SEC Division of Investment Management staff letter: American Odyssey Funds, Inc.

. , cJ .-' ~i~r~j21~L~'t~:~~~ii~~
ì& OCT ì 1996 ¡~; .cr.;",.", :~;:~". ",~,~r,"rl.~-:~t,j.'~ r:.,~ :.;"".'. . ,'.~1. . ~_ ,~.. Our Ref. No. 96-287-CC

American Odyssey
J RESPONSE OF THE OFFICE OF CHIEF COUNSEL Funds, Inc.

DIVISION OF INVESTMNT MAAGEMENT
File No. 811-7450

By letters dated June 3, 1996 and August 8, 1996, you

request assurance that we would not recommend enforcement action

to the Commission under Section 15 (a) of the Investment Company

Act of 1940 ("1940 Act") if, as more fully described in your

letter, the management agreement and the subadvisory agreement

with respect to the American Odyssey Long-Term Bond Fund

("Fund"), a series of the American Odyssey Funds, Inc. ("AOF"),

are amended without shareholder approval to eliminate (i) one of two subadvisers, and (ii) the higher advisory fees applicable to non- U. S. assets.

AOF is a registered open-end investment company with six

series (" funds"). American Odyssey Funds Management, Inc. (the

"Manager"), a registered investment adviser, serves as overall

investment manager of the funds pursuant to a management agreement between AOF and the Manager (the "Management Agreement"). The Manager does not perform the actual day- to-day management of the funds; rather, day-to-day management is

performed by subadvìsers. Each fund pays the Manager a fee based on the average daily net assets of the fund. The Manager pays

each subadviser: out of the fee it receives from the fund, a fee

also based on the -åverage daily net assets of the fund that are

managed by that subadviser.

You state that the Fund has two subadvisers, Western Asset

Management Company ("Western") and WIIO Global Management ("WLO"). A single advisory' agreement exists among AOF, the Manager,

Western andWLO (the "Subadvisory Agreement"). You state that both the Management Agreement and the Subadvisory Agreement

provide for higher fees for the management of non-U. S. assets

than for the management of a. S. assets. You state that the Fund

originally retained WLO as a subadviser in the event that its

expertise in fixed income securities denominated in foreign

currencies was required by the Fund. You represent that, since the commencement of the Fund's investment operations, however,

day-to-day management of the Fund's assets has been performed

solely by Western, and that neither the Manager nor Western has

used or expects to use the services of WLO. 1

Because WLO intends to discontinue its operations, and

Western has added staff with experience in the management of non-

You state thatthe Manager has paid all subadvisory fees with

i that fee to WLO.
ì respect to the Fund to Western, and Western has not paid any of

2

U. S. dollar fixed income investments, AOF and the Manager propose

to amend both the Management Agreement and the Subadvisory

Agreement to (i) remove the higher fee schedule applicable to

non""U. S. assets in the Fund and replace it with the same fee

schedule currently applicable to all U. S. assets held by the Fund

and (ii) remove WLO as a party. 2 You represent that the parties

propose to amend the advisory agreements without seeking

shareholder approval because holding a meeting would impose a

significant expense on shareholders while providing no real

benefit. You also represent that a vote will serve no useful

purpose because the level of advisory and management services

provided to the Fund will neither be reduced nor modified as a

resul t of the amendments.

You state that the proposed amendments will be made

effective only if approved by a maj ority of AOF' s Board of

Directors, including a maj ority of the directors who are not

interested persons of AOF. You further state that following

board approval, the Fund will promptly notify its shareholders of

the amendments to the Subadvisory and Management agreements by

delivery of either a revised prospectus or a supplement to the

existing prospectus.

Analysis
Section 15 (a) of the 1940 Act provides generally that no

person may serve as an investment adviser to a registered

investment company except pursuant to a written contract that,

among other things, has been approved by the vote of a maj ori ty of the company's outstanding voting securities. Any material

change in an advisory agreement creates a new contract that must

be approved in accordance with Section 15 (a) .3 You maintain that shareholder approval of the amendment of

the advisory agreements is not necessary in this case. You state

that the Subadvisory Agreement could easily have been structured

as two separate subadvisory agreements, one with Western and one

2._you represent that WLO is not identified in the Management

Agreement, and thus no changes are required to that agreement to

eliminate WLO as a subadviser.

