SEC Staff Allows Fee Rebate for Poor Performance
The staff of the SEC’s Division of Investment Management has granted no-action relief to allow an adviser to rebate investment advisory fees to clients that experience two consecutive calendar quarters of negative performance. The adviser acknowledges that the rebate provision is a contingent fee that could violate Section 205(a)(1)’s limitations on performance fees. However, the staff granted the no-action relief because of program conditions that limit risk to clients including: (i) the adviser utilizes a sub-adviser for all security recommendations and the adviser would only deviate for financial planning or other reasons not related to fees; (ii) the sub-adviser’s fees would not change regardless of the rebate; and (iii) the adviser would not benefit from any “catch up” provision that would allow recapture of the rebated fees.
OUR TAKE: It will be interesting to follow whether this idea of a rebate for performance is a marketing gimmick or part of a broader trend toward lower fees for active management.