The SEC staff issued an IM Guidance Update in February 2014 (the “Multi-Manager Update”) to express its views regarding the circumstances in which changes to the aggregate advisory fee rate permitted to be charged by the adviser and subadvisers of a fund operating under a multi-manager exemptive order must be approved by shareholders. Section 15(a) of the 1940 Act makes it “unlawful for any person to serve or act as an investment adviser of a registered investment company, except pursuant to a written contract, which . . . has been approved by the vote of a majority of the outstanding voting securities of such registered company.” However, the SEC often grants multi-manager exemptive orders that permit a fund or an adviser to enter into subadvisory contracts without requiring the contracts to be approved by fund’s shareholders. There are two basic types of multi-manager structure: (i) the “traditional” multi-manager model in which the fund enters into a contract with, and pays compensation for advisory services to, only the primary adviser (which is responsible for entering into contracts with, and paying compensation out of its own advisory fee to, each subadviser); and (ii) the “direct-pay” multi-manager model in which the fund enters into a contract with, and pays compensation to, each subadviser, in addition to entering into a contract with, and paying compensation to, the primary adviser. Direct-pay multi-manager orders have typically included an “aggregate fee condition” that limits the relief from the shareholder approval requirement only to subadvisory contracts that will not result in an increase in the aggregate advisory rate paid to the adviser and subadvisers. The Multi-Manager Update provides that all new applications for a multi-manager exemptive order should explicitly include the aggregate fee condition, regardless of the multi-manager model contemplated. The Multi-Manager Update includes the following examples to clarify the staff’s position on certain issues that the SEC commonly encounters in in the context of the “direct-pay” multi-manager model:
- The hiring of a fund’s first subadviser generally would require shareholder approval under the aggregate fee condition, unless the rate paid under the primary advisory contract is reduced by at least the amount that will be paid to the subadviser.
- Shareholder approval under the aggregate fee condition generally would not be required when a fund with one or more existing subadvisers hires an additional subadviser whose rate is no higher than: (i) in the case of the new subadviser replacing an existing subadviser, the rate of the subadviser being replaced; or (ii) the rate of another existing subadviser to which the adviser could have allocated the fund’s assets that are being allocated to the new subadviser (e.g., assets in the same asset class).
- Shareholder approval under the aggregate fee condition also generally would not be required if any increase in the rate payable by a fund to an existing subadviser is accompanied by a corresponding decrease in the primary advisory contract of the rate payable by the fund to the primary adviser.