Franklin Portfolio Associates, LLC; The Hirtle Callaghan Trust; Notice of Application, 57610-57613 [E7-19912]

Download as PDF 57610 Federal Register / Vol. 72, No. 195 / Wednesday, October 10, 2007 / Notices 10,787 advisers registered with the Commission as of August 31, 2007. The Commission has estimated that compliance with rule 204–3 imposes a burden of approximately 639.87 hours annually based on an average adviser having 670 clients. Based on this figure, the Commission estimates a total annual burden of 6,902,278 hours for this collection of information. Written comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to R. Corey Booth, Director/Chief Information Officer, Securities and Exchange Commission, C/O Shirley Martinson, 6432 General Green Way, Alexandria, VA 22312; or send an email to: PRA_Mailbox@sec.gov. October 1, 2007. Nancy M. Morris, Secretary. [FR Doc. E7–19855 Filed 10–9–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Proposed Collection; Comment Request Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of Investor Education and Advocacy, Washington, DC 20549–0213. rwilkins on PROD1PC63 with NOTICES Extension: Form ADV, SEC File No. 270–39, OMB Control No. 3235–0049. Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) the Securities and Exchange Commission (the ‘‘Commission’’) is soliciting comments on the collections of information summarized below. The Commission plans to submit this existing collection of information to the Office of Management and Budget (‘‘OMB’’) for extension and approval. VerDate Aug<31>2005 17:08 Oct 09, 2007 Jkt 214001 The title for the collection of information is ‘‘Form ADV’’ (17 CFR 279.1). Form ADV is the investment adviser registration form filed electronically with the Commission pursuant to rules 203–1 (17 CFR 275.203–1) and 204–1 (17 CFR 275.204– 1) under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) by advisers registered with the Commission or applying for registration with the Commission. The information collected takes the form of disclosures to the investment adviser’s clients and potential clients. The purpose of this collection of information is to provide advisory clients, prospective clients, and the Commission with information about the adviser, its business, and its conflicts of interest. Clients use certain of the information to determine whether to hire or retain an adviser. The information collected provides the Commission with knowledge about the adviser, its business, and its conflicts of interest. The Commission uses the information to determine eligibility for registration with the Commission and to manage its regulatory, examination, and enforcement programs. Respondents to the collection of information are investment advisers registered with the Commission or applying for registration with the Commission. The Commission estimates that the total annual reporting and recordkeeping burden of the collection of information for each respondent is 23.375 hours. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to R. Corey Booth, Director/Chief Information Officer, Securities and Exchange Commission, C/O Shirley Martinson, 6432 General Green Way, Alexandria, VA 22312 or send an e-mail to: PRA_Mailbox@sec.gov. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Dated: October 1, 2007. Nancy M. Morris, Secretary. [FR Doc. E7–19856 Filed 10–9–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. IA–2668; 803–184] Franklin Portfolio Associates, LLC; The Hirtle Callaghan Trust; Notice of Application October 3, 2007. Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’). ACTION: Notice of Application for Exemption under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). AGENCY: Applicants: Franklin Portfolio Associates, LLC (‘‘Franklin’’); The Hirtle Callaghan Trust (‘‘Trust’’); together (‘‘Applicants’’). Relevant Advisers Act Sections: Exemption requested under section 206A of the Advisers Act from section 205 of the Advisers Act and Advisers Act rule 205–1. Summary of Application: Applicants request an order permitting Franklin to charge a performance fee based on the performance of that portion of a Trust portfolio managed by Franklin (‘‘Franklin Account’’). Applicants further request that the order permit them to compute the performancerelated portion of the fee using changes in the Franklin Account’s gross asset value rather than net asset value. Filing Dates: The application was filed on July 7, 2005, and amended and restated on August 3, 2006 and October 1, 2007. 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 copies of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 29, 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 may request notification of a hearing by writing to the Commission’s Secretary. ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 72, No. 195 / Wednesday, October 10, 2007 / Notices rwilkins on PROD1PC63 with NOTICES Applicants, Franklin Portfolio Associates, LLC, c/o David Dirks, One Boston Place, 29th Floor, Boston, Massachusetts 02108; The Hirtle Callaghan Trust, c/o Rhonda Fell, Five Tower Bridge, 300 Barr Harbor Drive, Suite 500, West Conshohocken, PA 19428. FOR FURTHER INFORMATION CONTACT: David W. Blass, Assistant Director, or Vivien Liu, Senior Counsel, at (202) 551–6787 (Office of Investment Adviser 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 20549–0102 (telephone (202) 551–5850). Applicant’s Representations 1. Franklin is an investment adviser registered under the Advisers Act. The Trust is an open-end management investment company registered under the Investment Company Act of 1940. The Trust was organized in 1994 by Hirtle, Callaghan & Co. (‘‘Hirtle Callaghan’’), an investment adviser registered under the Advisers Act. The Trust is a series company that currently consists of several separate investment portfolios. Shares of the Trust are available only to clients of Hirtle Callaghan or clients of financial intermediaries, such as investment advisers that are acting in a fiduciary capacity with investment discretion and that have established relationships with Hirtle Callaghan. 2. Hirtle Callaghan serves as a ‘‘manager of managers’’ for the Trust. Hirtle Callaghan is responsible for monitoring the overall investment performance of the Trust’s portfolios and the performance of the portfolio managers that manage the Trust’s portfolios. Hirtle Callaghan may also from time to time recommend that the Trust’s Board of Trustees (the ‘‘Board’’) retain additional portfolio managers or terminate existing portfolio managers. Authority to select new portfolio managers and reallocate assets among the portfolio managers, however, resides with the Trust’s Board. 