Fund Directions - What Boards Should Know If An Investment Adviser Changes

What Boards Should Know If An Investment Adviser Changes

Thomas DuncanThe worsening global financial crisis is causing increased stress in the mutual fund management business. Many investment advisers are losing assets under management, fund outflows are at record levels and the steep drop-off in portfolio security values has reduced fund assets even further. The result of this combination of factors is a decline in profitability for most fund managers which could lead to an increase in merger and acquisition activity. To that end, Fund Directions spoke with Thomas Duncan, partner at Ballard Spahr Andrews & Ingersoll, last month about what boards should know if there are changes at their adviser.

Many integrated financial institutions have indicated a desire to sell investment advisory businesses to raise cash or to focus on core businesses. Some see a strategic opportunity to acquire fund management businesses, particularly now at attractive valuations. Private equity funds are also reported to be evaluating opportunities to enter the fund management business.

An investment adviser may be sold, or the adviser may elect to exit the fund management business and transfer a fund's investment advisory agreement to another adviser. A sale of a fund's investment adviser or other transfer of the adviser's business will require the board to evaluate and approve a number of proposals. These matters must be considered in a manner consistent with director's fiduciary duty to the fund and its shareholders. Consultation with legal counsel and other experienced professionals is important to aid the board in performing its responsibilities. A full understanding of the proposed changes and thoughtful requests for relevant information are critical in allowing board members to discharge their duties to the fund properly.

1. An assignment of an investment advisory contract terminates the contract.

Section 15(a) of the Investment Company Act of 1940 (the 1940 Act) requires that an investment advisory agreement provide for its automatic termination in the event of an "assignment." ...

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What Boards Should Know If An Investment Adviser Changes