Enhancing the Investment Advisory Contract Review Process Can Mitigate Recent Increased Litigation and Enforcement Risk of Sub-Advised Funds

June 01, 2012

The US Securities and Exchange Commission (SEC) Staff has made it clear that it intends to focus its examination and enforcement efforts on mutual fund fees and expenses as part of a new mutual fund fee initiative. At the same time, the plaintiffs’ class action bar is pursuing a new theory of liability against sponsors of subadvised funds, alleging that they receive a disproportionately large portion of the investment advisory fee while the sub-adviser purportedly does most of the work.

In light of these developments, mutual fund boards and management companies should review and consider ways to enhance their investment advisory contract approval process pursuant to Section 15(c) of the Investment Company Act of 1940, as amended (the Act). This article will review these recent developments and discuss strategies to enhance the Section 15(c) process.