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SEC (Securities and Exchange Commission) Guidance on Aggregate Advisory Fee Rate for Multi-Manager Funds

The Division of Investment Management issued an Investment Management Guidance Update to clarify when a fund using a multi-manager structure must obtain shareholder approval for an increase in advisory or subadvisory fee rates.

Background. Under a multi-manager structure, a fund’s investment adviser selects subadvisers to provide the day-to-day investment advisory services to the fund. A fund using a multi-manager structure may request exemptive relief from the SEC with respect to the requirements of Section 15(a) of the Investment Company Act.

Section 15(a) requires an investment adviser or subadviser of a registered investment company to have a written contract providing for advisory services that has been approved by a majority of the outstanding voting securities of the fund and that "precisely describes all compensation to be paid thereunder." An SEC-granted Section 15(a) exemptive order would allow a subadviser to serve under a written contract that has not received shareholder approval. Notwithstanding such exemptive order, the advisory rate in the primary contract between the fund and the investment adviser would still remain subject to shareholder approval.

Multi-Manager Structures. The guidance explains that multi-manager orders generally contemplate two contractual scenarios. Under the traditional multi-manager structure, the fund pays advisory fees to the investment adviser, who in turn, compensates each subadviser out of the advisory fee. In this structure, shareholders approve the aggregate advisory fee when they approve the primary investment advisory agreement.

Under the direct-pay multi-manager structure, just as the fund enters into a direct agreement with the investment adviser, the fund also enters into a direct agreement with each subadviser. Therefore, shareholders approve each subadviser’s individual fee when they approve each individual subadvisory agreement.

Under both models, shareholders approve any increases in advisory fee rates.

Multi-Manager Order Applications. The staff requests that all new multi-manager order applications specify the type of multi-manager structure that they intend to use and include an aggregate fee condition, which states that any change in an advisory or subadvisory agreement that results in an increase in the aggregate advisory fee rate will be subject to shareholder approval.

For fund complexes with existing multi-manager orders and using the direct-pay structure, the guidance provides the following examples of scenarios where the fund would not need to obtain shareholder approval: (i) when hiring its first subadviser, the fund reduces the investment adviser’s rate by the rate that the fund will pay the subadviser so that there is no aggregate advisory fee increase; (ii) the fund hires an additional subadviser and pays it a rate no higher than (a) the subadviser it is replacing or (b) the rate of an existing subadviser that could have covered the assets allocated to the new subadviser; and (iii) an increase to an existing subadvisory rate that is offset by a decrease in the investment advisory rate.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 120



About this Author

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.