Frederic Dorwart, Lawyers
Attorneys at Law
Old City Hall | Telephone (918) 583-9928 |
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Tulsa, Oklahoma 74103 |
MEMORANDUM
date: | December 15, 2016 |
subject: | Responses to Comments from SEC regarding the Cavanal Hill Funds’ (“CHF” or the “Trust”) |
· | Post-Effective Registration Statement filed October 7, 2016 |
to: | Amy E. Newsome Frederic Dorwart, Lawyers, Fund Counsel |
from: | Ed Bartz, Securities Exchange Commission (“SEC”) |
cc: | Jim Huntzinger, Brian Henderson, Bill King |
The following comments were provided by Ed Bartz (the “SEC Reviewer”) in a phone conversation with Amy Newsome, Legal Counsel to the Cavanal Hill Funds, on November 22, 2016. Please see the Funds’ responses to the comments and let us know if you have any further questions.
Comment #1: General Comment – All Series. Please provide a completed “Fees and Expenses” table and “Example” at least 2 days prior to filing 485B.
Fund Response: Complete “Fees and Expenses” tables and “Examples” are provided for each of the Fund Series in the attached Exhibit A. The 485B will not be filed prior to December 19, 2016.
Comment #2:General Comment – All Series. For each Series that includes a fee waiver, include a copy of the contract in the 485B filing. Please ensure that all such agreements extend for at least one year from the effective date of the Registration Statement.
Fund Response: A copy of each contract that provides for fee waivers shall be filed in Part C of the Funds 485B. All such contracts extend through 12/31/2017.
Comment #3:Statutory Prospectus – Limited Duration Fund – Principal Investment Strategy, pg. 8. The Principal Investment Strategy states:
“the Fund investsprimarily in debt obligations such as bonds, notes and debentures, and bills issued by U.S. corporations or by the U.S. government, its agencies or instrumentalities, municipal securities, mortgage-related securities, asset-backed securities and collateralized mortgage obligations that are rated within the three highest ratings categories assigned by a nationally recognized statistical ratings organization or, if not rated, found by the Adviser under guidelines approved by the Trust’s Board of Trustees to be of comparable quality.” (emphasis added)
Does the Fund invest in other debt instruments? If so, describe the ratings of other debt instruments. If “junk bond,” include that description and add a risk factor.
Fund Response: The Fund does not invest in any debt obligations that are not rated within the three highest ratings categories or, if unrated, of comparable quality, at the time of purchase. Use of the word “primarily,” was intended to address other possible investment vehicles, not credit quality. In order to clarify, the disclosure has been revised to read as follows:
“the Fund invests primarily in debt obligations such as bonds, notes and debentures, and bills issued by U.S. corporations or by the U.S. government, its agencies or instrumentalities, municipal securities, mortgage-related securities, asset-backed securities and collateralized mortgage obligations. Such debt obligations are rated within the three highest ratings categories assigned by a nationally recognized statistical ratings organization or, if not rated, found by the Adviser under guidelines approved by the Trust’s Board of Trustees to be of comparable quality.”
Comment #4:Statutory Prospectus – Limited Duration Fund – Principal Investment Risks, pg. 8. Add an example of portfolio risk associated with a portfolio with a duration of 3.5 years to “Interest Rate Risk.”
Fund Response: The following example has been added to the Risk:
“For a portfolio with a duration of 3.5 years, each 1% rise in interest rates would reduce the market value of the portfolio by an estimated 3.5%.”
Comment #5:Statutory Prospectus – Moderate Duration Fund – Principal Investment Strategy, pg. 12. The Principal Investment Strategy states:
“the Fund invests, under normal market conditions,primarily in debt obligations such as bonds, notes and debentures, and bills issued by U.S. corporations or the U.S. government, its agencies, or instrumentalities, municipal securities, mortgage-related securities, asset-backed securities and collateralized mortgage obligations that are rated within the three highest ratings categories assigned by a nationally recognized statistical ratings organization or, if not rated, found by the Adviser under guidelines approved by the Trust’s Board of Trustees to be of comparable quality.” (emphasis added)
Does the Fund invest in other debt instruments? If so, describe the ratings of other debt instruments. If “junk bond,” include that description and add a risk factor.
Fund Response: The Fund does not invest in any debt obligations that are not rated within the three highest ratings categories or, if unrated, of comparable quality, at the time of purchase. Use of the word “primarily,” was intended to address other possible investment vehicles, not credit quality. In order to clarify, the disclosure has been revised to read as follows:
“the Fund invests primarily in debt obligations such as bonds, notes and debentures, and bills issued by U.S. corporations or by the U.S. government, its agencies or instrumentalities, municipal securities, mortgage-related securities, asset-backed securities and collateralized mortgage obligations. Such debt obligations are rated within the three highest ratings categories assigned by a nationally recognized statistical ratings organization or, if not rated, found by the Adviser under guidelines approved by the Trust’s Board of Trustees to be of comparable quality.”
