Investment Company Act – Section 15(a)(4)
American Century Investment Management, Inc.
February 2, 2012
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 2011441220
In your letter dated September 22, 2011, you request assurance that the staff of the Division of Investment Management will not recommend enforcement action to the Securities and Exchange Commission (“Commission”) under section 15(a)(4) of the Investment Company Act of 1940 (“1940 Act”) against American Century Investment Management, Inc. (“ACIM”) if, under the circumstances described below, ACIM continues to provide services and receive compensation under existing investment advisory agreements between ACIM and its registered investment company clients without obtaining the approval by the shareholders of those registered investment companies of new investment advisory agreements.
You state the following:
ACC and ACIM
ACIM is a wholly owned subsidiary of American Century Companies, Inc. (“ACC”) and is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 (“Advisers Act”). ACIM serves as investment adviser to a number of investment companies that are registered with the SEC under the 1940 Act. The funds include investment companies that are within the American Century family of funds (“ACC Funds”), and other investment companies for which ACIM provides subadvisory services (“Subadvised Funds”). The ACC Funds include over 100 series of 15 open-end registered investment companies. ACIM serves as investment adviser to the ACC Funds pursuant to investment advisory agreements with each ACC Fund and provides investment advisory services to the Subadvised Funds pursuant to investment advisory agreements with each subadvised fund or the primary investment adviser of the subadvised fund (“Investment Advisory Agreements”).
In 1958, James E. Stowers, Jr. (“Mr. Stowers”) founded ACC, a privately held corporation organized under Delaware law. Currently, ACC has three classes of common stock outstanding: Class A, Class B and Class C. All three classes provide for identical economic interests, rights and privileges, except that Class A shares have one vote per share, Class B shares have 10,000 votes per share and Class C shares are non-voting. ACC also has one class of preferred stock outstanding: the Special Voting Preferred Stock (“Preferred Stock”), owned by Canadian Imperial Bank of Commerce (“CIBC”), which does not provide for any economic interests in ACC.
Currently, Class B shares collectively represent approximately 79% of the total voting power of ACC and are entitled to elect 75% of the directors on ACC’s Board of Directors. The Class A shares elect the remaining 25% of the directors. The James E. Stowers Twentieth Century Companies Stock Trust (“Trust”) (discussed below) holds just under 50% of the Class B shares, which is equivalent to 39.08% of the total voting power in ACC. No other person holds more than 25% of the total voting power in ACC.
The primary owners of the Class A shares are Stowers Resource Management, Inc. (“SRM”) and CIBC. SRM owns approximately 46.96% of the Class A shares, which represent approximately 8.86% of the total voting power in ACC. CIBC owns approximately 44.69% of the Class A shares and all of the Preferred Stock, which together represent 10.10% of the total voting power in ACC.
The Stowers Institute is a group of not-for-profit companies founded by Mr. Stowers and his wife that has become a nationally prominent charitable organization devoted to biomedical research for the prevention and cure of cancer and other genetically linked diseases. Mr. and Mrs. Stowers have contributed nearly $2 billion in cash and Class A shares to the Stowers Institute in support of its mission. More than 40% of ACC’s profits support research at the Stowers Institute.
The Stowers Institute consists of the Stowers Institute for Medical Research (“SIMR”) and SRM. SRM is a Supporting Organization of SIMR, as that term is defined in the Internal Revenue Code and, as such, is a public charity. SIMR controls SRM as its sole voting member and has the right and obligation to appoint a majority of the members of SRM’s Board.
Since 1994, Mr. Stowers has embarked on a careful plan to establish the Stowers Institute as a permanent and viable organization. As part of his plan, Mr. Stowers has set about transferring control of ACC from himself and his family to the Stowers Institute. In 1995, Mr. Stowers established the Trust, placing his Class B shares in the Trust for the ultimate benefit of the Stowers Institute. 1 Per his instructions, the Trust Agreement provides for the eventual transfer of the Class B shares from the Trust to the Stowers Institute.
Mr. Stowers was the trustee of the Trust (“Trustee”) from 1995 until February 16, 2010, when Richard W. Brown (“Mr. Brown”) became Trustee in accordance with the succession plan in the Trust Agreement. After Mr. Brown replaced Mr. Stowers as Trustee of the Trust, the shareholders of the ACC Funds voted to approve the funds’ Investment Advisory Agreements with ACIM.2 As part of the proposal to approve the Investment Advisory Agreements, the related proxy statements3 provided to ACC Fund shareholders in connection with such vote identified Mr. Brown as Trustee, the process for appointment of successor trustees, and “SRM, SIMR or another tax-exempt member of the Stowers Group of Companies” as the ultimate beneficiary of the Trust.