3. Franklin is one of five investment advisers that provide portfolio management services to the Small Capitalization Equity Portfolio (‘‘Portfolio’’) of the Trust. Each of these advisers is responsible for the management of a discrete portion of the Portfolio’s assets on a day-to-day basis. In doing so each acts as though it were advising a separate investment VerDate Aug<31>2005 17:08 Oct 09, 2007 Jkt 214001 company. Percentage limitations on investments are applied to each portion of the Portfolio without regard to the investments in the other advisers’ portions of the Portfolio. When each adviser receives information about portfolio positions from the Trust or its custodian, the adviser generally receives only information about the portion of the Portfolio assigned to it, and not information about the positions held by the Portfolio as a whole. Each adviser generally is responsible for preparing reports to the Trust and the Board only with respect to its discrete portion of the Portfolio. 4. Franklin is not affiliated with Hirtle Callaghan, the Trust or any other investment advisory organization that provides portfolio management and services to the Trust. Services provided to the Trust by Franklin are limited to investment selection for the Franklin Account, placement of transactions for execution, and certain compliance functions directly related to such services. Franklin and its affiliates do not act as a distributor or sponsor for the Trust or Portfolio. No member of the Trust’s Board is affiliated with Franklin. 5. Franklin currently receives a fee at the annual rate of 0.40 percent of the average daily net asset value of the Franklin Account, payable monthly. On August 26, 2004 the Trust’s Board approved an amendment to the portfolio management agreement between Franklin and the Trust under which the existing fee structure would be replaced with a fee structure that includes a performance component (‘‘Proposed Amendment’’). On October 25, 2004 the shareholders of the Portfolio approved the Proposed Amendment. The Proposed Amendment would become effective on the first day of the month following receipt of an order from the Commission approving the application. Franklin’s fee would be adjusted to reflect the performance of the Franklin Account only after the Proposed Amendment has been in effect for 12 months (the ‘‘Initial Period’’). 6. Under the Performance Fee Amendment, Franklin’s fee for each of the first three quarters of the Initial Period, would consist of a fee (‘‘Base Fee’’) computed by multiplying the average daily net assets of the Franklin Account for that quarter by the Designated Applicable Fee Rate, dividing the product by 365 and multiplying the resulting amount by the number of days in the quarter. The Designated Applicable Rate is: 0.40 percent for quarters when the average assets of the account are less than $100 million, or 0.35 percent for quarters when the average assets of the account PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 57611 are equal to or greater than $100 million.1 For the fourth quarter of the Initial Period, Franklin would receive a fee equal to the Designated Applicable Rate applied to the average daily net assets of the Franklin Account for the fourth quarter, divided by 365 and then multiplied by the number of days in that quarter plus or minus a Performance Component multiplied by the average daily net assets of the Account for the Initial Period. The Performance Component for the Initial Period would be calculated by (a) computing the difference between (i) the total return of the Franklin Account without regard to expenses incurred in the operation of the Franklin Account (‘‘Gross Total Return’’) during the Initial Period, and (ii) the return of the Russell 2000 Index during the Initial Period plus 0.40 percent; and (b) multiplying the resulting factor by 10 percent. 7. For each quarterly period subsequent to the Initial Period, Franklin would be entitled to receive quarterly payments of the Base Fee (approximately 0.10 percent or 0.0875 percent (10 or 8.75 basis points), respectively, depending upon the level of assets of the Franklin Account, as detailed above) of the average daily net assets of the Franklin account plus or minus 25 percent of the Performance Component multiplied by the average daily net assets of the Franklin Account for the immediately preceding 12 month period, on a ‘‘rolling basis.’’ 2 The Performance Component for such subsequent periods would be calculated by (a) computing the difference between (i) the Gross Total Return of the Franklin Account during the immediately preceding 12 month period and (ii) the return of the Russell 2000 Index during such period plus the Designated Applicable Rate; and (b) multiplying the resulting factor by 10 percent. 8. None of the expenses of the Portfolio, including the advisory fee 1 Expressed mathematically, the Base Fee is calculated as follows: {[(‘‘Designated Applicable Rate’’)(average daily net assets)] / X} × N, where ‘‘X’’ = the number of days in the preceding 12 month period and ‘‘N’’ = the number of days in the quarter. The average daily net assets are calculated over the preceding quarter during the first three quarters of the initial period and over the preceding 12 month period thereafter. 2 ‘‘Rolling Basis’’ means that, at each quarterly fee calculation, the Gross Total Return of the Franklin Account, the Index Return and the average daily net assets of the Franklin Account for the most recent quarter will be substituted for the corresponding values of the earliest quarter included in the prior fee calculation. Both the Base Fee and the Performance Component are calculated based on the same rolling period as described in this footnote and the accompanying text. E:\FR\FM\10OCN1.SGM 10OCN1 57612 Federal Register / Vol. 72, No. 195 / Wednesday, October 10, 2007 / Notices rwilkins on PROD1PC63 with NOTICES paid to Franklin, would be deducted from the performance of the Franklin Account for purposes of calculating the Gross Total Return. However, the Gross Total Return would reflect the effect (i.e., reducing performance) of all applicable brokerage and transaction costs. 9. The maximum annual fee payable under the Performance Fee Amendment would not exceed 0.70 percent (70 basis points) with respect to any 12-month period when assets of the Franklin Account are less than $100 million (or 0.60 percent (60 basis points) with respect to any 12-month period when quarterly assets of the Franklin Account in each quarter are equal to or in excess of $100 million) and cannot exceed 0.175 percent (17.5 basis points), for any calendar quarter when assets of the Franklin account are less than $100 million (or 0.15 percent (15 basis points), for any calendar quarter when assets of the Franklin account are equal to or more than $100 million). Franklin is guaranteed a minimum annual fee of 0.10 percent (10 basis points). 