The staff of the SEC’s Division of Investment Management issued an IM Guidance Update concerning the aggregate advisory fee condition in the SEC’s “multi-manager” exemptive relief. (Under the terms of this relief, a subadviser may be engaged without a vote of fund shareholders.) The Guidance Update refers to two different types of multi-manager structure: the “traditional” multi-manager model, in which the fund pays an advisory fee only to the primary adviser, and the “direct pay” multi-manager model in which the fund separately contracts with, and pays, the primary adviser and each subadviser. Regardless of the model, the exemptive relief is subject to the aggregate advisory fee condition which provides that an increase in the aggregate advisory fee paid by the fund must be approved by fund shareholders.
The Guidance Update instructs new applicants for multi-manager orders to “include the aggregate fee condition, regardless of the multi-manager model that they plan to use. [footnote omitted] The condition should specify that any new subadvisory contract or any amendment to any existing primary advisory contract or subadvisory contract that directly or indirectly results in an increase in the aggregate advisory rate charged to the fund will be submitted to the fund shareholders for their approval.” The Guidance Update notes that this approach is consistent with the SEC’s outstanding 2003 rule proposal designed to codify its multi-manager relief (which was discussed in the October 28, 2003 Financial Services Alert).
The Guidance Update also provides the following staff guidance on whether the aggregate advisory fee condition would be triggered under various circumstances for the direct pay multi-manager model:
- “A fund’s hiring of its first subadviser generally would require shareholder approval under the aggregate fee condition, unless the rate that the fund pays under its primary advisory contract will be reduced by the rate the fund will pay to the subadviser so that there is no increase in the aggregate advisory rate.
- 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.”