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Fund Seeks Renewal Of Lapsed Contract


In a rare but not unprecedented occurrence, the shareholders of a small fund are being asked to renew the fund's investment advisory contract, so that the advisor can be paid for the first time in nearly a year.

Shareholders of the $6.8 million Capital Management Mid-Cap Fund are being asked to re-approve the investment advisory agreement the fund has with its investment manager, Capital Management Associates of New York, as well as the fund's five-year-old 12b-1 plan.

For the past 10 months, the fund's board of directors has been unable to agree on a meeting date on which they were to approve the continuation of both the fund's advisory contract and the fund's 0.75 percent 12b-1 plan, according to proxy statements filed with the SEC July 17 and July 18. Consequently, both the fund's advisory contract and its 12b-1 plan lapsed on Nov. 10, 1999. A call to the fund seeking comment was not returned.

Since then, both the fund's advisor and affiliated distributor, Shields & Company, also of New York, have been serving without compensation. The fund is sold in the broker/dealer channel with a three percent front-end sales charge.

Mutual fund boards of directors are required periodically to review, approve or amend a fund's investment advisory contract. The independent directors must annually approve the continuation of a fund's 12b-1 plan. If the directors fail to re-approve either contractual agreement, the fund advisor must then go back to the fund's shareholders for their approval.

Because of Capital Management's board failed to to approve the continuation of the fund's advisory agreement and the fund's 12b-1 plan, shareholders will convene at a meeting Aug. 17 to do so.

The Capital Management Mid-Cap Fund will also ask shareholders to approve the retroactive payment of the 12b-1 fees that the fund would have been paid had the distribution plan not been allowed to lapse.

The fund would have paid its distributor an estimated $5,519 in 12b-1 fees between the date the plan lapsed and the upcoming Aug. 17 meeting, according to the July 18 proxy statement. The fund's investment advisor will forego retroactive payments, according to the filing.

Although it is rare that a fund group's board of directors inadvertently neglects to renew a fund's advisory agreement or 12b-1 plan, it can happen - and not just to small fund groups.

Through a series of missteps, the board of directors of the W.P. Stewart Growth Fund of New York found that the minutes of a 1996 board meeting at which the directors had approved the continuation of the fund's advisory agreement with its investment manager were missing. The board reconvened in early 1997 to make the necessary approval.

But at that meeting, the trustees inadvertently broke the in-person renewal requirement that mandates that all independent trustees physically meet together when considering a fund's advisory contract. Consequently, that vote was rendered moot, and the fund advisor had to go back to the fund's investors for approval of a new advisory contract.

In October, 1994, Gabelli Asset Management of Rye, New York, advisor to the Gabelli Global Telecommunications Fund, failed to have that fund's board of directors approve the continuation of the fund's 0.25 percent 12b-1 plan.

Consequently, Gabelli scheduled a special shareholder meeting in May, 1995 and asked fund shareholders to reinstate the elapsed plan and approve payment of the distribution fees the fund's distributor would have earned.