Multi-Strategy

[[Page 48260]]

Fund (collectively, ``Excluded Sub-Adviser'').
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    \5\ The term ``shareholder'' includes variable life and variable 
annuity contract owners having the voting interest in a separate 
account for which a Series serves as a funding medium.
    \6\ A ``Sub-Adviser'' is (1) an indirect or direct ``wholly-
owned subsidiary'' (as such term is defined in the Act) of the 
Adviser for that Series, or (2) a sister company of the Adviser for 
that Series that is an indirect or direct ``wholly-owned 
subsidiary'' (as such term is defined in the Act) of the same 
company that, indirectly or directly, wholly owns the Adviser (each 
of (1) and (2) a ``Wholly-Owned Sub-Adviser'' and collectively, the 
``Wholly-Owned Sub-Advisers''), or (3) not an ``affiliated person'' 
(as such term is defined in section 2(a)(3) of the Act) of the 
applicable Investment Company, Series or the Adviser, except to the 
extent that an affiliation arises solely because the sub-adviser 
serves as a sub-adviser to a Series (each a ``Non-Affiliated Sub-
Adviser'').
    \7\ Shareholder approval will be required for any other sub-
adviser changes and material amendments to sub-advisory agreements 
with respect to sub-advisers other than a Non-Affiliated Sub-Adviser 
or a Wholly-Owned Sub-Adviser (all such changes are referred to as 
``Ineligible Sub-Adviser Changes'').
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    7. Subadvised Series will inform shareholders of the hiring of a 
new Sub-Adviser pursuant to the following procedures (``Modified Notice 
and Access Procedures''): (a) Within 90 days after a new Sub-Adviser is 
hired for any Subadvised Series, that Subadvised Series will send its 
shareholders either a Multi-Manager Notice or a Multi-Manager Notice 
and Multi-Manager Information Statement; \8\ and (b) the Subadvised 
Series will make the Multi-Manager Information Statement available on 
the Web site identified in the Multi-Manager Notice no later than when 
the Multi-Manager Notice (or Multi-Manager Notice and Multi-Manager 
Information Statement) is first sent to shareholders, and will maintain 
it on that Web site for at least 90 days. In the circumstances 
described in the application, a proxy solicitation to approve the 
appointment of new Sub-Advisers provides no more meaningful information 
to shareholders than the proposed Multi-Manager Information Statement. 
Applicants state that the applicable Board would comply with the 
requirements of sections 15(a) and 15(c) of the Act before entering 
into or amending Sub-Advisory Agreements.
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    \8\ A ``Multi-Manager Notice'' will be modeled on a Notice of 
Internet Availability as defined in rule 14a-16 under the Securities 
Exchange Act of 1934 (``Exchange Act''), and specifically will, 
among other things: (a) Summarize the relevant information regarding 
the new Sub-Adviser; (b) inform shareholders that the Multi-manager 
Information Statement is available on a Web site; (c) provide the 
Web site address; (d) state the time period during which the Multi-
Manager Information Statement will remain available on that Web 
site; (e) provide instructions for accessing and printing the Multi-
Manager Information Statement; and (f) instruct the shareholder that 
a paper or email copy of the Multi-Manager Information Statement may 
be obtained, without charge, by contacting the Subadvised Series.
    A ``Multi-Manager Information Statement'' will meet the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the Exchange Act for an information statement, except as 
modified by the order to permit Aggregate Fee Disclosure, as defined 
below. Multi-Manager Information Statements will be filed with the 
Commission via the EDGAR system.
