CCO Resource Center: 15(c) Policies and Procedures
Chief Compliance Officer Committee
Members’ 15(c) Policies and Procedures
Section 15 of the Investment Company Act of 1940 (the “ICA”) governs the contracts funds enter into with their investment adviser and underwriters. Subsection (c) of Section 15 provides in relevant part that:
. . . it shall be unlawful for any registered investment company having a board of directors to enter into, renew, or perform any contract or agreement, written or oral, whereby a person undertakes regularly to serve or act as investment adviser of or principal underwriter for such company, unless the terms of such contract or agreement and any renewal thereof have been approved by the vote of a majority of directors, who are not parties to such contract or agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. It shall be the duty of the directors of a registered investment company to request and evaluate, and the duty of an investment adviser to such company to furnish, such information as may reasonably be necessary to evaluate the terms of any contract whereby a person undertakes regularly to serve or act as investment adviser of such company. . . .
Section 36 of the ICA governs the breach of fiduciary duty. Subsection (b) of Section 36 provides in relevant part that “the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser.”
During an ICI conference in March 2022, the Director of the Division of Investment Management, William Birdthistle, made public remarks that questioned whether fund advisers have been breaching their fiduciary duty to funds and their shareholders based on their compensation arrangements. According to Director Birdthistle,
Fund advisers do owe the funds they manage a fiduciary duty, which includes a duty of care and a duty of loyalty.[12] The Commission can always enforce a breach of fiduciary duty by a fund adviser. In addition, the Investment Company Amendments Act of 1970 also added Section 36(b), which as you know specifies that a registered fund’s adviser has a fiduciary duty with respect to the receipt of compensation for services or material payments from the fund or its shareholders. To enforce this duty, fund shareholders or the Commission may bring an action under this subsection. No plaintiff has yet won a 36(b) case, but if no adviser can ever lose one – and none has, so far – one wonders whether the duty enacted in the statute is truly being honored. [See https://www.sec.gov/news/speech/birdthistle-remarks-ici-investment-management-conference-032822.]
In other words, Director Birdthistle questioned whether fund advisers were violating their fiduciary duty under Section 36(b) based on their receipt of compensation pursuant to the contracts governed by Section 15(c) of the ICA, notwithstanding that courts have held otherwise.
Shortly after Director Birdthistle’s comments, the SEC’s Division of Enforcement began issuing subpoenas to fund advisers seeking detailed information on their 15(c) contracts with mutual funds. This detailed information included requests for any policies and procedures the advisers have relating to Section 15(c) and any information provided to fund boards as they considered entering into a contract with the adviser. Because this investigation was pursued via non-public subpoenas, very little information was publicly available about it. However, we do understand from talking to outside counsel that, because any allegations of an adviser’s breach of fiduciary duty under Section 36(b) would be incredibly complicated and difficult for the SEC to prove – especially considering that the courts who have looked at these issues have determined there has been no breach of fiduciary duty, we understand that the Division of Enforcement began to focus on whether advisers had adequate policies and procedures to satisfy their responsibilities under Section 15(c). This being the case, some funds began to review their 15(c) policies and procedures to ensure that they were compliant with the ICA. Members of the CCO Committee asked the ICI to collect members’ 15(c) policies and procedures and post them to the CCO Resource Center as a resource for CCOs. When we asked members of the Committee to provide us their 15(c) policies, we received very few in response. We discovered that this was because very few members had policies and procedures dedicated to Section 15(c), as that was an obligation of the fund’s board and not of the fund’s adviser. We did, however, receive a few 15(c) policies of members and they are available through the following link:
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