SEC Sanctions and Fines Mutual Fund Independent Directors and Sponsor for Inadequate Contract Review Process
The SEC censured and fined two mutual fund series trust independent directors, the trust’s sponsor, and its principals for failing to receive and deliver information necessary to approve advisory contracts. According to the SEC, independent trustees counsel asked for comparative fee and performance information as well as profitability data to inform the Trustees when determining whether to approve advisory contracts as required by Section 15(c) of the Investment Company Act. The SEC alleges that in one Board meeting, the Trustees never received the comparative fee information and the investment adviser, which was an affiliate of the sponsor, never adequately described the services it would perform as compared to the services performed by a retained sub-adviser. At another Board meeting, the SEC alleges that the comparative fee information included “inapt comparisons” including funds with different fee structures and different fund categories. The SEC also faulted the respondents for failing to receive/deliver relevant information on how the sponsor calculated profitability and how it allocated internal expenses.
OUR TAKE: The SEC warned that it would take action against independent directors that failed to completely exercise their fiduciary obligation to review advisory contracts. (See http://blog2.cipperman.com/2013/10/sec-will-target-gatekeepers-including-independent-directors-and-auditors/). We recommend that fund boards re-evaluate their 15(c) processes to follow the SEC’s mandates from this action, including the type of information required.