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    8. Applicants also request an order exempting the Subadvised Series 
from certain disclosure obligations that may require the Applicants to 
disclose fees paid by the Adviser to each Sub-Adviser. Applicants seek 
relief to permit each Subadvised Series to disclose (as a dollar amount 
and a percentage of its net assets) (a) the aggregate fees paid to the 
Adviser and any Wholly-Owned Sub-Advisers, and (b) the aggregate fees 
paid to Non-Affiliated Sub-Advisers (collectively, the ``Aggregate Fee 
Disclosure''). Any Subadvised Series that employs an Excluded Sub-
Adviser will provide separate disclosure of any fees paid to such 
Excluded 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 investment adviser to a registered 
investment company ``except pursuant to a written contract, which 
contract, whether with such registered company or with an investment 
adviser of such registered company, has been approved by the vote of a 
majority of the outstanding voting securities of such registered 
company.'' Rule 18f-2 under the Act provides that each series or class 
of stock in a series company affected by a matter must approve that 
matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 19(a)(3) of Form N-1A requires a registered 
investment company to disclose in its statement of additional 
information the method of computing the ``advisory fee payable'' by the 
investment company, including the total dollar amounts that the 
investment company ``paid to the adviser (aggregated with amounts paid 
to affiliated advisers, if any), and any advisers who are not 
affiliated persons of the adviser, under the investment advisory 
contract for the last three fiscal years.''
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to a registered investment company to comply with Schedule 14A under 
the 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 fee,'' 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. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of a registered investment 
company's registration statement and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b), and (c) of Regulation S-X require 
a registered investment company to include in its financial statement 
information about the investment advisory fees.
    5. Section 6(c) of the Act provides that the Commission by order 
upon application may conditionally or unconditionally 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.
    6. Applicants assert that the shareholders expect the Adviser, 
subject to review and approval of the applicable Board, to select the 
Sub-Advisers who are in the best position to achieve the Subadvised 
Series' investment objective. Applicants assert that, from the 
perspective of the shareholder, the role of the Sub-Adviser is 
substantially equivalent to the role of the individual portfolio 
managers employed by an investment adviser to a traditional investment 
company. Applicants believe that permitting the Adviser to perform the 
duties for which the shareholders of the Subadvised Series are paying 
the Adviser--the selection, supervision and evaluation of the Sub-
Advisers--without incurring unnecessary delays or expenses is 
appropriate in the interest of the Subadvised Series' shareholders and 
will allow such Subadvised Series to operate more efficiently. 
Applicants state that each Investment Management Agreement will 
continue to be fully subject to section 15(a) of the Act and rule 18f-2 
under the Act and approved by the applicable Board, including a 
majority of the Independent Board Members, in the manner required by 
sections 15(a) and 15(c) of the Act. Applicants are not seeking an 
exemption with respect to the Investment Management Agreements.
    7. Applicants assert that disclosure of the individual fees that 
the Adviser would pay to the Sub-Advisers does not serve any meaningful 
purpose. Applicants contend that the primary reasons for requiring 
disclosure of individual fees paid to Sub-Advisers are to inform 
shareholders of expenses to be charged by a particular Subadvised 
Series and to enable shareholders to compare the fees to those of other 
comparable investment companies. Applicants believe that the requested 
relief satisfies these objectives because the advisory fee paid to the 
Adviser will be fully disclosed and therefore, shareholders will know 
what the Subadvised Series' fees and expenses are and will be able to 
compare the advisory fees a Subadvised Series is charged to those of 
other investment

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companies. Applicants assert that the requested disclosure relief would 
enhance the Adviser's ability to negotiate the fees paid to Sub-
Advisers. Applicants state that the Adviser may be able to negotiate 
rates that are below a Sub-Adviser's ``posted'' amounts if the Adviser 
is not required to disclose the Sub-Advisers' fees to the public. 
Applicants submit that the relief requested to use Aggregate Fee 
Disclosure will encourage Sub-Advisers to negotiate lower subadvisory 
fees with the Adviser if the lower fees are not required to be made 
public.
    8. Applicants submit that the requested relief meets the standards 
for relief under section 6(c) of the Act. Applicants agree to the 
condition that states that the operation of the Subadvised Series in 
the manner described in the application must be approved by 
shareholders of a Subadvised Series before that Subadvised Series may 
rely on the requested relief. In addition, Applicants state that the 
proposed conditions to the requested relief are designed to address any 
potential conflicts of interest, including any posed by the use of 
Wholly-Owned Sub-Advisers, and provide that shareholders are informed 
when new Sub-Advisers are hired. Applicants assert that the conditions 
are designed to provide the Board with sufficient independence and the 
resources and information it needs to monitor and address any conflicts 
of interest with ``affiliated persons'' of the Adviser, including, but 
not limited to, Wholly-Owned Sub-Advisers. Applicants state that the 
requested relief is 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' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions \9\:
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    \9\ Applicants will comply with conditions 8, 9 and 13 if they 
rely on the relief that would allow them to provide the Aggregate 
Fee Disclosure.
