February 18, 2020

SEC Notices Novel Exemptive Order, Giving Board Greater Flexibility With Sub-Advisory Agreements

On January 21, 2020, the Securities and Exchange Commission (SEC) issued notice that it plans to grant an exemptive order that would allow the board (the Board) of a registered investment company (the Fund) to approve sub-advisory agreements on behalf of the Fund without meeting in person as required under Section 15(c) of the Investment Company Act of 1940 (the Act), as amended.


Section 15(c) of the Act prohibits a registered investment company from entering into, renewing or performing any contract or agreement for advisory or sub-advisory services unless the terms of the contract or agreement have been approved by the vote of a majority of independent board members. The vote must be cast in person at a meeting called for the purpose of voting on such approval. Section 6(c) of the Act allows the SEC to exempt any person, security or transaction – as well as any class or classes of persons, securities or transactions – from any provisions of the Act if the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.

The SEC staff has more recently shown a willingness to provide relief from the in-person meeting requirement of the Act. For example, in February 2019, the SEC staff issued a no-action letter that allowed boards to approve advisory contracts, 12b-1 plans and the independent auditor without meeting in person under certain unforeseen or emergency circumstances, such as extreme weather, illness and travel disruptions. On March 4, 2019, the Fund and its adviser filed an application for exemptive order with the SEC under Section 6(c) of the Act. The applicants requested that the SEC allow the Board to approve new sub-advisory agreements and material amendments to existing sub-advisory agreements without complying with the in-person meeting requirement of Section 15(c) of the Act. The applicants’ request for relief and conditions stated in their fourth amended application are summarized below.

Application for Exemptive Order

The Fund operates under a multi-manager structure. The applicants requested an exemption from Section 15(c) of the Act that would allow the Board to approve a sub-advisory agreement or a material amendment of a sub-advisory agreement – referred to as a sub-adviser change – without an in-person meeting. The applicants requested that under this relief, independent Board members could instead approve a sub-adviser change at a meeting at which the Board members participate by any means of communication that allow them to hear each other simultaneously during the meeting.

The applicants argued that allowing independent Board members to approve sub-adviser changes through means other than an in-person meeting would allow the Fund to operate more efficiently. The applicants explained that boards of registered investment companies, including the Board, typically hold quarterly in-person meetings. During the three- to four-month period between Board meeting dates, market conditions may change or investment opportunities may arise that the adviser may wish to take advantage of by implementing a sub-adviser change. In such a case, it may be impractical and costly to hold an additional in-person Board meeting given the geographical diversity of Board members and the additional cost of holding in-person meetings.

The applicants also noted that because the primary responsibility of managing the Fund is vested in the adviser, subject to the oversight of the Board, once the adviser completes its diligence of a prospective sub-adviser, the in-person Board meeting requirement creates an unnecessary burden for the Board that does not benefit shareholders.

Finally, the applicants noted that the in-person meeting requirement of Section 15(c) was originally put in place by the Congress in 1970 to ensure that all independent board members would be fully present at the meeting and well-informed. The applicants argued that given the countless technological advances that have occurred since 1970, registered funds are able to provide materials to their board members electronically in an easily readable format, and board members can hold non-in-person meetings at which they can be personally present and fully informed as to the matters that require action. The applicants stated that the conditions outlined below would allow the independent Board members to be fully present and informed, consistent with the policies and provisions of the Act.

Conditions to Exemptive Relief. The applicants agreed that any order of the SEC granting their requested relief will be subject to the following conditions:

  • The independent Board members will approve a sub-adviser change at a non-in-person meeting in which Board members may participate by any means of communication that allows those Board members participating to hear each other simultaneously during the meeting.
  • Management will represent that the materials provided to the Board for the non-in-person meeting include the same information the Board would have received if approval of a sub-adviser change were sought at an in-person Board meeting.
  • The notice of the non-in-person meeting will explain the need for considering the sub-adviser change at a non-in-person meeting. Once notice of the non-in-person meeting to consider a sub-adviser change is sent, Board members will be given the opportunity to object to considering the sub-adviser change at a non-in-person meeting. If a Board member requests that the sub-adviser change be considered in person, the Board will consider the sub-adviser change at an in-person meeting, unless such request is rescinded.
  • The Fund’s ability to rely on the requested relief will be disclosed in the sub-advised series’ registration statement.

The SEC stated that it continues to believe that a board’s decision-making process may benefit from the directors’ opportunity to interact in person, as a group and individually. However, the SEC agreed that under the circumstances described by the applicants, the need to act promptly for the benefit of the Fund may justify the Board’s meeting on a non-in-person basis. The SEC also agreed that technological advances would allow the Board to be fully present and informed despite a non-in-person meeting such that the applicants’ requested relief would meet the applicable standard for relief under the Act.

Practice Points

This exemptive relief, if granted, will represent an important development for registered investment companies that utilize a multi-manager structure. Because this is exemptive relief, other funds would be required to apply for the relief themselves in order to rely upon it. However, we expect that many other multi-manager funds will request their own similar relief.

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