In a recent IM Guidance Update, the staff of the SEC’s Division of Investment Management clarified circumstances that may trigger an increase in the “aggregate advisory fee rate” in funds with multi-manager orders that would require shareholder approval. The guidance outlines the two types of multi-manager fee arrangements:
- The “traditional model” where the fund enters a contract with the adviser and pays an advisory fee to that adviser. The adviser then enters separate contracts with sub-advisers and pays those sub-advisers with a portion of the advisory fee. The aggregate advisory rate is the rate paid to the adviser under the advisory contract.
- The “direct-pay multi-manager model” where the fund enters into a contract with and pays advisory fees directly to the adviser as well as each sub-adviser. The fees taken together are the “aggregate advisory rate.”
In the guidance, the staff asks that, regardless of the type of fee arrangement contemplated, that multi-manager applications require shareholder approval for an increase in the aggregate advisory rate. “The condition should specify that any new subavisory 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 also provides examples of the effect of sub-advisory changes in the direct-pay multi-manager model.