At the time he became Trustee of the Trust and through the present, Mr. Brown has been the Chairman of the Boards of Directors of SRM and SIMR. Mr. Brown is not a beneficiary of the Trust, has no personal economic interest in the assets of the Trust, and all of the decisions that Mr. Brown makes with regard to the Trust must be made for the ultimate benefit of the Stowers Institute.
Designation of Co-Trustees and Transfer of the B Shares to SIMR
You propose that the Class B shares be transferred to SIMR from the Trust, where they were placed by Mr. Stowers, for the ultimate benefit of the Stowers Institute. At the time that the Class B shares are transferred from the Trust to SIMR (“Transfer”), each current Director of SIMR will serve as a Co-Trustee of the Trust and will have held his or her position as Co-Trustee of the Trust for a minimum of 30 days. As Co-Trustees of the Trust, the Directors of SIMR will share the power to vote and dispose of the Class B Shares to the same extent that they will share those powers when the Class B shares are held directly by SIMR.
Neither the designation of the Board of Directors of SIMR as Co-Trustees of the Trust nor the Transfer will involve the receipt of compensation by ACC, ACIM, the Trust or any other person. ACIM will continue to serve as investment adviser under each Investment Advisory Agreement without any change to the terms of those agreements.
Section 15(a)(4) of the 1940 Act provides, in part:
It shall be unlawful for any person to serve or act as an investment adviser of a registered investment company, except pursuant to a written contract, which contract, whether with such registered company or with an investment adviser of such registered company, has been approved by the vote of a majority of the outstanding voting securities of such registered company, and . . . provides, in substance, for its automatic termination in the event of its assignment.
Section 2(a)(4) of the 1940 Act defines “assignment” to include:
any direct or indirect transfer or hypothecation of a contract . . . by the assignor, or of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor . . . .
While the phrase “controlling block of voting securities” is not defined in the 1940 Act, Section 2(a)(9) of the 1940 Act defines “control” as “the power to exercise a controlling influence over the management or policies of a company . . . .”4
The SEC has indicated that Congress enacted Section 15(a) of the 1940 Act “to give shareholders a voice in a fund’s investment advisory contract and to prevent trafficking in fund advisory contracts.”5 The staff of the Division of Investment Management has explained that trafficking essentially is the sale of investment advisory relationships.6
You assert that neither the designation of the Board of Directors of SIMR as Co-Trustees of the Trust nor the subsequent Transfer would constitute an assignment. You also believe that shareholder approval of the Investment Advisory Agreements should not be required in connection with the designation or the Transfer. You make a variety of arguments in support of the requested relief. For example, you assert that both the designation and the Transfer will be immaterial administrative changes that are not designed to and would not affect the control structure of ACC. You further assert that the shareholders of the ACC Funds exercised their voice in their funds’ Investment Advisory Agreements when they voted in 2010 to approve the agreements in connection with Mr. Brown’s replacement of Mr. Stowers as trustee of the Trust. You represent that these shareholders approved the Investment Advisory Agreements based on proxy statements that identified the process for appointment of successor trustees, and the Stowers Institute as the ultimate beneficiary of the Trust.
Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against ACIM under section 15(a)(4) of the 1940 Act if each member of the Board of Directors of SIMR is designated as Co-Trustee of the Trust, and the Class B shares of ACC are subsequently transferred from the Trust to SIMR, and ACIM continues to provide services and receive compensation under the Investment Advisory Agreements without obtaining shareholder approval.7 Our position is based particularly on your representations that:
- The Trust was established by Mr. Stowers, founder of ACC and ACIM, for the ultimate benefit of SRM and SIMR.
- After Mr. Brown replaced Mr. Stowers as Trustee of the Trust, the shareholders of the ACC Funds voted to approve the funds’ Investment Advisory Agreements with ACIM. The related proxy statements provided to ACC Fund shareholders in connection with such votes identified Mr. Brown as trustee, the process for appointment of successor trustees, and “SRM, SIMR or another tax-exempt member of the Stowers Group of Companies” as the ultimate beneficiary of the Trust.