3 Limited Term Municipal Fund, Inc. (pub. avail. Nov. 17, 1992).

Rule 18f-2 (c) (1) provides that, in the context of a series

company, approval of an advisory contract will be deemed granted

wi th respect to any series if a maj ori ty of the outstanding

voting securities ;of such series vote for approval' of the

contract.

.\ "
3 wi th WLO. 4 You represent that WLO is a subadviser to the Fund in

name only, and that WLO has never managed any assets for the Fund

under the Subadvisory Agreement or been paid any fees by the

Fund~ the Manager or Western. Finally, you represent that the

level and quality of advisory and management services that have

been provided to the Fund under the existing arrangements will

not change as a resul t of amending the Management Agreement and

the Subadvisory Agreement. You state that the only material

changes that would be effected by the amendments would be the

removal of WLO as a subadviser named in the Subadvisory Agreement

and the removal of the higher fee rate that is currently

specified in the Management and Subadvisory Agreements as payable

on non-U. S. assets of the Fund.5

On the basis of the facts and representations set forth in

your letter, particularly your representation that the proposed

changes would not reduce or modify in any way the level of

services provided to the Fund by the Manager or Western, we would

not recommend enforcement action to the Commission under Section

15 (a) if both the Management Agreement and the Subadvisory

Agreement are amended without shareholder approval to eliminate

WLO as a party and to remove the higher fees applicable to non- U. S. assets. 6 You should note that different facts and circumstances may require a different result.

~ VVcJU. Ü "'

Karrie McMillan

Special Counsel

4 We recognize that if the Subadvisory Agreement had been

structured as two separate subadvisory agreements, either

agreement could be terminated by the Manager or AOF' s board of

directors without a vote of the Fund's shareholders. This

argument alone, however, would not support a conclusion that a

shareholder vote is not required in this case.

5 While reduction of a subadvisory fee payable by a fund's

investment adviser ordinarily may increase the profitability of

the adviser under its contract with the fund, in this case you

represent that neither the Manager nor Western has ever paid any

fees under the contract to WLO.

6 See, ~, Washington Mutual Investors Fund, Inc. (pub. avail.

May 14, 1993). Compare AA Mutual Funds (pub. avail. Feb. 28,
1990) (shareholder approval required where amendment to

\ subadvisory agreement, without a corresponding amendment to the

i advisory agreement, would permit the primary investment adviser

to retain additional compensation).

i

SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.

WASHINGTON, D. C. 20036

FRANCIS M. SHEA 0905-19891
WARNER w. GARDNER￾LAWRENCE J. LATIO RICHARD T. CONWAY ROBERT T. BASSECHES BENJAMIN W. BOLEY RALPH J. MOORE, JR. MARTIN J. FLYNN STEPHEN J. POLLAK DAVID BOOTH BEERS ANTHONY A. LAPHAM RICHARD M. SHARP JOHN D. ALDOCK WILLIAM S. MOORE WENDY S. WHITE WILLIAM R. GALEOTA PATRICK M. HANLON NANCY C. SHEA TIMOTHY K. SHUBA JAMES R. BIRD MICHAEL S. GIANNOTIO JEFFREY C. MARTIN WILLIAM R. HANLON ELIZABETH RUNYAN GEISE COLLETE C. GOODMAN JULIE M. EDMOND LAURA S. WERTHEIMER (202) 828-2000 TELECOPIER: (202) 828-2195 ERIC C. JEFFREY ROBERT B. WASSERMAN BERNICE M. BLAIR ANNE R. BOWDEN LISA A. LANDSMAN CYNTHIA GURNEE PUGH DANA J. MARTIN J. BRADFORD WIEGMANN LLOYD D. COLLIER VALERIE E. ROSS MICHAEL K. IS ENMAN MARTHA HIRSCHFIELD AMY HORTON CELESTINE R. McCONVILLE KIM E. DETELBACH SUSAN L. PACHOLSKI DAVID B. SMITH, JR.' JAMES R. BRAMSON HEATHER H. ANDERSON" JOLYNN CHILDERS DELLINGER ERIKA K. SINGER' ERIK J. OLSON' TIMOTHY J. SIMEONE' REENA N. GLAZER' DAVID ALLEN GRAFF' JOHN TOWNSEND RICH RICHARD M. WYNER DAVID J. KATZ JULIE FURR YOUNGMAN' JAMES R. BIEKE THOMAS J. MIKULA
I. MICHAEL GREENBERGER EUGENIA LANGAN "NOT ADMITTED IN D.C.
R. JAMES WOOLSEY NANCY B. STONE
FREDERICK C. SCHAFRICK CHRISTOPHER E. PALMER DAVID B. COOK STEPHEN J. HADLEY MARK S. RAFFMAN ELIZABETH M. BROWN June 3, 1996 OF COUNSEL WILLIAM H. DEMPSEY BARBARA L. KIRSCHTEN No-Action Request 1940 Act -- Sec. 15(a) 1_J ~ii1..jiiQ2lt~)*~~i"~~tf-tIj~I¡:lØ-r-"~r.C¡.,

