CORRESP 1 v07843_corresp.txt PEPPER HAMILTON LLP 3000 Two Logan Square Eighteenth and Arch Streets Philadelphia, PA 19103-2799 October 28, 2004 VIA EDGAR Christian T. Sandoe, Esquire U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: The HomeState Group (1940 Act File No. 811-6722) Dear Mr. Sandoe: This letter responds to your oral comments received on Wednesday, October 20, 2004, regarding post-effective amendment number twenty-three ("Amendment No. 23") to the registration statement of The HomeState Group (the "Trust"), which was filed with the Commission on Form N-1A on August 27, 2004. We appreciate the opportunity to address your comments regarding the current disclosure contained in the Trust's prospectus and statement of additional information ("SAI") with respect to its series -- The Emerald Growth Fund (the "Growth Fund"), The Emerald Select Banking and Finance Fund (the "Banking and Finance Fund") and The Emerald Select Technology Fund (the "Technology Fund," which together with the Growth Fund and Banking and Finance Fund are hereinafter referred to as the "Funds"). We have organized the comments you presented and our response to such comments to follow the headings in the prospectus and SAI, which are as follows: Prospectus Expense Tables -------------- You inquired about the expiration of the investment adviser's fee waivers on October 31, 2004. The adviser has agreed to extend such fee waivers through October 31, 2005, and such dates have been changed to reflect this new agreement throughout the prospectus. Banking and Finance Fund -- Principal Investment Strategy --------------------------------------------------------- You commented on the definition of "principally engaged" in light of a fundamental policy described in the SAI regarding the Banking and Finance Fund as well as the impact of such definition on bank holding companies. We acknowledge your comments regarding a fundamental policy of the Banking and Finance Fund to invest not less than 25% of its total assets in the securities of companies principally engaged in the banking industry and not less than 25% of its total assets in securities of companies principally engaged in the financial services industry (the "Fundamental Concentration Policy"). Your concern was that the adviser could theoretically meet one test but not the other, in light of the definition of the term "principally engaged." It is the adviser's and Chief Compliance Officer's duty to ensure that each fund meets its stated policies. While a portfolio company could be considered solely engaged in the banking industry as a result of the definition of "principally engaged," that only means that the adviser must also invest enough assets in companies that are considered to be "principally engaged" in the financial services industry in order to meet both legs of the Banking and Finance Fund's Fundamental Concentration Policy. We do not believe that there is any inconsistency between the definition of "principally engaged" and the Banking and Finance Fund's Fundamental Concentration Policy as stated in the SAI. In light of the foregoing, however, disclosure regarding the Banking and Finance Fund's Fundamental Concentration Policy has been added immediately after the first sentence of the paragraph, which contains the fund's Names Rule disclosure. The prospectus disclosure has been amended to make clear that companies to which the "principally engaged" definition applies include parent holding companies of banks. For example, bank holding companies that are also engaged in the financial service industry could qualify for being counted under either or both categories. The Emerald Select Technology Fund ---------------------------------- You commented that the use of the term "Technology Fund" if not defined, as opposed to "Select Technology Fund," could be confusing to investors. The term "Technology Fund" has been defined. Technology Fund -- Portfolio Turnover ------------------------------------- You commented that in light of certain SAI disclosure regarding portfolio turnover, the prospectus should include a statement of an expectation of higher turnover. The prospectus has been amended to include such a statement. Shareholder Service Information -- Market Timing ------------------------------------------------ You commented that there should be disclosure of the consequences of the inability to detect market timing or prevent the reoccurrence of market timing if detected. Certain consequences of market timing are stated in the penultimate sentence of the paragraph on which you commented. The ultimate and penultimate sentences have been reordered, and additional disclosure regarding the consequences of market timing has been added. Appendix: Additional Fund Information -- Why Should I Invest In Small Cap Companies? ------------------------------------------- You commented on the affirmative