Document ID: SEC-2009-0869-0001
Agency: sec
Document Type: Notice
Title: Embarcadero Funds, Inc., et al.; Notice of Application
Posted Date: 2009-06-29T04:00Z

[Federal Register: June 29, 2009 (Volume 74, Number 123)]
[Notices]               
[Page 31073-31076]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jn09-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28769; File No. 812-13633]

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

June 22, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'' or ``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

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to enter into and materially amend subadvisory agreements without 
shareholder approval and would grant relief from certain disclosure 
requirements.

Applicants:  Embarcadero Funds, Inc. (the ``Company'') and Van Wagoner 
Capital Management, Inc. (the ``Adviser'').

Filing Dates:  The application was filed on February 18, 2009, and 
amended on June 15, 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 July 17, 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, Three Embarcadero 
Center, Suite 1100, San Francisco, CA 94111.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Attorney, 
at (202) 551-6990, or Jennifer L. Sawin, Branch Chief, 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 Company, a Maryland corporation organized as a series 
investment company, is registered under the Act as an open-end 
management investment company and currently consists of five series: 
The All-Cap Growth Fund, Small-Cap Growth Fund, Alternative Strategies 
Fund, Absolute Return Fund and Market Neutral Fund (each a ``Fund'' and 
collectively, the ``Funds'').\1\ Each series has separate investment 
objectives, policies and restrictions. The Adviser, a Delaware 
corporation, is an investment adviser registered under the Investment 
Advisers Act of 1940, as amended (``Advisers Act''). The Adviser serves 
as investment adviser to all five series of the Company under 
investment advisory agreements with the Company (``Advisory 
Agreements''). The Advisory Agreements have been approved by the 
shareholders of each Fund and by the board of directors of the Company 
(``Board''), including a majority of those directors who are not 
``interested persons'' of the Company or the Adviser as defined in 
section 2(a)(19) of the Act (``Independent Directors'').
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    \1\ Applicants also request relief with respect to existing and 
future series of the Company and any other existing or future 
registered open-end management investment company or series thereof 
that: (i) Is advised by the Adviser or any person controlling, 
controlled by, or under common control with the Adviser or its 
successors; (ii) uses the management structure described in this 
application; and (iii) complies with the terms and conditions of 
this application (together with the Funds that use Subadvisers, as 
defined below, the ``Subadvised Funds''). For purposes of the 
requested order, ``successor'' is limited to an entity or entities 
that result from a reorganization into another jurisdiction or a 
change in the type of business organization. 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 Subadvised Fund contains the name of a Subadviser, 
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 Subadvised Fund will precede the name 
of the Subadviser.
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    2. Under the terms of the Advisory Agreements, the Adviser shall, 
subject to and in accordance with the investment objective and policies 
of a Fund and any directions which the Board may issue to the Adviser, 
have overall responsibility for the general management and investment 
of the assets and securities portfolios of the Fund. For the investment 
management services it provides to each Fund, the Adviser receives from 
that Fund the fee specified in the Advisory Agreements, payable monthly 
at an annual rate based the average daily net assets of the Fund. The 
Advisory Agreements permit the Adviser, to delegate certain asset 
management responsibilities to one or more subadvisers 
(``Subadvisers''). The Adviser has entered or intends to enter into 
investment subadvisory agreements (``Subadvisory Agreements'') with 
various Subadvisers to provide investment advisory services to four of 
the Funds.\2\ Each Subadviser is, and any future Subadviser will be, 
registered as an investment adviser under the Advisers Act. The Adviser 
monitors and evaluates the Subadvisers and recommends to the Board 
their hiring, retention or termination. Subadvisers recommended to the 
Board by the Adviser are selected and approved by the Board, including 
a majority of the Independent Directors. Subadvisers have discretionary 
authority to invest the assets or a portion of the assets of a 
particular Fund. The Adviser will compensate each Subadviser out of the 
fees paid to the Adviser under the Advisory Agreements.
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    \2\ The Adviser may enter into Subadvisory Agreements in the 
future to provide investment advisory services to the fifth fund, 
the Alternative Strategies Fund.
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    3. Applicants request an order to permit the Adviser, subject to 
Board approval, to select certain Subadvisers and materially amend an 
existing Subadvisory Agreement without obtaining shareholder approval. 
The requested relief will not extend to any Subadviser who is an 
affiliated person, as defined in section 2(a)(3) of the Act, of the 
Company or of the Adviser, other than by reason of serving as a 
Subadviser to one or more Funds (``Affiliated Subadviser'').
    4. Applicants also request an exemption from the various disclosure 
provisions described below that may require the Funds to disclose fees 
paid by the Adviser to each Subadviser. An exemption is requested to 
permit the Company to disclose for each Subadvised Fund (as both a 
dollar amount and as a percentage of the Subadvised Fund's net assets): 
(i) The aggregate fees paid to the Adviser and any Affiliated 
Subadviser, if any; and (ii) the aggregate fees paid to Subadvisers 
other than Affiliated Subadvisers (collectively, the ``Aggregate Fee 
Disclosure''). Any Subadvised Fund that employs an Affiliated 
Subadviser will provide separate disclosure of any fees paid to the 
Affiliated Subadviser.

