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Advisory Contract Renewal

One of the most important responsibilities of the independent directors is to annually review and approve the advisory contract, including the advisory fees. This process is known as the 15(c) process, after the section of the 1940 Act that requires a majority of a fund’s independent directors to annually approve the fund’s advisory contract at an in-person meeting called for that purpose. Section 15(c) requires the board to “request and evaluate,” and the adviser to furnish, “such information as may reasonably be necessary” for the board “to evaluate the terms” of the advisory contract. The statute also requires the contract to be approved annually by the board at an in-person meeting.

Prior to approving the contract, the board reviews and considers a large amount of information about the adviser’s services and fees. Indeed, in the process, independent directors consider and review hundreds if not thousands of pages of detailed information, some of which is provided by third-party consultants. They develop questions for the adviser probing the appropriateness of the fee, review the answers provided by the adviser, and solicit additional information when the information provided by the adviser is deemed insufficient.

Boards consider a number of factors when reviewing an advisory contract, including those considered by federal courts in “excessive fee” cases (also known as 36(b) cases after the section of the 1940 Act that allows the SEC or a shareholder to sue a fund’s adviser for breach of fiduciary duty with respect to the receipt of compensation). The factors, which, for many years, have been referred to as the “Gartenberg factors” after the court decision that first articulated them, have been incorporated into an SEC disclosure rule requiring funds to discuss the basis for the board’s approval of the advisory contract. Thus, at a minimum, boards typically consider:

  • the nature, extent, and quality of the services to be provided by the investment adviser;
  • the investment performance of the fund and the investment adviser;
  • the costs of the services to be provided and profits to be realized by the investment adviser and its affiliates;
  • the extent to which economies of scale would be realized as the fund grows; and
  • whether fee levels reflect these economies of scale for the benefit of fund investors.

Boards also often consider comparative fees and services information, such as those under contracts between another fund and its adviser or the same adviser and other types of clients (e.g., pension funds and other institutional clients). The SEC requires funds to disclose whether the board relied upon such comparisons.


Breakpoints. The dollar amounts at which many mutual funds offer reduced fees to investors. There are two kinds of breakpoints. One kind of breakpoint is a reduction in management fees that fund advisers may charge their associated funds as fund assets surpass a given level. The other kind is a reduction in sales charges (load fees) to investors when they initially purchase fund shares. The amount of the discount varies, depending upon the amount of the investment: the more invested, the greater the likelihood of surpassing a breakpoint and thus receiving a discount.

The adviser’s fees are part of the advisory contract that directors review and approve every year. Directors are not required to negotiate for the absolute lowest rate with the adviser. Instead, regulators and the courts recognize that directors must balance a number of considerations, including the factors noted above. In the fee approval process, of course, directors may work with the adviser to take steps to bring fees down, such as instituting breakpoints at specified asset levels, waiving fees, reducing fees outright, or enhancing services.