- At the time he became Trustee of the Trust and at the time of the request for relief, Mr. Brown was the Chairman of the Board of Directors of SIMR.
- At the time of the proposed Transfer, each current Director of SIMR will serve as a Co-Trustee of the Trust and will have held his or her position as Co-Trustee of the Trust for a minimum of 30 days prior to the Transfer.
This response expresses our view on enforcement action only and does not express any legal or interpretive position on the issues presented. Because our position is based upon all of the facts and representations in your letter, any different facts or representations may require a different conclusion.
Catherine A. Courtney
1 The Trust Agreement provides that SIMR, SRM or another tax-exempt member of the Stowers Group of Companies is the ultimate beneficiary of the Trust. A material purpose of the Trust is to make provision for the support of the mission of the Stowers Institute. Section 1.1 of the Trust Agreement states that Mr. Stowers developed the administrative and dispositive provisions of the Trust Agreement, “. . . to achieve important objectives of Settlor, primarily making provision for the support of the mission of the STOWERS INSTITUTE FOR MEDICAL RESEARCH . . . .”
2 You represent that approval of the Investment Advisory Agreements occurred within 150 days of the termination of the previous investment management agreements, consistent with Rule 15a-4 under the 1940 Act. You represent further that shareholders of the Subadvised Funds either approved their respective Investment Advisory Agreements or their approval was unnecessary due to applicable exemptive relief under Section 15 of the 1940 Act.
3 See e.g., American Century Funds, Inc. Schedule 14A (Apr. 2, 2010) available at http://sec.gov/Archives/edgar/data/100334/000010033410000092/def14a-1apr10.htm; American Century Investment Trust Schedule 14A (Apr. 2, 2010) available at http://www.sec.gov/Archives/edgar/data/908406/000090840610000016/def14a-1apr10.htm.
4 Section 2(a)(9) of the 1940 Act provides a rebuttable presumption of control when “[a]ny person . . . owns beneficially, either directly or through one or more controlled companies, more than 25 per centum of the voting securities of a company . . . .” A person who owns 25 per centum or less of the voting securities of a company is presumed not to control the company. Section 2(a)(9) provides that any presumption that is established under the section may be rebutted by evidence, but will continue until the Commission makes a determination to the contrary by order either on its own motion or on application by an interested person. See also In the Matter of Fundamental Investors, Inc., et al., Investment Company Act Release No. 3596 (Dec. 27, 1962) (A presumption of control or non-control may be rebutted in a judicial proceeding, as well as by Commission order.)
The Commission has held that the term "controlling influence" means the ”act or process, or power of producing an effect which may be without apparent force or direct authority and is effective in checking or directing action, or exercising restraint or preventing free action.” See In the Matter of Investors Mutual, Inc., et al., Investment Company Act Release No. 4595 (May 11, 1966) at text preceding n.12 (citation omitted), aff'd, Phillips v. SEC, 388 F.2d 964 (2d Cir. 1968). Furthermore, a controlling influence:
need not be actually exercised; the latent power to exercise it is sufficient . . . . And those exercising a controlling influence need not necessarily be able to carry their point, since such influence may be effective without accomplishing its purpose fully. . . . In applying [these principles], however, it must be borne in mind that control determinations involve issues of fact which cannot be resolved by use of a mathematical formula. They require a careful appraisal of the over-all effect of the various relationships and other circumstances present in [each] particular case, some of which may point to one inference while others to an opposite one.
5 See, e.g., Temporary Exemption for Certain Investment Advisers, Investment Company Act Release No. 24177 (Nov. 29, 1999) citing Hearings on S.3580 Before the Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d. Sess. 253 (1940) (“S.3580 Hearings”) (statement of David Schenker).
6 See SEC Staff Report, Exemptive Rule Amendments of 2004: The Independent Chair Condition 21 (2005) (citing S.3580 Hearings at 38 (statement of Commissioner Healy: “after investors have invested substantial sums in companies on their faith in the reputation and standing of the existing managements, the insiders have frequently transferred control . . . to other persons, without the prior knowledge or consent of these security holders.”)).
7 This letter confirms the position that David W. Grim, Sara Crovitz and Catherine Courtney provided orally to Alison M. Fuller of Stradley Ronon Stevens & Young, LLP on August 10, 2011.
The Incoming Letter is in Acrobat format.