Document ID: SEC-2006-1702-0001
Agency: sec
Document Type: Notice
Title: Forum Funds, et al.; Notice of Application
Posted Date: 2006-12-28T05:00Z

[Federal Register: December 28, 2006 (Volume 71, Number 249)]
[Notices]               
[Page 78237-78239]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de06-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27605; 812-13265]

 
Forum Funds, et al.; Notice of Application

December 20, 2006.
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

[[Page 78238]]

relief from certain disclosure requirements.
    Applicants: Forum Funds (``Trust'') and Absolute Investment 
Advisers LLC (``Advisor'').
    Filing Dates: The application was filed on March 8, 2006, and 
amended on August 23, 2006. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in this 
notice.
    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 January 16, 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 
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: Anthony C.J. 
Nuland, Esq., Seward & Kissel LLP, 1200 G Street, NW., Washington, DC 
20005.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel, 
at (202) 551-6868, or Nadya B. Roytblat, Assistant Director, at (202) 
551-6821 (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 
20549-0104 (telephone (202) 551-8090).

Applicants' Representations

    1. The Trust, a Delaware statutory trust, is registered under the 
Act as an open-end management investment company. The Trust is 
comprised of multiple series, each with separate investment objective, 
policies, and restrictions.\1\ The Advisor is registered as an 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'') and serves as investment adviser to the one existing 
Fund pursuant to an investment advisory agreement (``Advisory 
Agreement''). The Advisory Agreement has been approved by the Trust's 
board of trustees (the ``Board''), including a majority of the trustees 
who are not ``interested persons,'' as defined in section 2(a)(19) of 
the Act, of the Trust or the Advisor (``Independent Trustees''), as 
well as by the shareholders of the Fund.
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    \1\ Applicants request relief with respect to existing and 
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 or an entity controlling, 
controlled by, or under common control with the Advisor; (b) uses 
the multi-manager structure, as described in the application; and 
(c) complies with the terms and conditions of the application 
(``Funds''). The Trust is the only existing registered open-end 
management investment company that currently intends to rely on the 
requested order. If the name of any Fund contains the name of a Sub-
Advisor (as defined below), the name of the Advisor will precede the 
name of the Sub-Advisor.
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    2. The Advisor, in its capacity as investment adviser to the Fund, 
oversees the portfolio management of the Fund by its subadvisers (each, 
a ``Sub-Advisor''). The Advisor will provide overall investment 
management services to each Fund, including Sub-advisor monitoring and 
evaluation and would be responsible for recommending the hiring, 
termination and replacement of Sub-Advisors to the Board. All 
subadvisory agreements (``Sub-Advisory Agreements'') will be approved 
by the Board, including a majority of the Independent Trustees. Under 
each Sub-Advisory Agreement, the Sub-Advisor would determine which 
securities will be purchased and sold for a Fund' investment portfolio 
or for a portion of the portfolio. Each Sub-Advisor will be registered 
under the Advisers Act and paid by the Advisor out of the fee it 
receives from the Fund under its Advisory Agreement. Applicants request 
an order to permit the Advisor, subject to Board approval, to enter 
into and materially amend Sub-Advisory Agreements without obtaining 
shareholder approval. The requested relief will not extend to any Sub-
Advisor that is an affiliated person, as defined in section 2(a)(3) of 
the Act, of a Fund or of the Advisor, other than by reason of serving 
as a Sub-Advisor to one or more of the Funds (``Affiliated Sub-
Advisor'').
    3. Applicants also request an exemption from the various disclosure 
provisions described below that may require a Fund to disclose fees 
paid by the Advisor to each Sub-Advisor. An exemption is requested 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 Affiliated Sub-Advisors; and (b) the aggregate fees 
paid to Sub-Advisors other than Affiliated Sub-Advisors (``Aggregate 
Fee Disclosure''). For any Fund that employs an Affiliated Sub-Advisor, 
the Fund will provide separate disclosure of any fees paid to such 
Affiliated Sub-Advisor.

