USAA Investment Management Company

January 8, 2004


United States Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549

Attn: Jonathan G. Katz


Re: Exemption from Shareholder Approval for Certain Subadvisory Contracts
(File No. S7-20-03)

Dear Mr. Katz:

USAA Investment Management Company (IMCO) is pleased to provide comments on the Securities and Exchange Commission's (Commission) proposed rulemaking to permit certain fund complexes to operate manager of manager funds and hire or replace subadvisers without shareholder approval. Currently, a fund company may change or replace subadvisers without seeking shareholder approval only if it has obtained a "manager of managers" exemptive order from the Commission. For purposes of this letter, the term manager of manager fund refers to a fund in which the shareholders have approved the ability of the principal adviser, subject to board of director oversight and approval, to hire, fire and replace subadvisers without obtaining shareholder approval in accordance with a Commission exemptive order.

IMCO serves as the investment adviser and distributor of the funds in the USAA family of funds, including thirty-eight (38) retail funds and five (5) funds used as investment options for variable insurance products issued by an affiliated life insurance company (hereafter, the USAA Funds). The USAA Funds and IMCO currently have an exemptive order (USAA Exemptive Order) that permits them to operate manager of manager funds subject to enumerated conditions. The USAA Funds rely on the USAA Exemptive Order in the operation of its funds that invest all or a portion of their assets in equity securities.

IMCO supports the proposed rule in its current form. The proposed rule would codify the manager of manager exemptive orders issued by the Commission, thereby freeing up Commission staff resources to devote to other more novel applications. Our primary concern is directed to a request for comment in the text of the proposing release. Although proposed Rule 15a-5, as drafted, does not restrict reliance on the rule to funds with multiple subadvisers, the Commission specifically requested comment on whether the rule should be so limited, or whether different conditions should apply to funds with only one subadviser.

We strongly believe that proposed Rule 15a-5 should be available to funds that have a single subadviser to the same extent the Rule would apply to funds with multiple subadvisers, particularly if the Commission repeals existing exemptive orders. In its proposing release, the Commission noted that the policy reason for permitting these subadvisory changes without shareholder approval is that fund shareholders can benefit by permitting the principal adviser to replace poorly performing subadvisers without the delays and costs associated with seeking shareholder approval. The Commission further acknowledged that these policy reasons exist for funds with multiple or single subadvisers. The conditions of the existing exemptive orders and the conditions in the proposed rules are designed, in effect, to ensure that shareholders consent (either expressly or impliedly) to the operation of a fund in this manner.1 Under these circumstances, shareholders of manager of manager funds have no expectation that they will be expected to vote to approve subadvisory changes to their funds.

IMCO strongly agrees that the same policy reasons justify reliance by a fund on the proposed rule because shareholders of all funds should be entitled to receive the benefit of swift action to address poor performance or other issues necessitating a subadvisory change,2 without the delay associated with obtaining shareholder approval, regardless of the number of subadvisers retained to manage a particular fund. This is particularly true given the fact that shareholders of such funds have approved the operational structure of the fund. Thus, shareholders investing in such funds do not have any expectation that they will have to vote for a change that will result in one subadviser. In fact, shareholders of such funds probably have the expectation that subadvisory changes will not be delayed by the proxy process.

It also is important to realize that the principal adviser of a manager of manager fund confronted with a poorly performing subadviser typically would not know at the beginning of the search process whether a single subadviser or multiple subadvisers will be chosen. Sometimes, hiring multiple subadvisers will be in the best interests of fund shareholders if a fund has different investment styles (i.e., a small cap fund that utilizes a blend of value and growth styles) or if a fund is large, and there is more than one strong candidate. Often times, however, hiring multiple subadvisers will not be in the best interests of fund shareholders. If the shareholders have consented to the operation of a manager of manager fund, whether shareholder approval will be required to make a change should not affect the decision-making process. Moreover, the flexibility to move to a single subadviser is also necessary to ensure manager-of-manager funds are not at a disadvantage to internally managed funds where shareholder approval is not necessary to make a portfolio manager change.

To illustrate our concerns with limiting reliance on the rule to funds with multiple subadvisers, we wanted to briefly describe a situation that IMCO recently faced with one of its funds. The USAA Income Stock Fund is one of the largest funds in the USAA family of funds. From June 28, 2002 (the original move to a manager-of-managers structure) through July 11, 2003, the Income Stock Fund had two subadvisers. From the time period of June 30, 2002 through July 11, 2003, the Income Stock Fund had a Lipper ranking in the 96th percentile, which means that it was in the bottom 5% of funds in its peer category. Effective July 11, 2003, IMCO replaced the two subadvisers with one new subadviser. From July 31, 2003 through the week ending December 31, 2003, the Income Stock Fund had a Lipper ranking in the top 8% of funds in its category.3

If the USAA Exemptive Order had required IMCO to retain multiple subadvisers, IMCO could not have hired the new subadviser alone before obtaining shareholder approval, a process that would have taken at least three additional months. We do not believe that requiring shareholder approval under these circumstances would have served any meaningful regulatory purpose or protected shareholder expectations or interests. Rather, after approving the implementation of this structure in 2002, shareholders of the Income Stock Fund had the expectation that IMCO could and would make any changes we deemed necessary in a timely manner. Finally, requiring shareholder approval under these circumstances would have only increased the Income Stock Fund's costs, and delayed a substitution that has resulted in a dramatic improvement in the Income Stock Fund's performance relative to its peers. Put simply, USAA fund shareholders have benefited from this flexibility.

We appreciate the opportunity to provide comments on this rule proposal. If you have any questions regarding our comments, or would like additional information, please contact Mark S. Howard at (210) 498-8696 or Eileen Smiley at (210) 498-4103.


Christopher W. Claus
President & Chief Executive Officer
USAA Investment Management Company

1 The exemptive orders, and proposed Rule 15a-5 would, require shareholders of existing funds to expressly approve the operation of a manager of managers fund. The consent of shareholders of new manager of manager funds can be inferred from their investment in a fund that is sold with the required disclosure in its prospectus. In either case, shareholders of these funds are on notice that subadvisory changes can and will be made without their prior approval.
2 Other reasons, such as legal or regulatory changes or a change in the personnel or control structure of a subadviser, also could warrant a change.
3 For internal performance tracking purposes, IMCO agreed to start measuring the new subadviser's performance from July 31, 2003 to give the new subadviser the time necessary transition the portfolio to its selection of stocks.