~ t('/l"l"!'J6,"'ìl'l#~~~i;A ¡
Jack W. Murphy, Esq. j:~.g,~. . h "- I CA ~l'l"JlJ';*'\ril!' Associate Director and Chief Counsel f

Division of Investment Management V~fl9.,t~.çn". ~15(ol__ 1 - ~..~..H~..r-".'" ~...i,~fiJ'¡,;ti~/,f Securities and Exchange Commission t ¡ Room 10070 :";:'0.1.(' . . -. ..' ' .. :, 450 Fifth Street, N.W. ly,'::;'.liL.__ .''"_''''''''''''''~'';~

Mai i stop 10 - 6 ;~';;~'~¡~4:~::!:!_'~:': J~~""'n-';'_L~'"¡'~"''-~~''~ Washington, D.C. 20549

Re: American Odyssey Funds, Inc. (Reg. No. 33-57536)

No-Action Request -- Section 15 (a) of the 1940 lict Dear Mr. Murphy:

On behalf of American Odyssey Funds, Inc. ("AOF") and American Odyssey Funds Management, Inc. (the "Manager"), we reqnest that the staff confirm that it will not recommend enforcement action if the subadvisory agreement with respect to one of AOF' s funds, the American Odyssey Long-Term Bond Fund, is amended without -" sQ?reholder approval to eliminate one of the two subadvisers and the higher advisory fee applicable to non-U. S. assets. BACKGROUND American Odyssey Funds, Inc. ("AOF") is a registered open end

investment company with six ser ies ( "Funds"), each of which

commenced operations on May 17, 1993. American Odyssey Funds

Management, Inc. (''-AOFMI''), a registered investment adviser, serves as overall investment manager of the Funds. The Manager does not

perform the actual day-to-day management of the Funds; that is

performed by other investment advisers (the "Subadvisers"). The

Manager assisted the Board of Directors in the selection of the

initial group of Subadvisers, and, subject to the supervision of

the Board, the Manager manages the operations of the Funds and is

responsible for monitoring the performance of the Subadvisers.

Each Fund pays the Manager a fee based on the average daily net

assets of the Fund. The Manager pays each Subadviser, out of the

fee it receives from the Fund, a fee also based on the average

daily net assets of the Fund.

Prior to commencement of operations in 1993, AOF and the

Manager entered into one subadvisory agreement for each of the six

Funds. Each of the subadvisory agreements was approved by the

shareholders and has annually been approved by AOF' s Board of

Directors. There have been no changes to those agreements, and the

same Subadvisers continue to serve the Funds.

