In February 2014, the Securities and Exchange Commission’s Division of Investment Management released a Guidance Update to clarify when a mutual fund using a “multi-manager structure” must obtain shareholder approval for primary and subadvisory advisory fee rates (aggregate advisory rates) paid by the fund. A multi-manager structure is one in which a primary investment adviser selects subadvisers that act as day-to-day portfolio managers. A mutual fund using a multi-manager structure may obtain relief from Section 15(a) of the Investment Company Act under an exemptive order from the SEC (multi-manager order). Section 15(a) requires an investment manager of a registered investment company to have a written contract approved by shareholders, and the contract must include all compensation terms for the investment adviser. Under a multi-manager order, a subadviser may serve under a contract that has not been approved by shareholders, though the primary adviser’s fee rate and the aggregate advisory rate remain subject to shareholder approval.

The Guidance Update confirms that funds with multi-manager structures must obtain shareholder approval for any increase in the aggregate advisory rate, whether they employ the “traditional” or “direct-pay” multi-manager model. In the traditional model, the primary adviser contracts with the subadvisers and compensates subadvisers from its primary advisory fee. In the “direct-pay” model, the fund contracts with and compensates directly the primary adviser as well as each separate subadviser. All potential multi-manager order applicants are required to include an “aggregate fee condition,” which states that any change to a subadvisory or primary contract that results in an increase in the aggregate advisory rate must be approved by shareholders. The Guidance Update grants relief from shareholder approval in three situations in the direct-pay model context: (1) in hiring its first subadviser, the fund lowers the primary adviser’s rate such that the aggregate advisory rate does not increase; (2) the fund pays an additional subadviser a rate that is no higher than that of either (a) the subadviser it is replacing or (b) an existing subadviser that could have covered the assets allocated to the new subadviser; and (3) the fund increases an existing subadviser’s rate but decreases the primary adviser’s rate commensurately. 

To read the full text of the Guidance Update, click here.