Comment #6:Statutory Prospectus – Moderate Duration Fund – Principal Investment Risks, pg. 12. Add an example of portfolio risk associated with a portfolio with a duration of 5 years to “Interest Rate Risk.”
Fund Response: The following example has been added to the Risk:
“For a portfolio with a duration of 5 years, each 1% rise in interest rates would reduce the market value of the portfolio by an estimated 5%.”
Comment #7:Statutory Prospectus – Bond Fund – Principal Investment Strategy, pg. 16. The Principal Investment Strategy states:
“the Fund invests, under normal market conditions,primarily in debt obligations such as bonds, notes and debentures, and bills issued by U.S. corporations or the U.S. government, its agencies, or instrumentalities, municipal securities, mortgage-related securities, asset-backed securities and collateralized mortgage obligations that are rated within the three highest ratings categories assigned by a nationally recognized statistical ratings organization or, if not rated, found by the Adviser under guidelines approved by the Trust’s Board of Trustees to be of comparable quality.” (emphasis added)
Does the Fund invest in other debt instruments? If so, describe the ratings of other debt instruments. If “junk bond,” include that description and add a risk factor.
Fund Response: The Fund does not invest in any debt obligations that are not rated within the three highest ratings categories or, if unrated, of comparable quality, at the time of purchase. Use of the word “primarily,” was intended to address other possible investment vehicles, not credit quality. In order to clarify, the disclosure has been revised to read as follows:
“the Fund invests primarily in debt obligations such as bonds, notes and debentures, and bills issued by U.S. corporations or by the U.S. government, its agencies or instrumentalities, municipal securities, mortgage-related securities, asset-backed securities and collateralized mortgage obligations. Such debt obligations are rated within the three highest ratings categories assigned by a nationally recognized statistical ratings organization or, if not rated, found by the Adviser under guidelines approved by the Trust’s Board of Trustees to be of comparable quality.”
Comment #8:Statutory Prospectus – Active Core Fund, pg. 23. Disclose significance of the use of the term “Core” in the name of the Fund – what does/should that mean to investors?
Fund Response: The Fund added the following language to its Principal Investment Strategy to address the significance and meaning of its use of the term “Core”:
“The broadly diversified portfolio of equity and fixed income securities of varying yields and durations is structured to offer a core foundation of investments.”
Comment #9: Statutory Prospectus – Active Core Fund – Principal Investment Risks – Credit Risk, pg. 24. This risk mentions a counterparty. Need to disclose in Principal Investment Strategy counterparty involvement (what investments are subject to risk related to the counterparty?).
Fund Response: Because Credit Risk applies to both the bond and equity funds in the Registration Statement, the definition was written to apply in either context. With respect to this particular bond fund, only the issuer risk applies so the Principal Investment Strategy does not require revision. For clarification, the defined term has been revised to read as follows:
“Credit risk is the possibility that the issuer of a debt instrument or a counterparty to an agreement fails to fulfill its obligations, reducing the Fund’s return. This includes failure by a bond issuer to repay interest and principal.”
Comment #10: Statutory Prospectus – Active Core Fund – Principal Investment Risks – Emerging Markets Risk, pg. 24. Need to disclose in Principal Investment Strategy the strategy that triggers this risk.
Fund Response: The strategy that leads to the risk is already found in the 4th paragraph of the Principal Investment Strategy. The Fund added language to make that connection clearer.
Comment #11: Statutory Prospectus – Active Core Fund – Principal Investment Risks – Foreign Investment Risk, pg. 24. Need to disclose in Principal Investment Strategy the strategy that triggers this risk.
Fund Response: The strategy that leads to the risk is already found in the 4th paragraph of the Principal Investment Strategy. The Fund added language to make that connection clearer.
Comment #12: Statutory Prospectus – Active Core Fund – Principal Investment Risks – Interest Rate Risk, pg. 24. The example is an example of duration, not maturity. Either remove or provide an interest rate risk example.
Fund Response: The Fund removed the example.
Comment #13:Statutory Prospectus – Mid Cap Core Equity Fund – Example, pg. 27. Only show 1 and 3 Year in Example [Form N1-A Instructions].
Fund Response: The Fund has deleted the 5 and 10 Year columns from the Example.