10. Because no performance adjustment will be paid until the end of the Initial Period, it is possible that payments of the Base Fee made to Franklin during the first 9 months may exceed the appropriate performance adjusted fee if the Performance Component has been negative. In the event of such an occurrence, the Proposed Amendment provides a ‘‘recoupment feature’’ pursuant to which advisory fees payable to Franklin will be reduced until the difference between the aggregate quarterly fees received by Franklin with respect to the Initial Period and the performance adjusted fee is fully recouped by the Trust. However, if the portfolio management agreement with Franklin is terminated before any recoupment has been fully accounted for, the Trust would not be able to recoup any outstanding excess that had been paid in previous quarters. Applicants’ Legal Analysis 1. Section 205(a)(1) of the Advisers Act generally prohibits an investment adviser from entering into any investment advisory agreement that provides for compensation to the adviser on the basis of a share of capital gains or capital appreciation of a client’s account. 2. Section 205(b) of the Advisers Act provides a limited exception to this prohibition, permitting an adviser to charge a registered investment company and certain other persons a fee that is based on asset value of the company or fund under management averaged over VerDate Aug<31>2005 17:08 Oct 09, 2007 Jkt 214001 a specified period and increases and decreases ‘‘proportionately with the investment performance of the company or fund over a specified period in relation to the investment record of an appropriate index of securities prices or such other measure of investment performance as the Commission by rule, regulation or order may specify.’’ 3. Rule 205–1 under the Advisers Act requires that the investment performance of an investment company be computed based on the change in the net (of all expenses and fees) asset value per share of the investment company. 4. Applicants request exemptive relief from section 205 of the Advisers Act and rule 205–1 thereunder to permit them to (i) apply the proposed fee only to the Franklin Account and not to the Portfolio as a whole, and (ii) compute the Performance Component measured by the change in the Franklin Account’s gross asset value, rather than the change in its net asset value. 5. Applicants state that Congress, in adopting and amending section 205 of the Advisers Act, and the Commission, in adopting rule 205–1, put into place safeguards designed to ensure that investment advisers would not take advantage of advisory clients. 6. Applicants assert that the Commission required that performance fees be calculated based on the net asset value of the investment company’s shares to prevent a situation where an adviser could earn a performance fee even though investment company shareholders did not derive any benefit from the adviser’s performance after the deduction of fees and expenses. 7. Applicants state that, unlike traditional performance fee arrangements, Franklin would not receive the Performance Component of its fee unless its management of the Franklin Account has resulted in performance in excess of the Index performance plus a ‘‘performance hurdle’’ equal to the Designated Applicable Rate. Applicants assert that increasing the performance of the Index by the above stated hurdle would have an effect similar to deducting Franklin’s fees. In the event the base fee changes, the performance hurdle also would be changed to match the Base Fee. Applicants state that since the fee structure contains a performance hurdle, the Portfolio’s shareholders will have protections similar to those contemplated by the net asset value requirement of rule 205–1. 8. Applicants suggest that Congress’ concern, in enacting the safeguards of section 205, came about because the vast majority of investment advisers exercised a high level of control over the PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 structuring of the advisory relationship. Applicants state that the proposed fee, however, was negotiated actively at arm’s-length between the Trust and Franklin. Applicants state that Franklin has little, if any, influence over the overall management of the Trust or the Portfolio beyond stock selection, and does not control the Portfolio or the Trust. Management functions of the Trust and the Portfolio reside in the Trust’s Board. The Trust is directly and fully responsible for supervising the Trust’s service providers and monitoring expenses of each of the Trust’s portfolios. The Trust’s Board is responsible for allocating the assets of the several portfolios among the portfolio managers. Neither Franklin nor any of its affiliates sponsored or organized the Trust, or serves as a distributor or principal underwriter of the Trust. Franklin and its affiliates do not own any shares issued by the Trust. No officer, director or employee of Franklin, nor any of its affiliates, serves as an executive officer or director of the Trust. Neither Franklin nor any of its affiliates is an affiliated person of Hirtle Callaghan or any other person who provides investment advice with respect to the Trust’s advisory relationships (except to the extent that such affiliation may exist by reason of Franklin or any of its affiliates serving as investment adviser to the Trust). No member of the Trust’s Board is affiliated with Franklin. 9. Applicants state that the proposed fee arrangement satisfies the purpose of rule 205–1 because it was negotiated at arms-length and the Trust, for the reasons stated in the previous paragraphs, does not need the protections afforded by calculating a performance fee based on net assets. Applicants argue that the proposed fee arrangement is therefore consistent with the underlying policies of section 205 and rule 205–1 under the Advisers Act and that the exemption would be consistent with the protection of investors. Applicants’ Conditions Applicants agree that any order granting the requested relief will be subject to the following conditions: 1. If the Base Fee changes, the performance hurdle will be changed to match the Base Fee and to ensure that the investment advisory fee continue to have the potential to increase and decrease proportionately. 