SEC Company Response from FAIRPORT FUNDS (CIK 0000930363) — Feb 28, 2005
FAIRPORT FUNDS (CIK 0000930363)
Date: Feb. 28, 2005 · CIK: 0000930363 · Accession: 0001035449-05-000119
AI Filing Summary & Sentiment
File numbers found in text: 811-8774
Letter
February 28, 2005 February 28, 2005 Dominick Minore Attorney U.S. Securities and Exchange Commission Office of Disclosure and Review Division of Investment Management United States Securities and Exchange Commission 50 Fifth Street, N.W. Washington, D.C. 20549
RE: Fairport Funds Post-Effective Amendment No. 15; File Nos. 33-84186 and 811-8774
Dear Mr. Minore:
On December 30, 2004, Fairport Funds (the "Trust"), on behalf of the Fairport Government Securities Fund (the "Fund"), a series of the Trust, filed Post-Effective Amendment No. 15 to its Registration Statement on Form N-1A. Please find below the Trust's responses to oral comments from you received on February 22, 2005. For your convenience, I have summarized your comments.
1. Comment: The prospectus discloses that under normal circumstances at least 80% of the Fund's total assets are invested in U.S. government securities. If this is a fundamental policy, it should be listed as a fundamental policy in the Statement of Additional Information ("SAI"). If it is not a fundamental policy, the prospectus should disclose that this strategy can be changed by the Board of Trustees only upon 60 days advance notice to shareholders.
Response: The Fund's investment strategy is not fundamental. Therefore, the disclosure of the Fund's investment strategy has been amended to read as follows:
The Fund primarily invests in U.S. government and agency securities and expects to maintain an average portfolio duration that will normally vary between three and seven years. Under normal circumstances, at least 80% of the Fund's total assets are invested in U.S. government securities. If the ------ Fund decides to change this strategy, shareholders will be given 60 days --------------------------------------------------------------------------- advance notice. --------------
2. Comment: Does the Fund intend to invest in Fannie Mae and Federal Home Loan Bank securities? If so, the disclosure should be amended to state that the obligations of these instrumentalities are not backed by the full faith and credit of the U.S. government and their right to borrow from the U.S. Treasury is limited.
Response: The disclosure has been amended to read as follows:
U.S. government securities are securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. Securities issued directly by the U.S. government consist of bills, notes and bonds issued by the U.S. Treasury, including U.S. Treasury inflation index-linked securities and separately traded interest and principal component parts of such securities that are transferable only through the Federal Reserve's book entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPs"). Agencies and instrumentalities of the U.S. government include
Michael.Wible@ThompsonHine.com Phone 614.469.3297 Fax 614.469.3361 <PAGE> THOMPSON -------------------------------------------------------------------------------- HINE ----
February 28, 2005 Page 2
the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), the Student Loan Marketing Association ("SLMA"), Federal Home Loan Banks ("FHLB") and the Federal Home Loan ---------------------------------- Mortgage Corporation ("FHLMC"). Obligations of agencies such as GNMA are backed by the full faith and credit of the U.S. government. Others, such as the obligations of FNMA, FHLMC and FHLB are not backed by the full faith and credit of the U.S. government but are supported by a limited right of the issuer to borrow from the U.S. Treasury; others, such as those of SLMA, are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still others, such as the Federal Farm Credit Banks, are supported only by the credit of the agency.
3. Comment: The explanation accompanying the Example states that the Example is based upon, among other assumptions, that "the Fund's operating expenses will remain the same (except for fee waivers/expense reimbursements reflected in the --------------------------------------------------------------- first year)". Please explain whether the total fund operating expenses shown on ---------- the expense table are gross or net of waivers and reimbursements.
Response: The Adviser has not contractually agreed to waive fees for the period beginning March 1, 2005 and the total fund operating expenses shown on the table are gross of waivers. Therefore, the parenthetical above has been deleted.
4. Comment: Does the Fund invest in interest only ("IO") or principal only ("PO") securities? If so, please disclose that the Fund invests in IOs and POs and discuss the risks of such investments.
Response: The Fund does not invest in IOs and POs.
5. Comment: The section entitled "Bond" under the heading NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS contains the following sentence: "Because the Fund invests principally in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, there is less risk that the principal of and interest on such securities will not be paid when due." Such mitigating language is inappropriate in risk disclosure.