statement that small-cap exposure helps reduce a diversified portfolio's risk. While the adviser believes this statement to be accurate, the disclosure has been changed to the following: "Introducing small-cap exposure to an investment portfolio provides an additional level of diversification, which may help to reduce portfolio risk." STATEMENT OF ADDITIONAL INFORMATION (SAI) Additional Information Concerning Investment Objectives and Policies - General ------------------------------------------------------------------------------ You commented on the use of the unqualified term "net assets" when referring to the Banking and Finance Fund and Technology Fund's Names Rule investment policy. The disclosure has been amended to read "net assets, plus borrowings for investment purposes, if any" to be consistent with the definition of "Assets" in the Names Rule as well as disclosure in the Funds' prospectus. Fundamental Investment Restrictions ----------------------------------- You commented on the singular grammatical usage of the term "industry" in fundamental policy number two for the Banking and Finance Fund as it relates to the finance industry. The disclosure in the SAI contains the language used in the Trust's Declaration of Trust verbatim. As a fundamental policy, it may not be changed without shareholder approval. Accordingly, we respectfully submit that it would be inappropriate to alter such language in the Trust's SAI. The grammar used is accurate as the sentence refers to the "banking industry" and "finance industry" separately, and not the banking and finance industries collectively, as done so in the prospectus. In addition, the prospectus states in the second paragraph of under "Principal Investment Strategy" the types of companies included in the finance industry so that there is little chance of confusion on the part of investors regarding the term "finance industry." Additional Purchase and Redemption Information ---------------------------------------------- You commented on superfluous language dealing with the transmission of orders. The superfluous language has been deleted. Management of the Fund - Compensation Table ------------------------------------------- You commented on the lack of a footnote relating to Mr. Penwell. The double asterisk footnote is inapplicable to Mr. Penwell. Mr. Penwell is not an employee of Emerald Advisers or its affiliates, although he will be considered a "Interested Person" of the Trust through July 1, 2006, as a result of his former law partnership which was the Trust's former legal counsel. No footnote regarding a Trustee's status as interested or disinterested is required under Item 12(c)(1) of Form N-1A. The language leading into the Compensation Table has been amended to make clear that only non-employee Trustees are entitled to trustee compensation. Related Transactions -------------------- You requested an analysis on why Mr. Masterson should not be deemed to have a material business relationship with the Trust as a result of the transaction disclosed. We bring your attention to the fact that the Trust filed a preliminary proxy statement on October 13, 2004, pursuant to which it will be asking shareholders of the Funds to vote on a new slate of trustees at a Special Meeting on November 29, 2004. Mr. Masterson decided previously not to stand for re-election as a trustee. Therefore, this issue shortly will be moot. However, we respond to your request as follows. As you are aware, Section 2(a)(19)(A)(iii) of the Investment Company Act of 1940 (the "1940 Act") provides that an interested person of an investment company includes any interested person of any investment adviser of an investment company, and that Section 2(a)(19)(B)(vii) of the 1940 Act provides that an interested person of an investment adviser of an investment company includes any natural person whom the Commission by order shall have determined to be an interested person by reason of having had at any time since the beginning of the last two completed fiscal years of such investment company a material business or professional relationship with such investment adviser or any controlling person of such investment adviser. Mr. Besecker owns a controlling interest in Emerald Asset Management, Inc. ("EAM") which, in turn, controls the Trust's investment adviser, Emerald Advisers, Inc. (the "Adviser"). The Staff has stated on multiple occasions that it believes that it generally is not appropriate to respond to no-action requests under subparagraph (B)(vii) of Section 2(a)(19). See Better Investing Fund, Inc., SEC No-Action letter, 1988 WL 235011 (Jun. 15, 1988), Daniel Calabria, SEC No-Action Letter, 1984 WL 48376 (Aug. 13, 1984), and Capital Supervisors Helios Fund Inc., SEC No-Action Letter, 1984 WL 45363 (May 14, 1984). In the cases where the Staff has spoken on the issue it has provided little guidance and has relied on a