15(C) Advisory Contract Renewal


In this case, the Advisor and his principal did not provide complete and accurate information to the Fund`s Board of Directors during process 15(c), and the three Board members approved the consultative arrangements without having all the information they had requested to properly assess the agreements using the Gartenberg factors. Subsection (c). Ed. L. 91–547, § 8(c), required the directors of a registered investment company to request and evaluate the information and the obligation of an investment adviser of such a company to provide the information that may reasonably be necessary to assess the terms of a contract in which a person regularly undertakes to serve or act as an investment adviser to such a company, “Interested persons” is replaced by “related persons” and “with the exception of a written agreement in force before March 15, 1940”, deleted after “written or oral”, point (1) designation after “approved” and item “or (2) by a majority of the outstanding voting securities of that company” after “such a party” and “the vote” is inserted in the sentence “by majority vote”. and a voting provision” that “was expressed in person at a meeting called for the purpose of voting on such consent.” Directors also requested the consultant`s financial statements for the last two-year period and the methodology used to allocate indirect costs and expenses to the fund when calculating the consultant`s profitability. The consultant provided a profit and loss account for one year, but did not provide balance sheet information for the requested period. Nor did it provide a description of its allocation method in its profitability calculation. In the questionnaire referred to in Article 15(c), the consultant replied that he had not waived any fees during the tax period at issue, even though he had waived part of his consultancy fees for that period.

Finally, the consultant informed counsel that the fee holdbacks in the advisory agreement were reasonable, although the consultation agreement does not refute such judgments. On June 17, 2015, the Securities and Exchange Commission (SEC) sued a fund advisor, its chief executive officer and three mutual fund administrators for failing to comply with their obligations related to the approval of mutual fund advisory agreements under section 15(c) of the Investment Companies Act of 1940. The Commonwealth Order states that: The defendants agreed to refrain or refrain from future violations of section 15(c),5, the consultant and its president agreed to a fine of $50,000, and each of the independent trustees agreed to pay a fine of $3,250.6 Section 15(c) does not specify what information may be “reasonably necessary” for the directors, to evaluate a consulting contract. Instead, the established “Gartenberg factors” are included in this analysis.3 This includes an analysis of the following: (i) the consultant`s costs for service delivery; (ii) the nature and quality of the consultant`s services; (iii) the extent to which the advisor achieves economies of scale as the Fund grows; (iv) the profitability of the fund for the advisor; (v) fee structures for comparable funds; (vi) the services provided to the Consultant or its affiliates; and (vii) the independence, expertise, diligence and conscience of the Council. With respect to the board of directors of another fund advised by CCM, the advisor also did not provide all the information that the board had requested as reasonably necessary for the evaluation of the consulting contract. For example, CCM provided the Commission with a table of numerous “integrated” comparisons with industry fee data that included: (i) classes of shares that are not comparable to the offerings of the funds concerned; (ii) information on assets at the level of the class of shares instead of information on assets at the level of the fund; (iii) products of different types from those of the funds concerned; and (iv) funds whose fee structures differ from those of the respective funds. In addition, the decision states that CCM did not provide certain financial information requested by the Commission to assist in assessing the advisor`s profitability. The order also points out that the advisor wrongly told the board that the fund had appropriate breakpoints, even though the breakpoints had in fact been omitted from the advisor`s contract.

The SEC also cited the fund manager for being responsible for preparing the fund`s shareholder reports and for failing to provide the required discussion of the directors` 15(c) process. The failure of the fund manager resulted in the submission of an incomplete report by the fund. The risk warning summarizes two regularly cited “deficiencies or weaknesses” that he observed in the context of the article 15(c): 1975 procedure – subsection (c). Publication L. 94–29, Article 28(2) inserted provisions which make it unlawful for the directors of a registered investment company to take into account, in their assessment of the terms of a contract in which a person undertakes to serve or act lawfully as an investment adviser to such a company, the purchase price or other consideration paid by each person in connection with a transaction of the type referred to in paragraph 1. power. (3) or (4) of paragraph (f). Since the Enforcement Division launched its Asset Management Unit (AMU)7 five years ago, staff have pursued other cases involving alleged failures in the 15c process.8 All indications are that this direction of the WBU will continue to continue. In fact, these two recent management actions related to paragraph 15(c) are the result of the UAM`s “fund fee initiative”, which has been going on for years. Reproduction, in whole or in part, of this newsletter is authorized with the prior permission of Thompson Hine LLP and subject to acknowledgment of source and copyright. .