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    1. Before a Subadvised Series may rely on the order requested in 
the application, the operation of the Subadvised Series in the manner 
described in the application, including the hiring of Wholly-Owned Sub-
Advisers, will be, or has been, approved by a majority of the 
Subadvised Series' outstanding voting securities as defined in the Act 
(or, in the case of an insurance-related Subadvised Series, pursuant to 
the voting instructions provided by contract owners with assets 
allocated to any registered separate account for which the Subadvised 
Series serves as a funding medium), or, in the case of a new Subadvised 
Series 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 Subadvised Series' 
shares to the public.
    2. The prospectus for each Subadvised Series will disclose the 
existence, substance, and effect of any order granted pursuant to the 
application. Each Subadvised Series will hold itself out to the public 
as employing the multi-manager structure described in the application. 
The prospectus will prominently disclose that the Adviser has the 
ultimate responsibility, subject to oversight by the applicable Board, 
to oversee the Sub-Advisers and recommend their hiring, termination and 
replacement.
    3. The Adviser will provide general management services to a 
Subadvised Series, including overall supervisory responsibility for the 
general management and investment of the Subadvised Series' assets. 
Subject to review and approval of the applicable Board, the Adviser 
will (a) set a Subadvised Series' overall investment strategies, (b) 
evaluate, select, and recommend Sub-Advisers to manage all or a portion 
of a Subadvised Series' assets, and (c) implement procedures reasonably 
designed to ensure that Sub-Advisers comply with a Subadvised Series' 
investment objective, policies and restrictions. Subject to review by 
the applicable Board, the Adviser will (a) when appropriate, allocate 
and reallocate a Subadvised Series' assets among multiple Sub-Advisers; 
and (b) monitor and evaluate the performance of Sub-Advisers.
    4. A Subadvised Series will not make any Ineligible Sub-Adviser 
Changes without the approval of the shareholders of the applicable 
Subadvised Series.
    5. Subadvised Series will inform shareholders of the hiring of a 
new Sub-Adviser within 90 days after the hiring of the new Sub-Adviser 
pursuant to the Modified Notice and Access Procedures.
    6. At all times, at least a majority of each Board will be 
Independent Board Members, and the nomination of new or additional 
Independent Board Members will be placed within the discretion of the 
then-existing Independent Board Members.
    7. Independent Legal Counsel, as defined in rule 0-1(a)(6) under 
the Act, will 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.
    8. The Adviser will provide the applicable Board, no less 
frequently than quarterly, with information about the profitability of 
the Adviser on a per Subadvised Series 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 Adviser will 
provide the applicable Board with information showing the expected 
impact on the profitability of the Adviser.
    10. Whenever a Sub-Adviser change is proposed for a Subadvised 
Series with an Excluded Sub-Adviser or a Wholly-Owned Sub-Adviser, the 
applicable 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 
Subadvised Series and its shareholders and does not involve a conflict 
of interest from which the Adviser, Excluded Sub-Adviser or Wholly-
Owned Sub-Adviser derives an inappropriate advantage.
    11. No Board member or officer of a Subadvised Series or director, 
manager, 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 Sub-Adviser, except for (i) 
ownership of interests in the Adviser or any entity, except a Wholly-
Owned Sub-Adviser, that controls, is controlled by, or is under common 
control with the Adviser, 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 Sub-Adviser or an entity that controls, 
is controlled by, or is under common control with a Sub-Adviser.
    12. In the event the Commission adopts a rule under the Act 
providing substantially similar relief to that requested in the 
application, the requested order will expire on the effective date of 
that rule.
    13. Each Subadvised Series will disclose the Aggregate Fee 
Disclosure in its registration statement.
    14. Any new Sub-Advisory Agreement or any amendment to a Series' 
existing Investment Management Agreement or Sub-Advisory Agreement that 
directly or indirectly results in an increase in the aggregate advisory 
rate payable by the Series will be submitted to the Series' 
shareholders for approval.

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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19338 Filed 8-14-14; 8:45 am]
BILLING CODE 8011-01-P