SEC Proposes New Rules On Fund Sub-Advisers

by Philip Morton, Investors Offshore.com

27 October 2003

The US Securities and Exchange Commission (SEC) last week amended rules relating to the appointment of sub-advisers at investment companies.

Currently, the Investment Company Act prohibits an investment adviser from serving a fund unless the fund's shareholders have voted to approve the appointment.

However, in response to the increasing number of "manager of managers" funds in which the principal investment adviser does not directly manage the fund's portfolio investments, but instead hires and fires sub-advisers according to their performance, the SEC has sought to change these rules in order to increase efficiency.

Under the new proposals, funds will be exempted from holding a shareholder vote on the appointment of sub-advisers:

• If hiring the sub-adviser does not increase the management fees payable by investors;
• If the sub-adviser has an arms-length relationship with the fund's principal adviser;
• If shareholders have authorized the fund to act as a "manager of managers" fund; and
• If shareholders are notified within 90 days of the appointment of a new sub-adviser.

The new rules are open for consultation until January 8, 2004.

Recommended