Only one Fund -- the American Odyssey Long-Term Bond Fund __

has more than one Subadviser. A single advisory agreement was

entered into among AOF, the Manager, Western Asset Management

Company ("Western") and WLO Global Management ("WLO"). WLO is a

partnership, whose only partners are a wholly-owned subsidiary of

Western and a wholly-owned subsidiary of Lombard Odier Portfolio

Management International Limited. Western was selected because of

its expertise in fixed-income investing generally, with WLO added

as an aòdi tional Subadviser in the event it was determined

appropriate to call upon WLO's expertise in fixed income securities

denominated in foreign currencies.l/ Both the advisory agreement

between AOF and the Manager and the Long-Term Bond Fund subadvisory

agreement provide higher fees for the management of non-U. S. assets

than for the management of U. S. assets. The fees are computed

daily and paid monthly at the annual rates set forth below based on

the value of the Long-Term Bond Fund's average daily net assets.

Fee Paid by Fund to

the Manager

0.50% for the first $250 million of

U. S. assets, plus
0.40% for U. S. assets over $250 million, plus

0.70% for the first $250 million of

non-U. S. assets, plus

0.60% for non-U.S. assets over $250 million.

l/ The Long-Term Bond Fund may invest up to 25% of its assets in

fixed income securities denominated in foreign currencies.

. ,

Fee Paid by Manager to

the Subadvisers

0.25% for the first $250 million of

U. S. assets, plus
0.15% for u.s. assets over $250 million, plus

0.45% for the first $250 million of

non-U. S. assets, plus

0.35% for non-U.S. assets over $250 million.

Since the commencement of operations, day-to-day management of

all the assets in the Long-Term Bond Fund has been performed by

Western. Nei ther the Manager nor Western has yet determined it appropriate to use the services of WLO. As required by the subadvisory agreement, the Manager has paid all subadvisory fees

wi th respect to the Long-Term Bond Fund to Western, and Western has

not paid any fee to WLO with respect to the Fund. All fees have been paid at the rates applicable to U. S. assets. There is no current intention that WLO will in the future

provide any services to the Fund. WLO is winding down its

operations, and its only remaining advisory agreement is with the

Fund. WLO i S partners would like to dissolve WLO, thus eliminating

the expenses involved in maintaining an adviser and its required

registration. In contrast, Western has added professionals to its

staff wi.th experience in the management of non-dollar fixed income

investments.
In light of these developments, AOF, the Manager, Western and WLO propose to amend the subadvisory agreement to make the following two changes: (1) designating Western as the sole Subadviser, thus eliminating WLO as a party; and (2) removing the

higher fee applicable to non-U.S. assets and replacing it with a

fee schedule applicable to all assets using the same rates

currently applicable to U. S. assets. As proposed, the fee schedule

would be revised to the following:

Fee Paid by Fund to

the Manager

0.50% for the first $250 million of

assets, plus

0.40% for assets over $250 million.

Fee Paid by Manager to

the Subadvisers

0.25% for the first $250 million of

assets, plus

0.15% for u.s. assets over $250 million.

other than the two changes identified above, there would be no other changes to the subadvisory agreements. The proposed changes would reduce neither the quality nor the quantity of services

provided to the Fund by the Manager and Western.

SECTION 15 (a)
Section 15 (a) of the Investment Company Act of 1940 (the "1940

Act") generally provides that no person may serve as an investment

adviser to a registered investment company except pursuant to a

written contract that, among other things, has been approved by the

vote of a majority of the company's outstanding voting securities.

Because of this provision, shareholder approval is generally sought before amending an advisory agreement.

In our view, shareholder approval should not be required for

the proposed amendments because they are in essence only the

termination of a subadvisory agreement, for wh.ich shareholder

approval is not required. The current subadvisory arrdngement is

documented in one combined agreement but could as easily have been

documented through two separate subadvisory agreements -- one with

Western with the lower fee applicable to U. S. assets and the other

wi th WLO with the higher fee applicable to non-U. S. assets. Had it

been documented through two agreements, the Fund could have

terminated the WLO subadvisory agreement and retained the Western

subadvisory agreement. Neither action Wüuld have required

shareholder approval. In our view, the proposed amendments should

be viewed as essentially the same action, al though in somewhat

different form, and thus shareholder approval should not be

required.
'. Seeking shareholder approval of the proposed amendment to drop

WLO would serve no useful purpose. If shareholders voted "yes,"

the agreement would be formally amended. If they voted "no," WLO

would remain a subadviser in name only, because there is no current intention to allocate any assets to WLO. In short, there is no real decision for shareholders to make, and thus a vote would serve

no purpose.

Similarly, as. the staff has previously stated~ a majority of

shareholders would always vote for a fee decrease, and thus no ) purpose is served by holding a vote with respect to the elimination

of the higher fee applicable to non-U. S. assets. The staff has

taken a no-action position when a fund amends its agreement to

reduce the advisory fee, provided the adviser does not reduce or

modify in any respect the services it provides to the fund. See,

~, Washington Mutual Investors Fund, Inc., 1993 SEe Noact Lexis

733 (May 14,1993); Limited Term Municipal Fund. Inc., 1992 SEC

Noact Lexis 1069 (Nov. 17, 1992). with the proposed amendments the

services provided to the Fund will not change and thus a vote would

serve no purpose. The services provided to the Fund by the Manager

and Western will not be reduced or be modified. While WLO will no

longer be a subadviser, that will have no real effect on

shareholders because WLO has not managed any assets and there is no

current intention for it to do so in the future. Instead, the

amendment has the positive effect of eliminating a higher fee that

could be applied to the management of non-U.S. assets.ll

Holding a meeting would impose on shareholders a significant expense. AOF is a Maryland corporation, and as such is not required to hold annual shareholder meetings. In fact, AOF has not

held a meeting of public shareholders, and has no current plans for

such a meeting. Thus, a special meeting would be required,

resul ting in additional expenses for the Fund.

The purposes behind Rule 2a-6 under the 1940 Act also support

a conclusion that no shareholder meeting is appropriate in these circumstances. Rule 2a-6 provides that a reorganization of the adviser will not be deemed an assignment (and thus a shareholder

vote will not be required), if there is no change in actual control

or management of the investment adviser. The Commission has

recognized that under those circumstances a shareholder vote would

serve no useful purpose.~1 The proposed amendments will not change

the actual control or management of the adviser that has to date

managed all of the Fund's assets. Thus, the proposed amendments __

like an assignment caused by a reorganization that changes neither

control or management are the kind of changes where a

shareholder vote would serve no purpose and thus should not be

required.
The proposed amendments will be considered by AOF' s Board of

Directors. The amendments will be made only if approved by a

II This higher fee would be formally eliminated from the agreement and would not be reinsti tuted wi thout shareholder approval. ¿I See Release No. IC-10809 (Aug. 6, 1979) (proposing Rule 2a-6)

(transaction does. not conflict with Congressional concerns);

:)
Release No. IA-1014 (Sept. 11, 1986) (adopting parallel provision under Investment Advisers Act of 1940, Rule 202 (a) (1) -1) (requiring investment company consent would serve no useful purpose).

~ .

ma j or i ty of AOF i s directors, including a majority of the directors who are not interested persons of AOF. The amendments will be

effective as of the date that AOF next supplements or revises its

prospectus after the date that the Board approves the amendments.

It is currently anticipated that the effective date will be May 1,

1997 (the date of AOF i s 1997 annual prospectus update), unless AOF

supplements its prospectus before that date for another reason.

Because the revised disclosure will be included in a supplement or

revised prospectus that would be prepared for reasons other than

the changes regarding WLO, it is proposed that AOF will pay for the

printing and mailing of the revised prospectus or supplement. See

Washington Mutual Investors Fund, Inc., 1993 SEC Noact Lexis 733

(May 14, 1993) (fund, rather than adviser, to pay costs of printing

and mailing of revised prospectus disclosing lower' fee schedule

because fund was required to print and mail the prospectus for

other reasons).

---

For the reasons set forth above, we request that the staff

confirm that it will not recommend enforcement action if the

subadvisory agreement with respect to the American Odyssey Long- Term Bond Fund is amended without shareholder approval to eliminate

WLO as a party and the higher fee applicable to non-U. S. assets.

Please call if you would like any additional information or

would li.ke to discuss any of these points. If the staff is unable

to confirm that it will not seek enforcement action based on this

letter, I would appreciate it if you would contact me to discuss

possible revisions or additional submissions. Thank you for your

consideration of this matter.

Yours truly,

-
Palmer
CEP / dd