Comment #14: Statutory Prospectus – Mid Cap Core Equity Fund – Principal Investment Strategy, pg. 28. The Fund identified the Russell Mid Cap Index in its strategy. Explain why management of the Fund considers this range to be mid-cap.
Fund Response: Management of the Fund recognizes the range in the selected index, like other indices, varies. The term is open to a wide range of interpretations in the industry. However, the Russell Mid Cap Index represents a standard, independent third-party definition that Management believes is within the expectation of investors and something that can be consistently evaluated among the Fund and its peers.
Comment #15: Statutory Prospectus – Mid Cap Core Equity Fund – Principal Investment Strategy, pg. 28. The Principal Investment Strategy includes reference to ADRs. Are any of the ADRs emerging market ADRs? If so, add a description in the Principal Investment Strategy and a Principal Investment Risk.
Fund Response: The Fund does not invest in emerging market ADRs.
Comment #16:Statutory Prospectus – Mid Cap Core Equity Fund – Principal Investment Strategy, pg. 28. Please provide a maturity policy with respect to corporate bonds.
Fund Response: The Fund added the following corporate bond maturity policy:
“The Fund seeks to maintain a dollar-weighted average portfolio maturity of three to twelve years for the debt portion of its portfolio.”
Comment #17:Statutory Prospectus – Mid Cap Core Equity Fund – Principal Investment Risks, pg. 28. The following Principal Investment Risks should be added: Foreign Investment Risk, Emerging Markets Risk (depending on response to Comment #15), Preferred Stock Risk and Interest Rate Risk.
Fund Response: The Fund has added Foreign Investment Risk, Preferred Stock Risk and Interest Rate Risk. As noted above, the Fund does not invest in emerging market ADRs so it did not add that risk.
Comment #18:Statutory Prospectus – Multi Cap Equity Income Fund – Principal Investment Strategy, pg. 31 The Principal Investment Strategy includes reference to ADRs. Are any of the ADRs emerging market or foreign ADRs? If so, add a description in the Principal Investment Strategy and a Principal Investment Risk.
Fund Response: The Fund does not invest in emerging market or foreign ADRs.
Comment #19:Statutory Prospectus – Multi Cap Equity Income Fund – Principal Investment Risks, pg. 31. Portfolio Turnover Risk is shown. Add a description of turnover to Principal Investment Strategy section.
Fund Response: The Fund has added language to more clearly indicate that the Fund may trade frequently to its Principal Investment Strategy.
Comment #20:Statutory Prospectus – Opportunistic Fund – Principal Investment Strategy, pg. 35. The second paragraph indicates that the Fund will invest in short positions. Please confirm that an estimate of dividend and interest expense associated with short sales is included in the fee table.
Fund Response: The Fund can confirm that the fee table includes estimates of dividend and interest expense associated with short sales, as required.
Comment #21:Statutory Prospectus – Opportunistic Fund – Principal Investment Strategy, pg. 35. The second paragraph indicates that the Fund may invest in “pooled investment vehicles.” Does the Fund invest in any hedge funds or private equity funds? If so, please explain how much is in each such type of vehicle as a percentage of the fund.
Fund Response: The Fund does not invest in any hedge funds or private equity funds.
Comment #22:Statutory Prospectus – World Energy Fund – Principal Investment Strategy, pg. 39. Please specify, pursuant to Rule 35(d)(1) that the 80% Rule relates to net assets plus borrowings for investment purposes or specify just “assets.”
Fund Response: The Cavanal Hill Funds would not ordinarily have borrowing for investment purposes. As a result, rather than regularly include a reference to borrowings that likely will not apply in the Prospectus, it is specified in the “Non-Fundamental Policies section of Investment Restrictions in the Statement of Additional Information that when “net assets” is used in the 80% investment requirements, it will be based on net assets plus any borrowings for investment purposes.
Comment #23:Statutory Prospectus – World Energy Fund – Principal Investment Strategy, pg. 39. The fourth paragraph indicates that the Fund will invest in short positions. Please confirm that an estimate of dividend and interest expense associated with short sales is included in the fee table.
Fund Response: The Fund can confirm that the fee table includes estimates of dividend and interest expense associated with short sales, as required.
If you have any questions or additional comments, please call me at the number set forth above.
/s/ Amy Newsome
Exhibit A
U.S. Treasury Fund
Government Securities Money Market Fund
Limited Duration Fund
Moderate Duration Fund
Bond Fund
Intermediate Tax Free Bond Fund
Active Core Fund
Mid Cap Core Equity Fund
Multi Cap Equity Fund
Opportunistic Fund
World Energy Fund