fact sensitive analysis. We note, however, that in Equitable of Iowa Variable Annuity, SEC No-Action Letter, 1980 WL 14310 (Jan. 6, 1980), the amounts in question were in the millions of dollars, and the two lines of credit, in particular, amounted to $3.5 million each. With respect to the $300,000 personal loan by Mr. Masterson to Mr. Besecker, the Board of Trustees of the Trust determined that the loan was neither large enough nor long enough in duration to compromise the independence of Mr. Masterson due to Mr. Masterson's apparent ability to make the loan, his affirmative statements regarding his ability to remain disinterested, and Mr. Besecker's independent ability to repay the loan. Code of Ethics and Personal Trading - Proxy Voting Policies ----------------------------------------------------------- You commented on specific voting policies/guidelines of the investment adviser. With regard to "Sweetners," the adviser has determined to amend its policy in light of the possible obsolescence of such a policy, and a similar amendment to the SAI will be made to remove this reference. With regard to "Abstention Votes," the adviser has determined to alter the last sentence of the policy/guideline to read "The Adviser will support any proposal to change a company's by-laws or articles of incorporation to reflect this view of accounting for abstention votes." The adviser believes that any law to the contrary, whether state or federal, to which the issuer is subject could not be changed by the by-laws or charter, and thus should not impact the adviser's voting policy regarding changes to an issuer's by-laws or charter, when proposed. For example, the effect of the adviser's policy would be to vote against a reorganization were an issuer proposed re-incorporating in a state the included abstentions in the denominator when counting shareholder votes, and vice versa. This investment proxy policy with respect to portfolio investments co-exists with the 1940 Act's requirement that the adviser in managing the affairs of the Fund must count abstentions in the denominator. Investment Adviser and Principal Underwriter -------------------------------------------- You commented on certain disclosure regarding the approval of the investment adviser's advisory contract. Additional disclosure has been added to: (i) address more specifically where the adviser's advisory fees fell within the range of fees considered as comparators by the trustees; (ii) explain that the trustees considered a break in the adviser's advisory fees with respect to the Banking and Finance Fund as an "economy of scale" in connection with the increase in the Funds' assets; and (iii) provide the trustees' conclusions regarding their consideration of the tenure of the adviser's management team and key personnel. Additional Brokerage Allocation Information ------------------------------------------- You commented on the inclusion of the previously required disclosure in connection with the NASD's anti-reciprocal rule. In light of the rescission of such rule and new rule 12b-1(h) under the 1940 Act, such disclosure has been removed. ************************** I trust that these responses address your comments. This letter incorporates by reference the "Tandy Letter" signed by an officer of the Trust and attached hereto as Exhibit A. If you have any further questions, please do not hesitate to contact me at (215) 981-4893 or my associate Adam L. Lantz at (215) 981-4602. Very truly yours, /s/ Gregory J. Nowak ---------------------------------------- Gregory J. Nowak, Esquire cc: Mr. Daniel W. Moyer IV Mr. Kenneth G. Mertz II Adam L. Lantz, Esq. EXHIBIT A The HomeState Group 1703 Oregon Pike, Suite 101 Lancaster, Pennsylvania 17605-0666 October 28, 2004 Filing Desk U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: The HomeState Group (1940 Act File No. 811-722) Dear Sir or Madam: In connection with the filing of Post-Effective Amendment No. 25 to its registration statement (the "Amendment"), as instructed, The HomeState Group (the "Trust") is providing the following: The Trust acknowledges that (i) it is responsible for the adequacy and accuracy of the disclosure in the Amendment, (ii) Commission staff comments or changes to disclosure in response to staff comments in the Amendment reviewed by the staff do not foreclose the Commission from taking any action with respect to the Amendment, and (iii) the Trust may not assert staff comments with respect to the Amendment as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. Please direct any questions concerning this letter to Gregory J. Nowak, Esquire, of Pepper Hamilton LLP, counsel to the Trust at 215.981.4893. Very truly yours, /s/ Daniel W. Moyer IV ---------------------------------------- Daniel W. Moyer IV President, The HomeState Group cc: Christian T. Sandoe, Esq., Securities and Exchange Commission Gregory J. Nowak, Esq.