Response: The sentence has been removed and the next sentence modified to read: "Because the Fund may invest in corporate bonds and other non-U.S. Government securities, there is more of a risk that the principal of and interest on such securities may not be paid when due."
6. Comment: Does the Fund invest in other investment companies, other than money market funds? If so, please disclose that the Fund's NAV is calculated based on the NAV of the underlying fund and the underlying fund's fair value policies are contained in its prospectus.
Response: The Fund does not invest in other investment companies, other than money market funds.
7. Comment: Disclose that the Fund does not monitor for market timing. Alternatively, respond supplementally as to why the Fund does not monitor for market timing?
Response: As disclosed in the prospectus, the Fund's Board of Trustees has determined that it is unlikely that a government bond fund with a large proprietary distribution and shareholder base would be used for market timing
<PAGE> THOMPSON -------------------------------------------------------------------------------- HINE ----
February 28, 2005 Page 3
purposes. In addition, the Fund does not have a history of market timing activity. As a result, the Board of Trustees of the Fund has not adopted market timing policies and procedures, including procedures to monitor for market timing. However, the Fund does reserve the right to reject any purchase order, including orders from persons or entities that the Fund believes are engaging in harmful excessive trading or market timing activities
8. Comment: Disclose whether there is a risk that employees of the Fund or the adviser will time the Fund and the procedures adopted by the Fund to prevent such activity. Alternatively, provide the response supplementally.
Response: Employees of the Fund are subject to the Fund's Code of Ethics adopted under Rule 17j-1 and employees of the adviser are subject to both the Fund's Code of Ethics and the adviser's Code of Ethics adopted under Rule 204A-1 under the Investment Advisers Act. Under both of these Codes, employees (i) owe a fiduciary duty to clients/shareholders and at all times have a duty to place the interests of such clients/shareholders ahead of their personal interests, (ii) are obligated to conduct all personal securities transactions in accordance with the Codes and in a manner so as to avoid any actual or potential conflict of interest or abuse of such employee's position of trust and responsibility, and any appearance of such conflict of interest or abuse of position, and (iii) should not take inappropriate advantage of their positions. In addition, employees covered by the adviser's Code of Ethics are required to report transactions in Fund shares on a quarterly basis. The Fund does not have any employees.
9. Comment: The SAI contains disclosure relating to certain types of securities and other instruments in which the Fund may invest. Unless other applicable limits apply, the SAI should disclose that the Fund may invest up to 20% of its total assets those securities.
Response: If the Fund invests or intends to invest up to 20% of its total asset in a particular type of security or other investment, the security or other investment would be disclosed in the prospectus. For instance, the prospectus discloses that the Fund may invest up to 20% of its total assets in corporate bonds and privately issued mortgage-backed securities. The fact that the instruments are disclosed in the SAI and not the prospectus indicates that they do not constitute a significant part of the Fund's investment strategy. Nevertheless. the following language has been added to the SAI immediately following the heading INFORMATION ON --------------- PERMITTED INVESTMENTS AND RELATED RISK FACTORS ----------------------------------------------
Under normal circumstances, at least 80% of the Fund's total assets are invested in U.S. government securities. The remainder of the Fund's assets may be invested in other investments, which may include the following:
10. Comments: The SAI discloses that the Fund may invest in asset-backed securities.
(a) Is there a minimum rating category below which the Fund will not purchase an asset-backed security? Is so, please disclose.
(b) The SAI also discloses that asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the benefit of a <PAGE> THOMPSON -------------------------------------------------------------------------------- HINE ----
February 28, 2005 Page 4
complete security interest in the related collateral. Please add additional disclosure stating that asset-backed securities may contain no security interest in the related collateral.
(c) The SAI discloses that credit enhancements may reduce the risks associated with asset-backed securities. Please add disclosure clarifying that while credit enhancements may reduce the risks associated with asset-backed securities, they cannot eliminate the risk.
