Document ID: SEC-2013-1671-0001
Agency: sec
Document Type: Notice
Title: Applications: KP Funds and Callan Associates Inc., et al.
Posted Date: 2013-09-27T04:00Z

[Federal Register Volume 78, Number 188 (Friday, September 27, 2013)]
[Notices]
[Pages 59735-59738]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23541]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30693; File No. 812-14143]

The KP Funds and Callan Associates Inc., et al.; Notice of 
Application

September 23, 2013.
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 Application: Applicants request an order that would permit 
them to enter into and materially amend subadvisory agreements with 
Wholly-Owned Subadvisors (as defined below) and non-affiliated 
subadvisors without shareholder approval and would grant relief from 
certain disclosure requirements.

Applicants: The KP Funds (the ``Trust'') and Callan Associates Inc. 
(``Callan'').

Filing Dates: The application was filed on April 3, 2013, and amended 
on August 21, 2013 and September 19, 2013.

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 18, 2013, 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants: 
The Trust, One Freedom Valley Drive, Oaks, PA 19456; and Callan, 101 
California Street, Suite 3500, San Francisco, CA 94111.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at 
(202) 551-6873, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Exemptive Applications 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. The Trust is organized as a Massachusetts business trust and is 
registered under the Act as an open-end management investment company. 
The Trust currently intends to offer 14 series (each, a ``Fund'' and 
collectively, the ``Funds''), each with its own distinct investment 
objectives, policies and restrictions.\1\ Callan is organized as a 
California corporation and is registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act''). Each Fund has, 
or will have, as its investment adviser, Callan or another entity 
controlling, controlled by or under common control with Callan or its 
successors (collectively, the ``Advisor'').\2\ Any future Advisor will 
be registered as an investment adviser under the Advisers Act.\3\
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    \1\ The Funds that currently intend to rely on the requested 
order are KP Large Cap Equity Fund, KP Small Cap Equity Fund, KP 
International Equity Fund, and KP Fixed Income Fund.
    \2\ For purposes of the requested order, ``successor'' is 
limited to any 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 applicants, as 
well as to any existing or 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 Advisor; (b) uses the 
manager of managers structure (``Manager of Managers Structure'') 
described in the application, and (c) complies with the terms and 
conditions of the application (included in the term ``Funds''). 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 Subadvisor 
(as defined below), the name of the Advisor that serves as the 
primary adviser to the Fund will precede the name of the Subadvisor.
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    2. Each Fund will enter into an investment advisory agreement with 
the Advisor (the ``Advisory Agreement''). The Advisory Agreement with 
Callan has been approved by the board of trustees of the Trust (the 
``Board''),\4\ including a majority of the members of the Board who are 
not ``interested persons,'' as defined in section 2(a)(19) of the Act, 
of the Trust, the relevant Fund, or the Advisor (``Independent 
Trustees'') and will be approved by the initial shareholder of the 
relevant Fund as required by sections 15(a) and 15(c) of the Act and 
rule 18f-2 thereunder. The terms of the Advisory Agreement will comply 
with section 15(a) of the Act.
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    \4\ The term ``Board'' also includes the board of directors or 
trustees of a future Fund.
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    3. Under the terms of the Advisory Agreement, the Advisor, subject 
to the authority of the Board, is responsible for the overall 
management of a Fund's business affairs and selecting the Fund's 
investments in accordance with the Fund's investment objectives, 
policies,

[[Page 59736]]