2. To the extent Franklin relies on the requested order with respect to advisory arrangements with other investment companies that it advises, those arrangements will meet the following requirements: (i) The investment E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 72, No. 195 / Wednesday, October 10, 2007 / Notices advisory fee will be negotiated on an arm’s-length basis between Franklin and the investment company or its primary investment adviser; (ii) the fee structure will contain a performance hurdle that is, at all times, no lower than the base fee; and should the base fee change, the hurdle also will be changed to match the base fee and to ensure that the investment advisory fee continues to have the potential to increase and decrease proportionally; (iii) neither Franklin nor any of its affiliates will serve as distributor or sponsor of the investment company; (iv) no member of the board of the investment company will be affiliated with Franklin or its affiliates; (v) neither Franklin nor any of its affiliates will organize the investment company; (vi) neither Franklin nor any of its affiliates will be an affiliated person of any primary adviser to the investment company or of any other person who provides advice with respect to the investment company’s advisory relationships (except to the extent that Franklin and/ or its affiliates may be affiliated with another portfolio manager by virtue of the fact that Franklin or the affiliate serves as a portfolio manager to the investment company or to another investment company); and (vii) other than described in this application, the Applicants will comply with section 205 and rules 205–1 and 205–2 under the Advisers Act. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Nancy M. Morris, Secretary. [FR Doc. E7–19912 Filed 10–9–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. IA–2667; 803–186] IronBridge Capital Management LP; The Hirtle Callaghan Trust; Notice of Application October 3, 2007. Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’). ACTION: Notice of Application for Exemption under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). AGENCY: IronBridge Capital Management LP (‘‘IronBridge’’); The Hirtle Callaghan Trust (‘‘Trust’’); together (‘‘Applicants’’). RELEVANT ADVISERS ACT SECTIONS: Exemption requested under section 206A of the Advisers Act from section rwilkins on PROD1PC63 with NOTICES APPLICANTS: VerDate Aug<31>2005 17:08 Oct 09, 2007 Jkt 214001 205 of the Advisers Act and Advisers Act rule 205–1. SUMMARY OF APPLICATION: Applicants request an order permitting IronBridge to charge a performance fee based on the performance of that portion of a Trust portfolio managed by IronBridge (‘‘IronBridge Account’’). Applicants further request that the order permit them to compute the performancerelated portion of the fee using changes in the IronBridge Account’s gross asset value rather than net asset value. FILING DATES: The application was filed on July 7, 2005, and amended and restated on August 3, 2006 and October 1, 2007. 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 copies of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 29, 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 may request notification of a hearing by writing to the Commission’s Secretary. ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. Applicants, IronBridge Capital Management LP, c/o Samuel T. Eddins, One Parkview Plaza, Suite 600, Oakbrook Terrace, Illinois 60181; The Hirtle Callaghan Trust, c/o Rhonda Fell, Five Tower Bridge, 300 Barr Harbor Drive, Suite 500, West Conshohocken, PA 19428. FOR FURTHER INFORMATION CONTACT: David W. Blass, Assistant Director, or Vivien Liu, Senior Counsel, at (202) 551–6787 (Office of Investment Adviser Regulation, Division of Investment Management). 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 20549–0102 (telephone (202) 551–5850). SUPPLEMENTARY INFORMATION: Applicant’s Representations 1. IronBridge is an investment adviser registered under the Advisers Act. The Trust is an open-end management investment company registered under the Investment Company Act of 1940. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 57613 The Trust was organized in 1994 by Hirtle, Callaghan & Co. (‘‘Hirtle Callaghan’’), an investment adviser registered under the Advisers Act. The Trust is a series company that currently consists of several separate investment portfolios. Shares of the Trust are available only to clients of Hirtle Callaghan or clients of financial intermediaries, such as investment advisers that are acting in a fiduciary capacity with investment discretion and that have established relationships with Hirtle Callaghan. 2. Hirtle Callaghan serves as a ‘‘manager of managers’’ for the Trust. Hirtle Callaghan is responsible for monitoring the overall investment performance of the Trust’s portfolios and the performance of the portfolio managers that manage the Trust’s portfolios. Hirtle Callaghan may also from time to time recommend that the Trust’s Board of Trustees (the ‘‘Board’’) retain additional portfolio managers or terminate existing portfolio managers. Authority to select new portfolio managers and reallocate assets among the portfolio managers, however, resides with the Trust’s Board. 3. IronBridge is one of five investment advisers that provide portfolio management services to the Small Capitalization Equity Portfolio (‘‘Portfolio’’) of the Trust. Each of these advisers is responsible for the management of a discrete portion of the Portfolio’s assets on a day-to-day basis. In doing so each acts as though it were advising a separate investment company. Percentage limitations on investments are applied to each portion of the Portfolio without regard to the investments in the other advisers’ portions of the Portfolio. When each adviser receives information about portfolio positions from the Trust or its custodian, the adviser generally receives only information about the portion of the Portfolio assigned to it, and not information about the positions held by the Portfolio as a whole. Each adviser generally is responsible for preparing reports to the Trust and the Board only with respect to its discrete portion of the Portfolio. 4. IronBridge is not affiliated with Hirtle Callaghan, the Trust or any other investment advisory organization that provides portfolio management and services to the Trust.1 Services provided to the Trust by IronBridge are limited to investment selection for the IronBridge Account, placement of transactions for 1 IronBridge does not have any affiliates at this time. Future affiliates, if any, will comply with the terms of any order issued by the Commission in connection with this application. E:\FR\FM\10OCN1.SGM 10OCN1

