The 15c Reporting Process

1
The 15(c) Reporting Process
2
Table of Contents

• Statutory Responsibilities
• Contract Renewal Considerations
• Cost Allocation Methodologies
• Process Considerations
• Disclosure Requirements

3
Statutory Responsibilities

• Advisory Contract - Governed by the Investment
  Company Act of 1940
• Section 15
• Terms of contract
• Process of entering into, continuing, amending
  and terminating
• Contract may be continued annually by board
  approval or shareholder vote
• Must be approved by independent directors at
  in-person meeting
• Section 15(c) requires the necessary information
  to evaluate the terms of the advisory contract
• Be requested by the funds directors
• Furnished by the investment adviser
• Section 36(b)
• Adviser has fiduciary duty with respect to
  compensation they receive in connection with
  their services to the fund
• Any fund shareholder or the SEC can bring an
  action against the adviser to recover any
  excessive fees.

4
Contract Renewal Considerations

• Advisor Profitability and Services
• Comparative Fees
• Actual and Contractual
• Economies of Scale and Breakpoints
• Comparison to similar accounts managed by the
  adviser
• Profitability
• Fund by Fund and complex-wide
• Complex-wide profitability as a percent of
  managers revenue
• Expense classification and allocation
• asset based, time based, cash flow based,
  occupancy based
• