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Investment Company Act of 1940 — Section 15(a)
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RESPONSE OF THE OFFICE OF CHIEF COUNSEL |
Our Ref. No. 2010321752 |
Your letter dated April 27, 2010 requests our assurance that we would not recommend enforcement action to the Commission against Claymore Advisors, LLC ("Claymore Advisors") under Section 15(a) of the Investment Company Act of 1940 (the "Investment Company Act") if, under the circumstances described in your letter, Claymore Advisors continues to serve as investment adviser to certain series of Claymore Exchange-Traded Fund Trust and Claymore Exchange-Traded Fund Trust 2 (together, the "Trusts") pursuant to a written investment advisory agreement that has not been approved by the vote of a majority of the outstanding voting securities of such series.1
You state the following: each of the Trusts is registered with the Commission as an open-end management investment company. Claymore Exchange-Traded Fund Trust is comprised of nineteen series and Claymore Exchange-Traded Fund Trust 2 is comprised of sixteen series (each such series, a "Fund") that all operate as exchange-traded funds ("ETFs"). Claymore Advisors, an investment adviser registered under the Investment Advisers Act of 1940, currently serves as adviser to each Trust. Claymore Advisors is a wholly owned subsidiary of Claymore Group Inc. ("Claymore Group").
On July 17, 2009, Claymore Group entered into an agreement and plan of merger between and among Claymore Group, Claymore Holdings, LLC and GuggClay Acquisition, Inc. pursuant to which Claymore Group and its subsidiaries (including Claymore Advisors) would become indirect, wholly owned subsidiaries of Guggenheim Partners, LLC ("Guggenheim") upon the closing of such transaction (the "Guggenheim Transaction"). The Board of Trustees of each Trust (each, a "Board" and together, the "Boards") was advised that the closing of the Guggenheim Transaction would cause the automatic termination of each Trust"s then-current investment advisory agreement with Claymore Advisors (each, an "Original Advisory Agreement") pursuant to such agreement"s terms.
On September 28, 2009, the Board of each Trust, including those trustees who are not "interested persons" as defined in the Investment Company Act, after determining that it would be appropriate for Claymore Advisors to continue to serve as investment adviser to the Funds, approved an interim investment advisory agreement between such Trust and Claymore Advisors (each, an "Interim Advisory Agreement") pursuant to the requirements of Rule 15a-4(b)(2) under the Investment Company Act. Each Interim Advisory Agreement was scheduled to take effect as of the closing date of the Guggenheim Transaction (the "Guggenheim Effective Date") and was scheduled to terminate upon the earlier of: (a) 150 calendar days after the Guggenheim Effective Date and (b) the approval of a new advisory agreement (each, a "New Advisory Agreement") by the shareholders of each Fund (such period, the "Interim Period"). You represent that each Interim Advisory Agreement complies with the requirements of Rule 15a-4.2 When the Guggenheim Transaction closed on October 14, 2009, each Trust"s Original Advisory Agreement automatically terminated and its Interim Advisory Agreement took effect as of such date. Accordingly, both Interim Advisory Agreements were scheduled to expire on Saturday, March 13, 2010 (the "Termination Date").
As of March 10, 2010, Claymore Advisors and the Trusts believed that, despite all the efforts made, there was a high probability that the Trusts would not receive the number of votes necessary to constitute a quorum with respect to five Funds (such Funds, the "Remaining Funds") by the Termination Date.3 You represent that Claymore Advisors and the Trusts acted promptly, immediately after the Guggenheim Effective Date, to prepare, print and mail the relevant proxy materials and made extraordinary efforts to enable a shareholder meeting to be held at which shareholders of each Fund could vote on the approval of the New Advisory Agreements, including retaining the services of an experienced proxy solicitation firm, The Altman Group ("Altman"), at the outset of the proxy process. You further represent that an overwhelming majority of the votes received from shareholders of the Funds (including the Remaining Funds) have been cast in favor of approving the New Advisory Agreements and that the only obstacle has been obtaining a quorum with respect to the Remaining Funds. You also argue that it has been a persistent problem for ETFs to obtain votes sufficient for a quorum within the 150-day time frame afforded by Rule 15a-4 under the Investment Company Act. ETFs are widely held and often experience frequent trading of their shares and therefore frequent turnover in the identity of their shareholders. You represent that Altman has advised the Trusts that, due to such frequent trading, the identities of the current shareholders of the Remaining Funds differ substantially from the shareholders as of the record date set for the shareholder meetings. Moreover, Altman has advised the Trusts that this shareholder turnover, and the resulting larger proportion of record-date shareholders that are no longer shareholders of a Remaining Fund, has made it difficult for the Remaining Funds to obtain a quorum as former shareholders typically are less willing to vote their proxies than current shareholders.
