SEC Staff Issues No-Action Letter on Hiring Affiliated Sub-Advisers without Shareholder Approval

August 02, 2019

The staff of the Division of Investment Management of the Securities and Exchange Commission (Staff) issued a no-action letter on July 9, 2019 regarding multi-manager exemptive relief for registered open-ended investment companies (funds). In the no-action letter, the Staff states that it would not recommend enforcement action against a fund or its investment adviser (adviser) if, under certain conditions, the fund or its adviser relied on its existing multi-manager exemptive relief (Multi-Manager Relief) in connection with: (i) entering into a sub-advisory agreement with any affiliated sub-adviser for the fund, without obtaining shareholder approval of the sub-advisory agreement; or (ii) disclosing sub-advisory fees paid to any sub-advisers in the aggregate. The no-action letter is conditioned upon prior shareholder approval of operating the fund in this manner. The no-action letter also states that the Staff would not recommend enforcement action if a fund or its adviser relies on its existing Multi-Manager Relief without applying it to cover any affiliated sub-advisers, but complies with the conditions set forth in recent exemptive relief to Carillon Series Trust (Carillon Order), rather than the conditions of its own Multi-Manager Relief.

Prior to the Carillon Order, the SEC granted Multi-Manager Relief only with respect to sub-advisers that were either: unaffiliated with the fund or its adviser (other than by virtue of serving as a sub-adviser to the fund)(Unaffiliated Sub-Advisers); or wholly-owned subsidiaries of the adviser or a sister company of the adviser (Wholly-Owned Sub-Advisers). The no-action letter indicates that the Staff will not recommend enforcement action if any fund or adviser that currently has Multi-Manager Relief essentially takes advantage of the additional relief provided by the Carillon Order without obtaining further exemptive relief from the SEC.


Section 15(a) of the Investment Company Act of 1940 generally requires shareholder approval of a fund’s investment advisory and sub-advisory agreements. Since 1995, the SEC has routinely granted Multi-Manager Relief to funds and their advisers, providing an exemption from this requirement if a number of conditions are met, including that the operation of the fund pursuant to its Multi-Manager Relief is approved by shareholders and disclosed in the fund’s prospectus.2 Originally, Multi-Manager Relief applied solely to Unaffiliated Sub-Advisers, but in recent years the SEC began granting Multi-Manager Relief that applies both to Unaffiliated Sub-Advisers and Wholly-Owned Sub-Advisers. However this relief had not been granted with regard to sub-advisers that were affiliated with the fund or its adviser for reasons other than being a sub-adviser to the fund, but were not Wholly-Owned Sub-Advisers.

Carillon Order

The Carillon Order expanded Multi-Manager Relief to apply to any affiliated sub-advisers, and contained a set of conditions (New Conditions) differing in some respects from the standard conditions in most prior multi-managers orders (Previous Conditions). As with all Multi-Manager Relief, the Carillon Order permits reliance thereon only by the applicant for the Carillon Order (or their successors and certain other affiliates).

Unlike the Previous Conditions, the New Conditions do not require a fund’s adviser to report quarterly to the Board regarding certain profitability information on a per sub-advised fund basis, or the impact on this profitability of the hiring or termination of a sub-adviser. Also, as the Carillon Order expands Multi-Manager Relief to affiliated sub-advisers that are not Wholly-Owned Sub-Advisers, the New Conditions remove the requirement for shareholder approval of agreements with such sub-advisers. Further, the New Conditions contain a new requirement that the adviser disclose to the relevant fund’s Board information concerning: (i) any material interest the fund’s adviser or certain of its affiliates have in a sub-adviser, as well as the impact a proposed sub-advisory agreement might have on such an interest; (ii) any arrangement or understanding the adviser (or certain of its affiliates) have that (a) may have had a material effect on a proposed sub-adviser change, (b) may have a material effect on an annual review of a sub-adviser’s contract by the Board, or (c) may be materially affected by a proposed sub-adviser change; (iii) any material interest in a sub-adviser held directly or indirectly by an officer or director of a sub-advised fund (other than through a pooled investment vehicle not controlled by the officer or director); and (iv) any other information that might be relevant to the Board in connection with its evaluation of any conflicts of interest associated with a proposed sub-adviser change or annual review of a sub-advisory agreement.3

The No-Action Letter

In the no-action letter, the Staff stated that it would not recommend enforcement action if a fund or its adviser with any form of Multi-Manager Relief relies on such relief with respect to any sub-adviser, regardless of its affiliation with the fund or its adviser. This position is based upon the provision that the fund and its adviser comply with the New Conditions in their entirety (including obtaining shareholder approval to operate in this manner with respect to any sub-adviser). In addition, the Staff stated that it would not recommend enforcement action if a fund or its adviser does not extend the scope of its current Multi-Manager Relief, but elects to rely instead on the New Conditions, rather than the conditions contained in its current Multi-Manager Relief.4


1) Carillon Series Trust, et al., Investment Company Act Rel. Nos. 33464 (May 2, 2019) (notice) and 33494 (May 29, 2019) (order).
2) Multi-Manager Relief also often permitted a fund with multiple sub-advisers to disclose sub-advisory fees paid to the sub-advisers in the aggregate rather than individually.
3) The Previous Conditions typically prohibited a director or officer of a fund, or a director, manager, or officer of the fund’s adviser, from owning any interest in a sub-adviser (other than through a pooled investment vehicle not controlled by such person), except for the following: (i) ownership of interests in the adviser or any entity other than a Wholly-Owned Sub-Adviser that controls, is controlled by, or is under common control with the adviser; or (ii) ownership of less than 1% of the outstanding securities of any class of equity or debt of a publicly-traded company that is either: a sub-adviser; or an entity that controls, is controlled by, or is under common control with a sub-adviser.
4) The no-action letter clarifies that the Staff's no-action position does not apply to aggregate subadvisory fee disclosure relief if a fund's current Multi-Manager Relief does not also provide such relief.

Subscribe to Dechert Updates