Response: The disclosure in the SAI has been amended as follows:
ASSET-BACKED SECURITIES -----------------------
The Fund is permitted to invest in asset-backed securities that are -------- rated, at the time of purchase, within the four highest rating categories --------------------------------------------------------------------------- by one or more rating agencies. Asset-backed securities have structural ------------------------------- characteristics similar to mortgage-backed securities and a similar risk of prepayment. However, asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the benefit of a complete security interest in the related collateral, and may contain no ---------- security interest in the related collateral. The underlying assets include ------------------------------------------- assets such as motor vehicle installment sales contracts, other installment loan contracts and receivables from credit card and other revolving credit arrangements. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, some of which may reduce the ability of the Fund, as an investor, to obtain full payment in the event of default or insolvency. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities. The risks associated with asset-backed securities are often reduced, but not eliminated, by the ------------------ addition of credit enhancements such as a letter of credit from a bank, excess collateral or a third-party guarantee. With respect to an asset-backed security arising from secured debt (such as automobile receivables), there is a risk that parties other than the originator and servicer of the loan may acquire a security interest superior to that of the security's holders.
11. Comment: We have the following comments on the section of the SAI entitled DISCLOSURE OF PORTFOLIO HOLDINGS:
1. With respect to the release of portfolio holdings information to such service providers as the Fund's auditors, legal counsel, printers, proxy voting services (if applicable), pricing services, printers, parties to merger and reorganization agreements and their agents, and prospective or newly hired investment advisers or sub-advisers, disclose the length of the time lag between the date of the information and the information disclosed.
2. Will disclosure of portfolio holdings information to all third parties be pursuant to conditions of confidentiality?
3. Specifically identify by name those rating agencies whom the Fund has an ongoing arrangement to disclose portfolio holdings information. <PAGE> THOMPSON -------------------------------------------------------------------------------- HINE ----
February 28, 2005 Page 5
4. Identify by title those individuals who may authorize the disclosure of the Fund's portfolio holdings.
5. Specify that in the Board's review of proposed arrangements to disclose portfolio holdings, the Board considers not only whether disclosure is in the best interest of the Fund shareholders, but also whether the information will be kept confidential and whether the disclosure presents a conflict of interest between the interests of Fund shareholders on and those of the adviser, distributor or any aff
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THOMPSON ATLANTA CINCINNATI COLUMBUS NEW YORK
--------------------------------------------------------------------------------
HINE BRUSSELS CLEVELAND DAYTON WASHINGTON, D.C.
--------------------------------------------------------------------------------
February 28, 2005
February 28, 2005
Dominick Minore
Attorney
U.S. Securities and Exchange Commission
Office of Disclosure and Review
Division of Investment Management
United States Securities and Exchange Commission
50 Fifth Street, N.W.
Washington, D.C. 20549
RE: Fairport Funds Post-Effective Amendment No. 15; File Nos. 33-84186 and
811-8774
Dear Mr. Minore:
On December 30, 2004, Fairport Funds (the "Trust"), on behalf of the Fairport
Government Securities Fund (the "Fund"), a series of the Trust, filed
Post-Effective Amendment No. 15 to its Registration Statement on Form N-1A.
Please find below the Trust's responses to oral comments from you received on
February 22, 2005. For your convenience, I have summarized your comments.
1. Comment: The prospectus discloses that under normal circumstances at least
80% of the Fund's total assets are invested in U.S. government securities. If
this is a fundamental policy, it should be listed as a fundamental policy in the
Statement of Additional Information ("SAI"). If it is not a fundamental policy,
the prospectus should disclose that this strategy can be changed by the Board of
Trustees only upon 60 days advance notice to shareholders.
Response: The Fund's investment strategy is not fundamental.
Therefore, the disclosure of the Fund's investment strategy has been
amended to read as follows:
The Fund primarily invests in U.S. government and agency securities and
expects to maintain an average portfolio duration that will normally vary
between three and seven years. Under normal circumstances, at least 80% of
the Fund's total assets are invested in U.S. government securities. If the
------
Fund decides to change this strategy, shareholders will be given 60 days
---------------------------------------------------------------------------
advance notice.
--------------
2. Comment: Does the Fund intend to invest in Fannie Mae and Federal Home Loan
Bank securities? If so, the disclosure should be amended to state that the
obligations of these instrumentalities are not backed by the full faith and
credit of the U.S. government and their right to borrow from the U.S. Treasury
is limited.
Response: The disclosure has been amended to read as follows:
U.S. government securities are securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities. Securities issued directly
by the U.S. government consist of bills, notes and bonds issued by the U.S.