As of March 10, 2010, you proposed, in the event that each Board determined that it would be in the best interests of the Remaining Funds and their shareholders for Claymore Advisors to continue to serve as investment adviser to the Remaining Funds during the Additional Period (as defined below), to have Claymore Advisors continue to serve as investment adviser to each of the Remaining Funds pursuant to the requirements of Rule 15a-4 for an additional period of time after the expiration of the original 150-day period not to exceed the earlier of (x) the date on which such Remaining Fund obtains the votes necessary to achieve a quorum and holds a shareholder vote, and (y) forty-five calendar days after the Termination Date (the "Additional Period").4 During the Additional Period, each Trust, upon the recommendation of its Board, would continue to seek the approval of the New Advisory Agreement by the shareholders of each Remaining Fund. In light of the continuing extensive proxy solicitation efforts, Claymore Advisors and the Trusts believed that they would be able to obtain a quorum for the Remaining Funds before the expiration of the Additional Period.
In your proposal, you represented that Claymore Advisors would serve as investment adviser to such Remaining Funds for the Additional Period without any compensation or any reimbursement of its costs. You further represented that, other than changes to reflect the new termination date and the absence of any compensation or reimbursement of costs to Claymore Advisors for the Additional Period, the terms and conditions of the Interim Advisory Agreements would remain the same. You also represented that Fund shareholders have not incurred any expenses associated with the Guggenheim Transaction or the New Advisory Agreements, including the solicitation of requisite shareholder approval of such agreements, and that Claymore Advisors has borne all postage, printing, tabulation and proxy solicitation costs relating to the Guggenheim Transaction and the approval of the New Advisory Agreements, including all of the expenses associated with the preparation and filing of Form N-14 and other relevant filings with the Commission. Moreover, during the Additional Period, Claymore Advisors would continue to bear all costs and expenses related to the Guggenheim Transaction and the New Advisory Agreements.
Accordingly, as of March 10, 2010, you requested assurance that we would not recommend enforcement action against Claymore Advisors under Section 15(a) of the Investment Company Act if Claymore Advisors continued to serve as investment adviser to the Remaining Funds for the Additional Period pursuant to a written investment advisory agreement that has not been approved by the vote of a majority of the outstanding voting securities of such funds.
Section 15(a) of the Investment Company Act states, in relevant part, that 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 has been approved by the vote of a majority of the outstanding voting securities of such registered company. Section 15(a) was adopted to give fund shareholders a voice in approving fund investment advisory contracts and to prevent trafficking in fund advisory contracts.5
Rule 15a-4 under the Investment Company Act provides a temporary exemption from the shareholder approval requirement in Section 15(a) in circumstances in which the previous advisory contract was terminated by the board of directors or by the vote of a majority of the outstanding voting securities of the registered investment company, by a failure to renew the previous advisory contract, or by an assignment of the previous advisory contract, as defined in Section 2(a)(4) of the Investment Company Act. Rule 15a-4 permits a person to act as an investment adviser to a registered investment company under an interim advisory agreement that has not been approved by the company"s shareholders for a period of 150 days following the date on which the previous contract terminated, subject to the requirements set forth in the rule.6 Rule 15a-4 was designed to prevent registered investment companies from being harmed by losing investment advisory services before shareholders can approve a new investment advisory contract.7
On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against Claymore Advisors under Section 15(a) of the Investment Company Act if, under the circumstances described in your letter, Claymore Advisors continues to serve as investment adviser to each Remaining Fund pursuant to a written investment advisory agreement that has not been approved by the vote of a majority of the outstanding voting securities of such Remaining Fund.8
This response expresses our views on enforcement action only and does not express any legal conclusions on the questions presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.
Shannon Conaty
Senior Counsel
The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2010/claymoreadvisors042710.htm
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