The staff of the SEC’s Division of Investment Management (the “Staff”) granted no-action relief for the implementation of an adjustment in the fee paid by a mutual fund’s adviser to the fund’s subadviser, without shareholder approval.
Background. RiverNorth/DoubleLine Strategic Income Fund (the “Fund”) is a registered open‑end fund. RiverNorth Capital Management, LLC (the “Adviser”) serves as the Fund’s adviser under an advisory agreement with the Fund (the “Advisory Agreement”). The Adviser has entered into a subadvisory agreement (the “Subadvisory Agreement”) with the Fund’s sole subadviser, Doubleline Capital, LP (the “Subadviser”). The Adviser allocates a portion of the Fund’s portfolio to the Subadviser for it to manage, and manages the remainder itself. The Subadviser’s fee under the Subadvisory Agreement, which is paid by the Adviser, is currently based on the value of the assets the Subadviser manages net of Fund expenses.
Subadvisory Fee Amendment. Without seeking the approval of Fund shareholders under Section 15(a) of the Investment Company Act of 1940 (the “1940 Act”), the Adviser has proposed to implement an amendment to the Subadvisory Agreement under which the Subadviser’s fee would be calculated based on the gross value of the assets it manages, without any deduction for Fund expenses (the “Amendment”). As a reason for this change, the Adviser cited the fact that the Subadviser has little control over Fund operating expenses. As a justification for the requested relief, the Adviser noted that the adjustment would have no effect on the advisory fee paid by the Fund under the Advisory Agreement or the services performed. The Fund’s board of trustees, including a majority of the trustees who are not interested persons (as defined by Section 2(a)(19) of the 1940 Act), determined that the Amendment would be in the best interests of the Fund and its shareholders and approved the implementation of the Amendment, pending receipt of assurance from the Staff regarding the need for a shareholder vote.
Basis for Relief. In granting the requested relief with respect to shareholder approval of the Amendment, the Staff stated that its position was based particularly on the following representations from the Adviser:
- there will be no increase in advisory fees rates charged to the Fund and its shareholders;
- neither the Adviser or the Subadviser will reduce or modify in any way the nature and level of its services with respect to the Fund;
- the Amendment will be approved in accordance with the provisions of Section 15 of the 1940 Act, other than the shareholder vote requirement; and
- the Fund will provide appropriate notice about the Amendment to existing and prospective shareholders.