Treasury, including U.S. Treasury inflation index-linked securities and
separately traded interest and principal component parts of such securities
that are transferable only through the Federal Reserve's book entry system
known as Separately Traded Registered Interest and Principal Securities
("STRIPs"). Agencies and instrumentalities of the U.S. government include
Michael.Wible@ThompsonHine.com Phone 614.469.3297 Fax 614.469.3361
<PAGE>
THOMPSON
--------------------------------------------------------------------------------
HINE
----
February 28, 2005
Page 2
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Student Loan Marketing Association
("SLMA"), Federal Home Loan Banks ("FHLB") and the Federal Home Loan
----------------------------------
Mortgage Corporation ("FHLMC"). Obligations of agencies such as GNMA are
backed by the full faith and credit of the U.S. government. Others, such as
the obligations of FNMA, FHLMC and FHLB are not backed by the full faith
and credit of the U.S. government but are supported by a limited right of
the issuer to borrow from the U.S. Treasury; others, such as those of SLMA,
are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; and still others, such as the Federal
Farm Credit Banks, are supported only by the credit of the agency.
3. Comment: The explanation accompanying the Example states that the Example is
based upon, among other assumptions, that "the Fund's operating expenses will
remain the same (except for fee waivers/expense reimbursements reflected in the
---------------------------------------------------------------
first year)". Please explain whether the total fund operating expenses shown on
----------
the expense table are gross or net of waivers and reimbursements.
Response: The Adviser has not contractually agreed to waive fees for
the period beginning March 1, 2005 and the total fund operating expenses
shown on the table are gross of waivers. Therefore, the parenthetical above
has been deleted.
4. Comment: Does the Fund invest in interest only ("IO") or principal only
("PO") securities? If so, please disclose that the Fund invests in IOs and POs
and discuss the risks of such investments.
Response: The Fund does not invest in IOs and POs.
5. Comment: The section entitled "Bond" under the heading NON-PRINCIPAL
INVESTMENT STRATEGIES AND RISKS contains the following sentence: "Because the
Fund invests principally in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, there is less risk that the
principal of and interest on such securities will not be paid when due." Such
mitigating language is inappropriate in risk disclosure.
Response: The sentence has been removed and the next sentence modified
to read: "Because the Fund may invest in corporate bonds and other non-U.S.
Government securities, there is more of a risk that the principal of and
interest on such securities may not be paid when due."
6. Comment: Does the Fund invest in other investment companies, other than money
market funds? If so, please disclose that the Fund's NAV is calculated based on
the NAV of the underlying fund and the underlying fund's fair value policies are
contained in its prospectus.
Response: The Fund does not invest in other investment companies,
other than money market funds.
7. Comment: Disclose that the Fund does not monitor for market timing.
Alternatively, respond supplementally as to why the Fund does not monitor for
market timing?
Response: As disclosed in the prospectus, the Fund's Board of Trustees
has determined that it is unlikely that a government bond fund with a large
proprietary distribution and shareholder base would be used for market
timing
<PAGE>
THOMPSON
--------------------------------------------------------------------------------
HINE
----
February 28, 2005
Page 3
purposes. In addition, the Fund does not have a history of market timing
activity. As a result, the Board of Trustees of the Fund has not adopted
market timing policies and procedures, including procedures to monitor for
market timing. However, the Fund does reserve the right to reject any
purchase order, including orders from persons or entities that the Fund
believes are engaging in harmful excessive trading or market timing
activities
8. Comment: Disclose whether there is a risk that employees of the Fund or the
adviser will time the Fund and the procedures adopted by the Fund to prevent
such activity. Alternatively, provide the response supplementally.
Response: Employees of the Fund are subject to the Fund's Code of
Ethics adopted under Rule 17j-1 and employees of the adviser are subject to
both the Fund's Code of Ethics and the adviser's Code of Ethics adopted
under Rule 204A-1 under the Investment Advisers Act. Under both of these
Codes, employees (i) owe a fiduciary duty to clients/shareholders and at
all times have a duty to place the interests of such clients/shareholders
ahead of their personal interests, (ii) are obligated to conduct all
personal securities transactions in accordance with the Codes and in a
manner so as to avoid any actual or potential conflict of interest or abuse
of such employee's position of trust and responsibility, and any appearance
of such conflict of interest or abuse of position, and (iii) should not
take inappropriate advantage of their positions. In addition, employees
covered by the adviser's Code of Ethics are required to report transactions
in Fund shares on a quarterly basis. The Fund does not have any employees.
