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October 27, 2003
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 56-03
SEC RULES COMMITTEE No. 86-03
RE: SEC PROPOSES MANAGER OF MANAGERS RULE UNDER THE INVESTMENT
COMPANY ACT OF 1940
The Securities and Exchange Commission has proposed new Rule 15a-5 under the
Investment Company Act of 1940, which would permit an investment adviser to serve as a
subadviser to an investment company without approval by the fund’s shareholders.1 The
proposed rule would largely codify a number of exemptive orders the SEC has issued that
facilitate funds’ ability to enter into “manager of managers” arrangements.2 As discussed
below, reliance on the proposed rule is subject to several conditions.
Comments on the proposal are due to the SEC on or before January 8, 2004. We have
scheduled a conference call for Thursday, November 13, at 4:00 p.m., Eastern Time, to discuss
members’ comments on the proposal. The dial-in number for the call is 888-889-1956 and the
passcode is Manager of Managers/Simmons. If you, or someone else from your organization,
would like to participate on the call, please contact Stephanie Holly by phone at (202) 326-
5814 or by e-mail at sholly@ici.org. If you will be unable to participate on the call but would
like to provide comments, please provide them to me prior to the scheduled call. I may be
reached by phone at (202) 326-5923, by fax at (202) 326-5827, or by email at bsimmons@ici.org.
1 Exemption from Shareholder Approval for Certain Subadvisory Contracts, SEC Release Nos. 33-8312, 34-48683, IC-26230,
dated October 23, 2003 (“Proposing Release”). The SEC’s proposal also would amend: (1) Form N-1A under the
Investment Company Act and the Securities Act of 1933; (2) Schedule 14A under the Securities Exchange Act of 1934;
and (3) Rule 6-07 under the Investment Company Act and the Securities Act. The Proposing Release is available from
the SEC’s website at http://www.sec.gov/rules/proposed/33-8312.htm.
2 The Proposing Release makes clear, however, that the proposed rule would benefit funds with single subadvisers
as well as funds with multiple subadvisers inasmuch as it would not require a fund or portfolio to engage a certain
minimum number of subadvisers. See Proposing Release at 19. The Proposing Release also notes the Commission’s
intention to rescind its previously issued exemptive orders once the new rule is adopted. The Release explains that
because those orders contain conditions that may vary slightly from fund to fund, permitting funds to operate under
those orders could adversely impact competition.
2
1. Terms of the Subadvisory Contract; Subadvisory Fees
Proposed Rule 15a-5 provides that a subadvisory contract would not require
shareholder approval if it does not directly or indirectly increase the management and advisory
fees charged to the fund or its shareholders. (Thus, any contract that increases these fees would
require shareholder approval.) The proposed amendments to Form N-1A would provide
additional relief to sponsors of manager of managers funds. In particular, Item 15 would be
amended to permit those funds to disclose only the aggregate amount of advisory fees that it
pays to its unaffiliated subadvisers as a group, rather than requiring them to disclose each of the
fees separately. The Proposing Release notes, however, that while the individual fee paid to the
principal adviser’s unaffiliated subadviser would not have to be disclosed, the individual fee
paid to each wholly-owned subadviser (as defined in the rule) would have to be disclosed.
2. Obligation to Supervise Subadvisers
Proposed Rule 15a-5(a)(4) would require any contract between a fund and its principal
adviser to obligate the principal adviser to supervise the subadviser. To more effectively carry
out this responsibility, Proposed Rule 15a-5(b)(4) includes a condition that requires the
subadvisory contract to be terminable at any time by the principal adviser, on no more than 60
days written notice, without payment of penalty.
3. Arm’s Length Relationship Between Principal Adviser and Subadvisers
Proposed Rule 15a-5(a)(2) contains two conditions that prohibit conflicting relationships.
First, the provision precludes a subadviser relying on the rule from being an affiliated person of
the principal adviser with which it has contracted or of the fund (other than by reason of
serving as the fund’s investment adviser). Second, no director or officer of the fund, and no
principal adviser or director or officer of the principal adviser with which the subadviser has
contracted, may directly or indirectly own any material interest in the subadviser other than an
interest through ownership of shares of a pooled investment vehicle that is not controlled by
such person or entity. The proposed provision would, however, permit the principal adviser,
without shareholder approval, to materially amend the contract of its wholly-owned
subadviser, or terminate such contract and replace the wholly-owned subadviser with another
wholly-owned subadviser. The Proposing Release explains that expanding the scope of the rule
to include wholly-owned subadvisers is appropriate inasmuch as the relationship would not
provide the principal adviser with any economic incentive to replace one wholly-owned
subadviser with another wholly-owned subadviser (other than to increase the fund’s return on
its investments).
4. Board Oversight
Consistent with the SEC’s rules on fund governance, Proposed Rule 15a-5(a)(7) would
require a manager of managers fund relying on the rule to have a board of directors whose
independent directors (i) constitute a majority of the directors, (ii) are selected and nominated
by other independent directors, and (iii) if represented by legal counsel, are represented by
“independent legal counsel.”
3
5. Investor Expectations
The SEC’s proposal contains four requirements designed to assure that investors
understand that they are investing in a manager of managers fund, and that they receive
information about the subadvisers, including that they could be changed at any time without
shareholder approval. First, proposed Rule 15a-5(a)(3) would require that, except in the case of
a newly offered fund, shareholders approve the fund’s operation as a manager of managers
fund, by authorizing the adviser (with the approval of the fund’s board) to enter into
subadvisory contracts without shareholder approval. Second, the proposed amendments to
Form N-1A would require a fund to disclose in its prospectus the principal adviser’s ability,
subject to board approval, to retain and discharge subadvisers without shareholder approval.
Third, to prevent confusion about the relative roles of the principal adviser and the subadviser,
Proposed Rule 15a-5(a)(6) would prohibit a fund from having a name that contains the
subadviser’s name unless the subadviser’s name is preceded by the principal adviser’s name.
Finally, Proposed Rule 15a-5(a)(5) would require a fund, within 90 days after entering into a
subadvisory contract or materially amending a wholly-owned subadviser’s existing contract, to
furnish shareholders with (and file with the Commission) an information statement that
describes the subadvisory agreement, and contains other information that would have been
provided in a proxy statement had a shareholder vote been held.
Barry E. Simmons
Associate Counsel