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SEC Adopts Advisory Agreement Disclosure Requirements

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  • Baker, John
    The Securities and Exchange Commission has adopted rule and form amendments to improve the disclosure provided by registered management investment companies
    Message 1 of 1 , Aug 2, 2004
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      The Securities and Exchange Commission has adopted rule and form amendments to improve the disclosure provided by registered management investment companies about how their boards of directors evaluate and approve, and recommend shareholder approval of, investment advisory contracts. Release Nos. 33-8433, 34-49909, IC-26486, 69 Fed. Reg. 39798 (June 23, 2004). The amendments require a registered management investment company to provide disclosure in its reports to shareholders regarding the material factors and the conclusions with respect to those factors that formed the basis for the board's approval of advisory contracts during the reporting period. The disclosure will be subject to certification by the fund's principal executive and financial officers. The existing statement of additional information disclosure requirement is removed; instead, the prospectus must state that a discussion regarding the board's basis for approving any investment advisory contract is available in the fund's annual or semi-annual report to shareholders, as applicable.

      The amendments include the following enhancements to the existing disclosure requirements in fund proxy statements, paralleling the disclosure in fund shareholder reports and addressing SEC concerns that some funds do not provide adequate specificity regarding the board's basis for its decision:

      --Selection of Adviser and Approval of Advisory Fee. The amendments clarify that the fund must discuss both the board's selection of the investment adviser and its approval of amounts to be paid under the advisory contract.

      --Specific Factors. The fund must include a discussion of (1) the nature, extent, and quality of the services to be provided by the investment adviser; (2) the investment performance of the fund and the investment adviser; (3) the costs of the services to be provided and profits to be realized by the investment adviser and its affiliates from the relationship with the fund; (4) the extent to which economies of scale would be realized as the fund grows; and (5) whether fee levels reflect these economies of scale for the benefit of fund investors.

      --Comparison of Fees and Services Provided by Adviser. The fund's discussion will be required to indicate whether the board relied upon comparisons of the services to be rendered and the amounts to be paid under the contract with those under other investment advisory contracts, such as contracts of the same and other investment advisers with other registered investment companies or other types of clients (e.g., pension funds and other institutional investors).

      All fund reports to shareholders with respect to periods ending on or after March 31, 2005, and all proxy statements filed on or after October 31, 2004, will be required to comply with the amendments. The March 31, 2005 compliance date was selected so that a fund will only be required to comply with the new disclosure requirements prospectively, with respect to board approvals occurring on or after October 1, 2004. The new prospectus disclosure must be provided in the first initial registration statement, or the first post-effective amendment that is an annual update, filed on or after the transmission to shareholders of a report containing the new disclosure. The SAI amendments are effective January 31, 2006, but the SAI disclosure may be omitted prior to that date if the fund has previously provided the required disclosure with respect to that board approval in a shareholder report. The adopting release is available at the Federal Register website or at

      http://www.sec.gov/rules/final/33-8433.htm


      John M. Baker <JMB@...>
      Stradley, Ronon, Stevens & Young, LLP http://www.stradley.com
      1220 19th Street, N.W., Suite 600, Washington, DC 20036
      (202) 419-8413 Fax (202) 822-0140
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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