Agencies

[Federal Register Volume 72, Number 195 (Wednesday, October 10, 2007)]
[Notices]
[Pages 57610-57613]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-19912]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-2668; 803-184]


Franklin Portfolio Associates, LLC; The Hirtle Callaghan Trust; 
Notice of Application

October 3, 2007.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for Exemption under the Investment 
Advisers Act of 1940 (``Advisers Act'').

-----------------------------------------------------------------------

    Applicants: Franklin Portfolio Associates, LLC (``Franklin''); The 
Hirtle Callaghan Trust (``Trust''); together (``Applicants'').
    Relevant Advisers Act Sections: Exemption requested under section 
206A of the Advisers Act from section 205 of the Advisers Act and 
Advisers Act rule 205-1.
    Summary of Application: Applicants request an order permitting 
Franklin to charge a performance fee based on the performance of that 
portion of a Trust portfolio managed by Franklin (``Franklin 
Account''). Applicants further request that the order permit them to 
compute the performance-related portion of the fee using changes in the 
Franklin Account's gross asset value rather than net asset value.
    Filing Dates: The application was filed on July 7, 2005, and 
amended and restated on August 3, 2006 and October 1, 2007.
    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 copies of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 29, 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 may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090.

[[Page 57611]]

Applicants, Franklin Portfolio Associates, LLC, c/o David Dirks, One 
Boston Place, 29th Floor, Boston, Massachusetts 02108; The Hirtle 
Callaghan Trust, c/o Rhonda Fell, Five Tower Bridge, 300 Barr Harbor 
Drive, Suite 500, West Conshohocken, PA 19428.

