IM Guidance Update

February 2014 | No. 2014- 0 3

US Securities and Exchange Commission

Division of Investment Management

MULTI-MANAGER FUNDS – AGGREGATE ADVISORY FEE RATE

Many mutual funds today use a so-called “multi-manager structure,” in which a fund’s 

primary investment adviser selects and oversees subadvisers who, in effect, serve as 

day-to-day portfolio managers for the fund. A mutual fund that uses this structure 

(multi-manager fund) may operate pursuant to a Commission exemptive order under 

the Investment Company Act that allows a subadviser to serve under a contract that 

has not been approved by the fund’s shareholders, subject to a set of protective conditions (multi-manager order). Since 1995, the Commission and the staff, under delegated 

authority, have issued over 200 multi-manager orders.1

 These orders enable funds to 

realize certain efficiencies while protecting the interests of their shareholders.2

Under the multi-manager orders, among other requirements, the aggregate fee rate 

payable by a fund for advisory services, both primary and subadvisory (aggregate advisory rate), remains subject to fund shareholder approval. The staff periodically receives 

interpretive questions about circumstances that may or may not trigger an increase in 

the aggregate advisory rate and necessitate shareholder approval. The staff is issuing 

this guidance to assist funds in complying with this aspect of the multi-manager orders.

Background

Section 15(a) of the Investment Company Act, in relevant part, makes it “unlawful for 

any person to serve or act as investment adviser of a registered investment company, 

except pursuant to a written contract, which contract, whether with such registered 

company or with an investment adviser of such registered company, has been approved 

by the vote of a majority of the outstanding voting securities of such registered company.” Section 15(a)(1) also requires the contract to “precisely describe[] all compensation to be paid thereunder.”

A multi-manager order grants relief from Section 15(a) to permit a subadviser to serve 

under a contract that has not been approved by the multi-manager fund’s shareholders. 

A multi-manager fund’s contract with its primary adviser (primary advisory contract), as 

well as the aggregate advisory rate, remain subject to shareholder approval.
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Multi-manager orders generally contemplate two potential contractual scenarios 

(multi-manager models):

•	 The “traditional” multi-manager model—the fund enters into a contract with, and 

pays compensation for advisory services to, only the primary adviser. The primary 

adviser, in turn, enters into separate contracts with one or more subadvisers, and 

compensates the subadvisers out of the advisory fee it receives from the fund. The 

primary advisory contract specifies the rate that the fund agrees to pay for advisory 

services and must be approved by the fund’s shareholders under Section 15(a). Any 

increase in the specified rate (i.e., in the aggregate advisory rate), generally would 

constitute a material amendment to the primary advisory contract requiring shareholder approval under Section 15(a). 

•	 The “direct-pay” multi-manager model—the fund enters into a contract with, and 

pays compensation to, each subadviser (subadvisory contract), in addition to entering into a contract with, and paying compensation to, the primary adviser. In this 

model, the rate specified in the primary advisory contract is not the aggregate 

advisory rate because it does not include the compensation that the fund has 

agreed to pay to the subadviser(s). Multi-manager orders that contemplate this 

model include a condition requiring the fund to seek shareholder approval for any 

subadvisory contract change that would result in an increase in the aggregate 

advisory rate (aggregate fee condition). 

Under both multi-manager models, an increase in the aggregate advisory rate is subject 

to fund shareholder approval, by operation either of the primary advisory contract alone 

(in the “traditional” multi-manager model), or of the combination of the primary advisory 

contract and the aggregate fee condition (in the “direct-pay” multi-manager model). 

Potential Applicants for Multi-Manager Orders

To streamline applications for multi-manager orders and make explicit the existing 

requirements under both multi-manager models, the staff requests that all new applications include the aggregate fee condition, regardless of the multi-manager model that 

they plan to use.3 The condition should specify that any new subadvisory 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. 

Existing Multi-Manager Orders

The staff periodically receives interpretive questions about the aggregate fee condition. 

Typically, such questions arise in circumstances involving subadvisory contract changes. 

The staff is providing the following examples in the context of the “direct-pay” multimanager model to assist funds and their counsel in complying with this aspect of their 

multi-manager orders:
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•	 A fund’s hiring of its first subadviser generally would require shareholder approval 

under the aggregate fee condition, unless the rate that the fund pays under its primary advisory contract will be reduced by the rate the fund will pay to the subadviser so that there is no increase in the aggregate advisory rate.

•	 Shareholder approval under the aggregate fee condition generally would not be 

required when a fund with one or more existing subadvisers hires an additional 

subadviser whose rate is no higher than: (i) in the case of the new subadviser 

replacing an existing subadviser, the rate of the subadviser being replaced; or 

(ii) the rate of another existing subadviser to which the adviser could have allocated 

the fund’s assets that are being allocated to the new subadviser (e.g., assets in the 

same asset class).

•	 Shareholder approval under the aggregate fee condition also generally would not 

be required if any increase in the rate payable by a fund to an existing subadviser is 

accompanied by a corresponding decrease in the primary advisory contract of the 

rate payable by the fund to the primary adviser.

These examples are not exhaustive of the potential circumstances that might arise 

involving subadvisory contract changes and are provided only for general guidance 

purposes. The staff encourages applicants to contact the staff with any questions about 

the aggregate fee condition or any other aspect of the multi-manager orders.

Endnotes

1 In 2003, the Commission proposed rule 15a-5 under the Investment Company Act 

to codify the exemptive relief granted in the multi-manager orders. See Exemption 

from Shareholder Approval for Certain Subadvisory Contracts, Rel. IC-26230 (Oct. 

23, 2003) (Proposing Release).

2 In the Proposing Release, the Commission noted that:

Many sponsors of [multi-manager] funds have asserted that without relief 

from the shareholder voting requirement, the costs and delays associated 

with obtaining a shareholder vote would prevent advisers from hiring and 

firing subadvisers and from achieving the funds’ investment objectives. 

They also have asserted that the underlying purpose of section 15(a)—

to give shareholders a voice in the fund’s investment advisory arrangements—would be satisfied without a shareholder vote on the subadvisory 

contracts because the principal adviser’s contract must still be approved 

by fund shareholders.

Proposing Release, at text accompanying note 9. See also Nationwide Mutual 

Funds, et al. (SEC Staff No-Action Letter, pub. avail. Apr. 5, 2011). 

3 This approach is consistent with the Commission’s proposed rule 15a-5. 
This IM Guidance Update summarizes the views of the Division of Investment Management 

regarding various requirements of the federal securities laws. Future changes in laws or 

regulations may supersede some of the discussion or issues raised herein. This IM Guidance 

Update is not a rule, regulation or statement of the Commission, and the Commission has 

neither approved nor disapproved of this IM Guidance Update.

The Investment Management Division works to:

s protect investors

s promote informed investment decisions and 

s facilitate appropriate innovation in investment products and services 

through regulating the asset management industry.

If you have any questions about this IM Guidance Update, please contact:

Daniele Marchesani or Jean Minarick

Chief Counsel’s Office/Public Inquiry

Phone: 202.551.6825

Email: IMOCC@sec.gov

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