and restrictions. For the investment advisory services that it provides 
to a Fund, the Advisor receives the fee specified in the Advisory 
Agreement based on the Fund's average daily net assets. The Advisory 
Agreement also permits the Advisor to enter into investment subadvisory 
agreements (``Subadvisory Agreements'') with one or more subadvisors 
(each, a ``Subadvisor'') for the purpose of managing a Fund's 
investments.\5\ Each Subadvisory Agreement will be approved by the 
Board, including by a majority of the Independent Trustees, and the 
initial shareholder of the Fund in accordance with sections 15(a) and 
15(c) of the Act and rule 18f-2 under the Act. Each Subadvisor is or 
will be registered as an investment adviser under the Advisers Act or 
not subject to such registration. The Advisor will supervise, evaluate 
and allocate assets to the Subadvisors, and make recommendations to the 
Board about their hiring, retention or release. The Advisor will 
compensate each Subadvisor out of the fee paid to the Advisor under the 
Advisory Agreement or the Fund will be responsible for paying 
subadvisory fees directly to the Subadvisor.\6\
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    \5\ A ``Subadvisor'' to a Fund is: (a) An indirect or direct 
``wholly-owned subsidiary'' (as such term is defined in the Act) of 
the Advisor for that Fund; (b) a sister company of the Advisor for 
that Fund 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 Advisor (each of (a) and 
(b), a ``Wholly-Owned Subadvisor'' and collectively, the ``Wholly-
Owned Subadvisors''); or (c) an investment subadvisor for that Fund 
that is not an ``affiliated person'' (as such term is defined in 
section 2(a)(3) of the Act) of the Fund or the Advisor, except to 
the extent that an affiliation arises solely because the subadvisor 
serves as a subadvisor to a Fund (each, a ``Non-Affiliated 
Subadvisor'').
    \6\ To the extent a Fund pays subadvisory fees directly from its 
assets, any changes to a Subadvisory Agreement that would result in 
an increase in the total management and advisory fees payable by the 
Fund will be required to be approved by the shareholders of that 
Fund.
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    4. Applicants request an order to permit the Advisor, subject to 
the approval of the Board, including a majority of the Independent 
Trustees, to, without obtaining shareholder approval: (a) Select 
Subadvisors to manage all or a portion of the assets of a Fund and 
enter into Subadvisory Agreements with the Subadvisors; and (b) 
materially amend Subadvisory Agreements with the Subadvisors.\7\ The 
requested relief will not extend to any subadvisor, other than a 
Wholly-Owned Subadvisor, who is an affiliated person, as defined in 
section 2(a)(3) of the Act, of the Fund or the Advisor, other than by 
reason of serving as a subadvisor to one or more of the Funds 
(``Affiliated Subadvisor'').
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    \7\ Shareholder approval will continue to be required for any 
other subadvisor change (not otherwise permitted by rule or other 
action of the Commission or its staff) and material amendments to an 
existing Subadvisory Agreement with any subadvisor other than a Non-
Affiliated Subadvisor or a Wholly-Owned Subadvisor (all such changes 
referred to as ``Ineligible Subadvisor Changes'').
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    5. Funds will inform shareholders of the hiring of a new Subadvisor 
pursuant to the following procedures (``Modified Notice and Access 
Procedures''): (a) Within 90 days after a new Subadvisor is hired for 
any Fund, that Fund will send its shareholders either a Multi-manager 
Notice or a Multi-manager Notice and Multi-manager Information 
Statement; \8\ and (b) the Fund 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.
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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 Subadvisor; (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 Fund.
    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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    6. Applicants also request an order exempting the Funds from 
certain disclosure obligations that may require each Fund to disclose 
fees paid by the Advisor to each Subadvisor. Applicants seek relief to 
permit each 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 Advisor and any Wholly-Owned Subadvisors; and (b) the aggregate 
fees paid to Non-Affiliated Subadvisors (collectively, the ``Aggregate 
Fee Disclosure''). The Aggregate Fee Disclosure for a Fund also will 
include separate disclosure of any subadvisory fees paid to any 
Affiliated Subadvisor.

Applicants' Legal Analysis

    1. Section 15(a) of the Act states, in 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, 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 investment 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 
management investment companies. Item 19(a)(3) of Form N-1A requires a 
registered open-end management investment company to disclose in its 
statement of additional information, with respect to each investment 
adviser, the method of calculating the advisory fee payable by the 
investment company, including the total dollar amounts paid to each 
adviser 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