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 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 disclosure of 
the method and

[[Page 31075]]

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 Subadvisers.
    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 rely on the Adviser's 
experience to select one or more Subadvisers best suited to achieve the 
Subadvised Fund's investment objectives. Applicants assert that, from 
the perspective of the investor, the role of the Subadvisers is 
comparable to that of the individual portfolio managers employed by 
traditional investment company advisory firms. Applicants state that 
requiring shareholder approval of each Subadvisory Agreement would 
impose unnecessary delays and expenses on the Subadvised Funds, and may 
preclude the Fund from acting promptly in a manner considered advisable 
by the Adviser and the Board. Applicants note that each Subadvised 
Fund's Advisory Agreements and Subadvisory Agreements with Affiliated 
Subadvisers (if any) will continue to be subject to the shareholder 
approval requirements of section 15(a) of the Act and rule 18f-2 under 
the Act.
    8. Applicants assert that many investment advisers use a ``posted'' 
rate schedule to set their fees. Applicants state that while investment 
advisers 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 relief requested to use Aggregate Fee Disclosure will 
encourage potential Subadvisers to negotiate lower subadvisory fees 
with the Adviser.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Subadvised Fund may rely on the order requested in the 
application, the operation of the Subadvised Fund in the manner 
described in the application will be approved by a majority of the 
Subadvised Fund's outstanding voting securities, as defined in the Act, 
or, in the case of a Subadvised 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 Subadvised Fund's shares to the public.
    2. The prospectus for each Subadvised Fund will disclose the 
existence, substance, and effect of any order granted pursuant to the 
application. Each Subadvised 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 
Subadvisers and recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of any new Subadviser, the affected 
Subadvised Fund's shareholders will be furnished all information about 
the new Subadviser that would be included in a proxy statement, except 
as modified to permit Aggregate Fee Disclosure. This information will 
include Aggregate Fee Disclosure and any change in such disclosure 
caused by the addition of the new Subadviser. To meet this obligation, 
a Subadvised Fund will provide shareholders within 90 days of the 
hiring of a new Subadviser 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 a Subadvisory Agreement with any 
Affiliated Subadviser without that agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Subadvised Fund.
    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 placed within the discretion of the then-
existing Independent Directors.
    6. When a Subadviser change is proposed for a Subadvised Fund with 
an Affiliated Subadviser, 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 Subadvised Fund and its shareholders and does not involve a 
conflict of interest from which the Adviser or the Affiliated 
Subadviser 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. The Adviser will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Adviser on a 
per-Subadvised Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any Subadviser during the 
applicable quarter.
    9. Whenever a Subadviser is hired or terminated, the Adviser will 
provide the Board with information showing the expected impact on the 
profitability of the Adviser.
    10. The Adviser will provide general management services to each 
Subadvised Fund, including overall supervisory responsibility for the 
general management and investment of the Subadvised Fund's assets and, 
subject to review and approval of the Board, will: (i) Set each 
Subadvised Fund's overall investment strategies; (ii) evaluate, select 
and recommend Subadvisers to manage all or part of a Subadvised Fund's 
assets; (iii) when appropriate, allocate and reallocate a Subadvised 
Fund's assets among multiple Subadvisers; (iv) monitor and evaluate the 
performance of Subadvisers; and (v) implement procedures reasonably 
designed to

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ensure that the Subadvisers comply with each Subadvised Fund's 
investment objective, policies and restrictions.
    11. No director or officer of the Company, 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 Subadviser, except for: (i) Ownership of interests in the 
Adviser or any entity 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 Subadviser or an entity that controls, 
is controlled by, or is under common control with a Subadviser.
    12. Each Subadvised Fund will disclose in its registration 
statement the Aggregate Fee Disclosure.
    13. In the event the Commission adopts a rule under the 1940 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-15225 Filed 6-26-09; 8:45 am]

BILLING CODE 8010-01-P