FOR FURTHER INFORMATION CONTACT: David W. Blass, Assistant Director, or 
Vivien Liu, Senior Counsel, at (202) 551-6787 (Office of Investment 
Adviser 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 
20549-0102 (telephone (202) 551-5850).

Applicant's Representations

    1. Franklin is an investment adviser registered under the Advisers 
Act. The Trust is an open-end management investment company registered 
under the Investment Company Act of 1940. The Trust was organized in 
1994 by Hirtle, Callaghan & Co. (``Hirtle Callaghan''), an investment 
adviser registered under the Advisers Act. The Trust is a series 
company that currently consists of several separate investment 
portfolios. Shares of the Trust are available only to clients of Hirtle 
Callaghan or clients of financial intermediaries, such as investment 
advisers that are acting in a fiduciary capacity with investment 
discretion and that have established relationships with Hirtle 
Callaghan.
    2. Hirtle Callaghan serves as a ``manager of managers'' for the 
Trust. Hirtle Callaghan is responsible for monitoring the overall 
investment performance of the Trust's portfolios and the performance of 
the portfolio managers that manage the Trust's portfolios. Hirtle 
Callaghan may also from time to time recommend that the Trust's Board 
of Trustees (the ``Board'') retain additional portfolio managers or 
terminate existing portfolio managers. Authority to select new 
portfolio managers and reallocate assets among the portfolio managers, 
however, resides with the Trust's Board.
    3. Franklin is one of five investment advisers that provide 
portfolio management services to the Small Capitalization Equity 
Portfolio (``Portfolio'') of the Trust. Each of these advisers is 
responsible for the management of a discrete portion of the Portfolio's 
assets on a day-to-day basis. In doing so each acts as though it were 
advising a separate investment company. Percentage limitations on 
investments are applied to each portion of the Portfolio without regard 
to the investments in the other advisers' portions of the Portfolio. 
When each adviser receives information about portfolio positions from 
the Trust or its custodian, the adviser generally receives only 
information about the portion of the Portfolio assigned to it, and not 
information about the positions held by the Portfolio as a whole. Each 
adviser generally is responsible for preparing reports to the Trust and 
the Board only with respect to its discrete portion of the Portfolio.
    4. Franklin is not affiliated with Hirtle Callaghan, the Trust or 
any other investment advisory organization that provides portfolio 
management and services to the Trust. Services provided to the Trust by 
Franklin are limited to investment selection for the Franklin Account, 
placement of transactions for execution, and certain compliance 
functions directly related to such services. Franklin and its 
affiliates do not act as a distributor or sponsor for the Trust or 
Portfolio. No member of the Trust's Board is affiliated with Franklin.
    5. Franklin currently receives a fee at the annual rate of 0.40 
percent of the average daily net asset value of the Franklin Account, 
payable monthly. On August 26, 2004 the Trust's Board approved an 
amendment to the portfolio management agreement between Franklin and 
the Trust under which the existing fee structure would be replaced with 
a fee structure that includes a performance component (``Proposed 
Amendment''). On October 25, 2004 the shareholders of the Portfolio 
approved the Proposed Amendment. The Proposed Amendment would become 
effective on the first day of the month following receipt of an order 
from the Commission approving the application. Franklin's fee would be 
adjusted to reflect the performance of the Franklin Account only after 
the Proposed Amendment has been in effect for 12 months (the ``Initial 
Period'').
    6. Under the Performance Fee Amendment, Franklin's fee for each of 
the first three quarters of the Initial Period, would consist of a fee 
(``Base Fee'') computed by multiplying the average daily net assets of 
the Franklin Account for that quarter by the Designated Applicable Fee 
Rate, dividing the product by 365 and multiplying the resulting amount 
by the number of days in the quarter. The Designated Applicable Rate 
is: 0.40 percent for quarters when the average assets of the account 
are less than $100 million, or 0.35 percent for quarters when the 
average assets of the account are equal to or greater than $100 
million.\1\
---------------------------------------------------------------------------

    \1\ Expressed mathematically, the Base Fee is calculated as 
follows: {[(``Designated Applicable Rate'')(average daily net 
assets)] / X{time}  x N, where ``X'' = the number of days in the 
preceding 12 month period and ``N'' = the number of days in the 
quarter. The average daily net assets are calculated over the 
preceding quarter during the first three quarters of the initial 
period and over the preceding 12 month period thereafter.
---------------------------------------------------------------------------