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state that their requested relief meets this standard for the reasons 
discussed below.
    6. Applicants assert that the shareholders expect the Advisor, 
subject to the review and approval of the Board, to select the 
Subadvisors who are in the best position to achieve the Fund's 
investment objective. Applicants assert that, from the perspective of 
the shareholder, the role of the Subadvisor 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 Advisor to perform the duties for which the 
shareholders of the Funds are paying the Advisor--the selection, 
supervision and evaluation of the Subadvisors--without incurring 
unnecessary delays or expenses is appropriate in the interest of the 
Fund's shareholders and will allow such Funds to operate more 
efficiently. Applicants state that each Advisory Agreement will 
continue to be fully subject to section 15(a) of the Act and rule 18f-2 
under the Act.
    7. Applicants assert that disclosure of the individual fees that 
the Advisor would pay to the Subadvisors of Funds that operate under 
the Manager of Managers Structure would not serve any meaningful 
purpose. Applicants contend that the primary reasons for requiring 
disclosure of individual fees paid to Subadvisors are to inform 
shareholders of expenses to be charged by a particular Fund 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 Advisor 
will be fully disclosed and, therefore, shareholders will know what the 
Funds' fees and expenses are and will be able to compare the advisory 
fees a Fund is charged to those of other investment companies. 
Applicants assert that the requested disclosure relief would benefit 
shareholders of the Funds because it would improve the Advisor's 
ability to negotiate the fees paid to Subadvisors. Applicants state 
that the Advisor may be able to negotiate rates that are below a 
Subadvisor's ``posted'' amounts if the Advisor is not required to 
disclose the Subadvisors' fees to the public. Applicants submit that 
the relief requested to use Aggregate Fee Disclosure will encourage 
Subadvisors to negotiate lower subadvisory fees with the Advisor if the 
lower fees are not required to be made public.

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, including the 
hiring of Wholly-Owned Subadvisors, 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 initial shareholder(s) before offering that 
Fund's shares to the public.
    2. Each Fund relying on the requested order will disclose in its 
prospectus, the existence, substance, and effect of any order granted 
pursuant to the application. Each Fund will hold itself out to the 
public as utilizing the Manager of Managers Structure. The prospectus 
will prominently disclose that the Advisor has ultimate responsibility 
(subject to oversight by the Board) to oversee the Subadvisors and 
recommend their hiring, termination, and replacement.
    3. A Fund will inform shareholders of the hiring of a new 
Subadvisor within 90 days after the hiring of the new Subadvisor 
pursuant to the Modified Notice and Access Procedures.
    4. A Fund will not make any Ineligible Subadvisor Changes without 
the approval of the shareholders of the applicable Fund.
    5. At all times, at least a majority of the Board will be 
Independent Trustees, and the selection and nomination of new or 
additional Independent Trustees will be placed within the discretion of 
the then-existing Independent Trustees.
    6. Whenever a subadvisor change is proposed for a Fund with an 
Affiliated Subadvisor or a Wholly-Owned Subadvisor, 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 the Fund and its shareholders, and does not 
involve a conflict of interest from which the Advisor or the Affiliated 
Subadvisor or Wholly-Owned Subadvisor 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 Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.
    8. The Advisor will provide general management services to a 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 a Fund's overall investment strategies; (b) 
evaluate, select and recommend Subadvisors to manage all or a part of a 
Fund's assets; (c) allocate and, when appropriate, reallocate a Fund's 
assets among one or more Subadvisors; (d) monitor and evaluate the 
performance of Subadvisors; and (e) implement procedures reasonably 
designed to ensure that the Subadvisors comply with a Fund's investment 
objective, policies and restrictions.
    9. No trustee or officer of a Trust or of a Fund, or director, 
manager, or officer of the Advisor, will own, directly or indirectly 
(other than through a pooled investment vehicle that is not controlled 
by such person), any interest in a subadvisor to a Fund, except for: 
(a) Ownership of interests in the Advisor or any entity that controls, 
is controlled by, or is under common control with the Advisor; 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 
Subadvisor or an entity that controls, is controlled by, or is under 
common control with a Subadvisor.
    10. Each Fund will disclose in its registration statement the 
Aggregate Fee Disclosure.
    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. For any Fund that pays subadvisory fees directly from its 
assets, any changes to a Subadvisory Agreement that would result in an 
increase in the total management and advisory fees payable by the Fund 
will be required to be approved by the shareholders of that Fund.
    13. Whenever a subadvisor is hired or terminated, the Advisor will 
provide the Board with information showing the expected impact on the 
profitability of the Advisor.
    14. The Advisor will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Advisor on a 
per Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any subadvisor during the 
applicable quarter.

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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23541 Filed 9-26-13; 8:45 am]
BILLING CODE 8011-01-P