Fulcrum Fees: Registered Funds’ Alternative Fee Structure

September 01, 2014
The Investment Lawyer

As has been widely reported in the mainstream financial press and specialized industry publications, hedge fund and private equity fund managers have begun to explore the world of investment companies registered under the  Investment Company Act of 1940, as amended (the 1940 Act). In doing so, they have faced certain challenges which have deterred some of the most skilled asset managers from entering the 1940 Act space. One significant deterrent is that unlike advisers to hedge funds and private equity funds, advisers to registered investment companies (that is, mutual funds and closed-end funds) are prohibited under most circumstances from charging a performance fee.

However, new entrants to the 1940 Act space may not be aware that they are in fact permitted to charge a type of performance fee known as a “fulcrum” fee. While this type of performance fee is complex and may not appeal to some managers, others may be interested in understanding how a fulcrum fee works to align a manager’s incentives with those of a fund and its shareholders. The purpose of this article is to briefly review the laws and regulations which permit a registered adviser to charge a fulcrum fee, and to discuss related guidance from the Securities and Exchange Commission (SEC) and its Staff, and from the American Institute of Certified Public Accountants (AICPA).

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