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 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 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

[[Page 78239]]

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 by investing in a Fund, shareholders are 
in effect hiring the Advisor to manage the Fund' assets through 
monitoring and evaluation of Sub-Advisors rather than by hiring the 
Advisor's own employees to directly manage assets, and that 
shareholders will expect that the Advisor, under the overall authority 
of the Board, will oversee the Sub-Advisors and recommend to the Board 
whether to hire, terminate or replace Sub-Advisors. Applicants believe 
that permitting Sub-Advisors to be hired without incurring the delay 
and expense of obtaining shareholder approval of each Sub-Advisory 
Agreement is appropriate in the interest of the Fund's shareholders and 
will allow each Fund to potentially operate more efficiently. 
Applicants note that the Advisory Agreements will continue to be 
subject to section 15(a) of the Act and rule 18f-2 under the Act.
    8. Applicants further assert that many Sub-Advisors 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 requested relief will encourage potential 
Sub-Advisors to negotiate lower subadvisory fees with the Advisor, the 
benefits of which may be passed on to Fund shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Advisor 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: (i) Set the Fund's overall 
investment strategies; (ii) evaluate, select and recommend Sub-Advisors 
to manage all or a portion of a Fund's assets; (iii) allocate and, when 
appropriate, reallocate a Fund's assets among multiple Sub-Advisors; 
(iv) monitor and evaluate Sub-Advisor performance; and (v) implement 
procedures reasonably designed to ensure that Sub-Advisors comply with 
the relevant Fund's investment objective, policies and restrictions.
    2. Before a Fund may rely on the order requested herein, the 
operation of the Fund in the manner described in this 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 3 below, by the initial 
shareholder before such Fund's shares are offered to the public.
    3. The prospectus for each Fund will disclose the existence, 
substance and effect of any order granted pursuant to this application. 
In addition, each Fund will hold itself out to the public as employing 
the manager of managers structure described in this application. The 
prospectus will prominently disclose that the Advisor has ultimate 
responsibility, subject to oversight by the Board, to oversee the Sub-
Advisors and recommend their hiring, termination, and replacement.
    4. Within 90 days of the hiring of any new Sub-Advisor, 
shareholders of the relevant Fund will be furnished all information 
about the new Sub-Advisor 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 a new Sub-Advisor. To meet this obligation, 
the Advisor will provide shareholders of the applicable Fund, within 90 
days of the hiring of a new Sub-Advisor, 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.
    5. No trustee/director or officer of a Fund or director 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 Sub-Advisor, except for: (i) Ownership of interests in 
the Advisor or any entity that controls, is controlled by, or is under 
common control with the Advisor; 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-Advisor or an entity that controls, 
is controlled by or is under common control with a Sub-Advisor.
    6. At all times, at least a majority of the Board will be 
Independent Trustees, and the nomination of new or additional 
Independent Trustees will be placed within the discretion of the then-
existing Independent Trustees.
    7. Whenever a Sub-Advisor change is proposed for a Fund with an 
Affiliated Sub-Advisor, the Fund's 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 Sub-Advisor derives 
an inappropriate advantage.
    8. Each Fund in its registration statement will disclose the 
Aggregate Fee Disclosure.
    9. 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.
    10. The Advisor will provide the Board, no less frequently than 
quarterly, with information about the Advisor's profitability on a per 
Fund basis. This information will reflect the impact on profitability 
of the hiring or termination of any Sub-Advisor during the applicable 
quarter.
    11. Whenever a Sub-Advisor is hired or terminated, the Advisor will 
provide the Board with information showing the expected impact on the 
Advisor's profitability.
    12. The Advisor will not enter into a Sub-Advisory Agreement with 
any Affiliated Sub-Advisor, without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Fund.
    13. The requested order will expire on the effective date of rule 
15a-5 under the Act, if adopted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-22200 Filed 12-27-06; 8:45 am]

BILLING CODE 8011-01-P