    For the fourth quarter of the Initial Period, Franklin would 
receive a fee equal to the Designated Applicable Rate applied to the 
average daily net assets of the Franklin Account for the fourth 
quarter, divided by 365 and then multiplied by the number of days in 
that quarter plus or minus a Performance Component multiplied by the 
average daily net assets of the Account for the Initial Period. The 
Performance Component for the Initial Period would be calculated by (a) 
computing the difference between (i) the total return of the Franklin 
Account without regard to expenses incurred in the operation of the 
Franklin Account (``Gross Total Return'') during the Initial Period, 
and (ii) the return of the Russell 2000 Index during the Initial Period 
plus 0.40 percent; and (b) multiplying the resulting factor by 10 
percent.
    7. For each quarterly period subsequent to the Initial Period, 
Franklin would be entitled to receive quarterly payments of the Base 
Fee (approximately 0.10 percent or 0.0875 percent (10 or 8.75 basis 
points), respectively, depending upon the level of assets of the 
Franklin Account, as detailed above) of the average daily net assets of 
the Franklin account plus or minus 25 percent of the Performance 
Component multiplied by the average daily net assets of the Franklin 
Account for the immediately preceding 12 month period, on a ``rolling 
basis.'' \2\ The Performance Component for such subsequent periods 
would be calculated by (a) computing the difference between (i) the 
Gross Total Return of the Franklin Account during the immediately 
preceding 12 month period and (ii) the return of the Russell 2000 Index 
during such period plus the Designated Applicable Rate; and (b) 
multiplying the resulting factor by 10 percent.
---------------------------------------------------------------------------

    \2\ ``Rolling Basis'' means that, at each quarterly fee 
calculation, the Gross Total Return of the Franklin Account, the 
Index Return and the average daily net assets of the Franklin 
Account for the most recent quarter will be substituted for the 
corresponding values of the earliest quarter included in the prior 
fee calculation. Both the Base Fee and the Performance Component are 
calculated based on the same rolling period as described in this 
footnote and the accompanying text.
---------------------------------------------------------------------------

    8. None of the expenses of the Portfolio, including the advisory 
fee

[[Page 57612]]

paid to Franklin, would be deducted from the performance of the 
Franklin Account for purposes of calculating the Gross Total Return. 
However, the Gross Total Return would reflect the effect (i.e., 
reducing performance) of all applicable brokerage and transaction 
costs.
    9. The maximum annual fee payable under the Performance Fee 
Amendment would not exceed 0.70 percent (70 basis points) with respect 
to any 12-month period when assets of the Franklin Account are less 
than $100 million (or 0.60 percent (60 basis points) with respect to 
any 12-month period when quarterly assets of the Franklin Account in 
each quarter are equal to or in excess of $100 million) and cannot 
exceed 0.175 percent (17.5 basis points), for any calendar quarter when 
assets of the Franklin account are less than $100 million (or 0.15 
percent (15 basis points), for any calendar quarter when assets of the 
Franklin account are equal to or more than $100 million). Franklin is 
guaranteed a minimum annual fee of 0.10 percent (10 basis points).
    10. Because no performance adjustment will be paid until the end of 
the Initial Period, it is possible that payments of the Base Fee made 
to Franklin during the first 9 months may exceed the appropriate 
performance adjusted fee if the Performance Component has been 
negative. In the event of such an occurrence, the Proposed Amendment 
provides a ``recoupment feature'' pursuant to which advisory fees 
payable to Franklin will be reduced until the difference between the 
aggregate quarterly fees received by Franklin with respect to the 
Initial Period and the performance adjusted fee is fully recouped by 
the Trust. However, if the portfolio management agreement with Franklin 
is terminated before any recoupment has been fully accounted for, the 
Trust would not be able to recoup any outstanding excess that had been 
paid in previous quarters.

