Commonfund Institutional Funds, et al.; Notice of Application

AGENCY:

Securities and Exchange Commission (“Commission”).

ACTION:

Notice of an application under section 6(c) of the Investment Company Act of 1940 (the “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.

SUMMARY:

Applicants request an order to permit them to enter into and materially amend subadvisory agreements without shareholder approval and to grant relief from certain disclosure requirements.

APPLICANTS:

Commonfund Institutional Funds (the “Company”) and Commonfund Asset Management Company, Inc. (“ COMANCO”).

FILING DATES:

The application was filed on December 13, 1999 and amended on July 19, 2001.

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 17, 2001, 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, Commission 450 Fifth Street, NW., Washington, DC 20549-0609. Applicants, c/o Timothy W. Levin, Esq., Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103.

FOR FURTHER INFORMATION CONTACT:

Emerson S. Davis, Sr., Senior Counsel, at (202) 942-0714, or Janet M. Grossnickle, Branch Chief, at (202) 942-0564 (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 for a fee from the Commission's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

1. The Company, a Delaware business trust, is registered under the Act as an open-end management investment company. The Company currently offers eight series (together the “Funds,” and each a “Fund”). Each Fund has its own investment objectives, policies and restrictions. COMANCO, registered under the Investment Advisers Act of 1940 (“Advisers Act”), serves as the investment adviser to each Fund pursuant to an investment advisory agreement with the Company (“Advisory Agreement”) that was approved by the board of directors of the Company (the “Board”), including a majority of the directors who are not “interested persons,” as defined in section 2(a)(19) of the Act (“Independent Directors”), and the sole shareholder of each Fund.

2. Under the terms of the Advisory Agreement. COMANCO serves as investment adviser to each Fund and provides investment sub-adviser selection, monitoring and asset allocation services to the Funds and may hire one or more sub-advisers (“Sub-Adviser”) to exercise day-to-day investment discretion over all or a portion of the assets of a Fund pursuant to separate investment sub-advisory agreements. In its capacity as investment adviser, COMANCO is required (a) to perform due diligence on prospective Sub-Advisers; (b) to communicate performance targets and evaluations to Sub-Advisers; (c) to supervise compliance with each Fund's investment objectives and policies; and (d) to recommend to the Board whether sub-advisory agreements should be renewed, modified or terminated. Each Sub-Adviser is or will be either registered or exempt from registration under the Advisers Act. Sub-Advisers are recommended to the Board by COMANCO and selected and approved by the Board, including a majority of the Independent Directors. Each Sub-adviser's free is paid by COMANCO out of the management fee received by COMANCO from the respective Fund.

3. COMANCO will recommend and, if the Board, including a majority of the Independent Directors, approves the recommendations monitor for the Fund one or more Sub-Advisers that follow a range of investment styles. The Board will rely upon COMANCO to monitor the Sub-Advisers' performance and their compliance with a Fund's investment objectives and policies, and to recommend the hiring and or termination of Sub-Advisers. In using a manager of managers approach, COMANCO believes that the likelihood of outperformance is increased through the use of multiple Sub-Advisers in appropriate cases because underperformance by a single Sub-Adviser would not necessarily result in overall underperformance. The Funds currently use 24 Sub-Advisers.

4. Applicants request relief to permit COMANCO, subject to the Board's approval, to enter into and materially amend sub-advisory agreements without shareholder approval. The requested relief will not extend to a Sub-Adviser that is an affiliated person, as defined in section 2(a)(3) of the Act, of a Fund or COMANCO, other than by reason of serving as a Sub-Adviser to one or more of the Funds (an “Affiliated Manager”).

5. Applicants also request an exemption from the various disclosure provisions described below that may require the Funds to disclose the fees paid by COMANCO to the Sub Advisers. An exemption is requested to permit a Fund to disclose (as both a dollar amount and as a percentage of a Fund's net assets): (a) aggregate fees paid to COMANCO and any Affiliated Managers; and (b) aggregate fees paid to Sub-Advisers other than Affiliated Managers (“Aggregate Fees”). If a Fund employs an Affiliated Manager, the Fund will provide separate disclosure of any fees paid to the Affiliated Manager.

Applicant's 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 the vote of the 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 15(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 (the “Exchange Act”). Items 22(c)(1)(ii), 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 “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. From 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 form any provision 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 believe that the requested relief meets this standard for the reasons discussed below.

7. Applicants assert that by investing in a Fund, shareholders, in effect, will hire COMANCO to manage the Fund's assets by selecting and monitoring Sub-Advisers rather than by hiring its own employees to manage assets directly. Applicants state that investors will purchase Fund shares to gain access to COMANCO's expertise in overseeing Sub-Advisers. Applicants further assert that the requested relief will reduce Fund expenses and permit the Funds to operate more efficiently. Applicants note that the Advisory Agreement will remain 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 Sub-Advisers charge their customers for advisory services according to a “posted” rate schedule. Applicants state that while Sub-Advisers are willing to negotiate fees lower than those posted in the schedule, particularly with large institutional clients, they are reluctant to do so where the fees are disclosed to other prospective and existing customers. Applicants submit that the relief will encourage Sub-Advisers to negotiate lower advisory fees with COMANCO, the benefits of which are likely to be passed on to shareholders.

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 shareholder prior to offering shares of the Fund to the public.

2. Each Fund will disclose in its prospectus 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” approach described in this application. The prospectus will prominently disclose that COMANCO has ultimate responsibility (subject to oversight by the Board) for the investment performance of a Fund due to its responsibility to oversee Sub-Advisers and recommend their hiring, termination, and replacement.

3. Within 90 days of the hiring of any new Sub-Adviser, COMANCO will furnish shareholders of the affected Fund with all of the information about the new Sub-Adviser that would be contained in a proxy statement, except as modified by the order to permit the disclosure of Aggregate Fees. This information will include the disclosure of Aggregate Fees and any change in such disclosure caused by the addition of a new Sub-Adviser. COMANCO will meet this condition by providing shareholders with an information statement meeting the requirements of Regulation 14C and Schedule 14C and Item 22 of Schedule 14A under the Exchange Act, except as modified by the order to permit the disclosure of Aggregate Fees.

4. COMANCO will not enter into a sub-advisory agreement with any Affiliated Manager without such agreement, including the compensation to be paid thereunder, being approved by the shareholders of the Fund.

5. At all times, 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 change of Sub-Adviser is proposed for a Fund with an Affiliated Manager, the Board, including a majority of the Independent Directors, will make a separate funding, reflected in the Board minutes, that the change is in the best interests of the Fund and its shareholders and does not involve a conflict of interest from which COMANCO or the Affiliated Manager derives an inappropriate advantage.

7. COMANCO will provide general management services to each Fund, and, subject to review and approval by the Board, will: (a) Set the Fund's overall investment strategies; (b) evaluate, select and recommend Sub-Advisers to manage 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-Adviser's performance; and (e) implement procedures reasonably designed to ensure that the Sub-Advisers comply with the Fund's investment objective, policies, and restrictions of the Fund.

8. No director or officer of the Company, or director or officer of COMANCO 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 COMANCO or an entity that controls, is controlled by or is under common control with COMANCO; or (b) 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.

Each Fund will disclose in its registration statement the Aggregate Fees.

10. 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.

11. COMANCO will provide the Board, no less frequently than quarterly, with information about COMANCO's profitability on a per-Fund basis. The information will reflect the impact on profitability of the hiring or termination of any Sub-Adviser during the applicable quarter.

12. Whenever a Sub-Adviser is hired or terminated, COMANCO will provide the Board information showing the expected impact on COMANCO's profitability.