9. Comment: The SAI contains disclosure relating to certain types of securities
and other instruments in which the Fund may invest. Unless other applicable
limits apply, the SAI should disclose that the Fund may invest up to 20% of its
total assets those securities.
Response: If the Fund invests or intends to invest up to 20% of its
total asset in a particular type of security or other investment, the
security or other investment would be disclosed in the prospectus. For
instance, the prospectus discloses that the Fund may invest up to 20% of
its total assets in corporate bonds and privately issued mortgage-backed
securities. The fact that the instruments are disclosed in the SAI and not
the prospectus indicates that they do not constitute a significant part of
the Fund's investment strategy. Nevertheless. the following language has
been added to the SAI immediately following the heading INFORMATION ON
---------------
PERMITTED INVESTMENTS AND RELATED RISK FACTORS
----------------------------------------------
Under normal circumstances, at least 80% of the Fund's total assets are
invested in U.S. government securities. The remainder of the Fund's assets
may be invested in other investments, which may include the following:
10. Comments: The SAI discloses that the Fund may invest in asset-backed
securities.
(a) Is there a minimum rating category below which the Fund will not
purchase an asset-backed security? Is so, please disclose.
(b) The SAI also discloses that asset-backed securities involve certain
risks that are not posed by mortgage-related securities, resulting mainly from
the fact that asset-backed securities do not usually contain the benefit of a
<PAGE>
THOMPSON
--------------------------------------------------------------------------------
HINE
----
February 28, 2005
Page 4
complete security interest in the related collateral. Please add additional
disclosure stating that asset-backed securities may contain no security interest
in the related collateral.
(c) The SAI discloses that credit enhancements may reduce the risks
associated with asset-backed securities. Please add disclosure clarifying that
while credit enhancements may reduce the risks associated with asset-backed
securities, they cannot eliminate the risk.
Response: The disclosure in the SAI has been amended as follows:
ASSET-BACKED SECURITIES
-----------------------
The Fund is permitted to invest in asset-backed securities that are
--------
rated, at the time of purchase, within the four highest rating categories
---------------------------------------------------------------------------
by one or more rating agencies. Asset-backed securities have structural
-------------------------------
characteristics similar to mortgage-backed securities and a similar risk of
prepayment. However, asset-backed securities involve certain risks that are
not posed by mortgage-related securities, resulting mainly from the fact
that asset-backed securities do not usually contain the benefit of a
complete security interest in the related collateral, and may contain no
----------
security interest in the related collateral. The underlying assets include
-------------------------------------------
assets such as motor vehicle installment sales contracts, other installment
loan contracts and receivables from credit card and other revolving credit
arrangements. For example, credit card receivables generally are unsecured
and the debtors are entitled to the protection of a number of state and
Federal consumer credit laws, some of which may reduce the ability of the
Fund, as an investor, to obtain full payment in the event of default or
insolvency. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities. The risks associated
with asset-backed securities are often reduced, but not eliminated, by the
------------------
addition of credit enhancements such as a letter of credit from a bank,
excess collateral or a third-party guarantee. With respect to an
asset-backed security arising from secured debt (such as automobile
receivables), there is a risk that parties other than the originator and
servicer of the loan may acquire a security interest superior to that of
the security's holders.
11. Comment: We have the following comments on the section of the SAI entitled
DISCLOSURE OF PORTFOLIO HOLDINGS:
1. With respect to the release of portfolio holdings information to such
service providers as the Fund's auditors, legal counsel, printers,
proxy voting services (if applicable), pricing services, printers,
parties to merger and reorganization agreements and their agents, and
prospective or newly hired investment advisers or sub-advisers,
disclose the length of the time lag between the date of the
information and the information disclosed.
2. Will disclosure of portfolio holdings information to all third parties
be pursuant to conditions of confidentiality?
3. Specifically identify by name those rating agencies whom the Fund has
an ongoing arrangement to disclose portfolio holdings information.
<PAGE>
THOMPSON
--------------------------------------------------------------------------------
HINE
----
February 28, 2005
Page 5
4. Identify by title those individuals who may authorize the disclosure
of the Fund's portfolio holdings.
5. Specify that in the Board's review of proposed arrangements to
disclose portfolio holdings, the Board considers not only whether
disclosure is in the best interest of the Fund shareholders, but also
whether the information will be kept confidential and whether the
disclosure presents a conflict of interest between the interests of
Fund shareholders on and those of the adviser, distributor or any
aff