Applicants' Legal Analysis

    1. Section 205(a)(1) of the Advisers Act generally prohibits an 
investment adviser from entering into any investment advisory agreement 
that provides for compensation to the adviser on the basis of a share 
of capital gains or capital appreciation of a client's account.
    2. Section 205(b) of the Advisers Act provides a limited exception 
to this prohibition, permitting an adviser to charge a registered 
investment company and certain other persons a fee that is based on 
asset value of the company or fund under management averaged over a 
specified period and increases and decreases ``proportionately with the 
investment performance of the company or fund over a specified period 
in relation to the investment record of an appropriate index of 
securities prices or such other measure of investment performance as 
the Commission by rule, regulation or order may specify.''
    3. Rule 205-1 under the Advisers Act requires that the investment 
performance of an investment company be computed based on the change in 
the net (of all expenses and fees) asset value per share of the 
investment company.
    4. Applicants request exemptive relief from section 205 of the 
Advisers Act and rule 205-1 thereunder to permit them to (i) apply the 
proposed fee only to the Franklin Account and not to the Portfolio as a 
whole, and (ii) compute the Performance Component measured by the 
change in the Franklin Account's gross asset value, rather than the 
change in its net asset value.
    5. Applicants state that Congress, in adopting and amending section 
205 of the Advisers Act, and the Commission, in adopting rule 205-1, 
put into place safeguards designed to ensure that investment advisers 
would not take advantage of advisory clients.
    6. Applicants assert that the Commission required that performance 
fees be calculated based on the net asset value of the investment 
company's shares to prevent a situation where an adviser could earn a 
performance fee even though investment company shareholders did not 
derive any benefit from the adviser's performance after the deduction 
of fees and expenses.
    7. Applicants state that, unlike traditional performance fee 
arrangements, Franklin would not receive the Performance Component of 
its fee unless its management of the Franklin Account has resulted in 
performance in excess of the Index performance plus a ``performance 
hurdle'' equal to the Designated Applicable Rate. Applicants assert 
that increasing the performance of the Index by the above stated hurdle 
would have an effect similar to deducting Franklin's fees. In the event 
the base fee changes, the performance hurdle also would be changed to 
match the Base Fee. Applicants state that since the fee structure 
contains a performance hurdle, the Portfolio's shareholders will have 
protections similar to those contemplated by the net asset value 
requirement of rule 205-1.
    8. Applicants suggest that Congress' concern, in enacting the 
safeguards of section 205, came about because the vast majority of 
investment advisers exercised a high level of control over the 
structuring of the advisory relationship. Applicants state that the 
proposed fee, however, was negotiated actively at arm's-length between 
the Trust and Franklin. Applicants state that Franklin has little, if 
any, influence over the overall management of the Trust or the 
Portfolio beyond stock selection, and does not control the Portfolio or 
the Trust. Management functions of the Trust and the Portfolio reside 
in the Trust's Board. The Trust is directly and fully responsible for 
supervising the Trust's service providers and monitoring expenses of 
each of the Trust's portfolios. The Trust's Board is responsible for 
allocating the assets of the several portfolios among the portfolio 
managers. Neither Franklin nor any of its affiliates sponsored or 
organized the Trust, or serves as a distributor or principal 
underwriter of the Trust. Franklin and its affiliates do not own any 
shares issued by the Trust. No officer, director or employee of 
Franklin, nor any of its affiliates, serves as an executive officer or 
director of the Trust. Neither Franklin nor any of its affiliates is an 
affiliated person of Hirtle Callaghan or any other person who provides 
investment advice with respect to the Trust's advisory relationships 
(except to the extent that such affiliation may exist by reason of 
Franklin or any of its affiliates serving as investment adviser to the 
Trust). No member of the Trust's Board is affiliated with Franklin.
    9. Applicants state that the proposed fee arrangement satisfies the 
purpose of rule 205-1 because it was negotiated at arms-length and the 
Trust, for the reasons stated in the previous paragraphs, does not need 
the protections afforded by calculating a performance fee based on net 
assets. Applicants argue that the proposed fee arrangement is therefore 
consistent with the underlying policies of section 205 and rule 205-1 
under the Advisers Act and that the exemption would be consistent with 
the protection of investors.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. If the Base Fee changes, the performance hurdle will be changed 
to match the Base Fee and to ensure that the investment advisory fee 
continue to have the potential to increase and decrease 
proportionately.
    2. To the extent Franklin relies on the requested order with 
respect to advisory arrangements with other investment companies that 
it advises, those arrangements will meet the following requirements: 
(i) The investment

[[Page 57613]]

advisory fee will be negotiated on an arm's-length basis between 
Franklin and the investment company or its primary investment adviser; 
(ii) the fee structure will contain a performance hurdle that is, at 
all times, no lower than the base fee; and should the base fee change, 
the hurdle also will be changed to match the base fee and to ensure 
that the investment advisory fee continues to have the potential to 
increase and decrease proportionally; (iii) neither Franklin nor any of 
its affiliates will serve as distributor or sponsor of the investment 
company; (iv) no member of the board of the investment company will be 
affiliated with Franklin or its affiliates; (v) neither Franklin nor 
any of its affiliates will organize the investment company; (vi) 
neither Franklin nor any of its affiliates will be an affiliated person 
of any primary adviser to the investment company or of any other person 
who provides advice with respect to the investment company's advisory 
relationships (except to the extent that Franklin and/or its affiliates 
may be affiliated with another portfolio manager by virtue of the fact 
that Franklin or the affiliate serves as a portfolio manager to the 
investment company or to another investment company); and (vii) other 
than described in this application, the Applicants will comply with 
section 205 and rules 205-1 and 205-2 under the Advisers Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-19912 Filed 10-9-07; 8:45 am]
BILLING CODE 8011-01-P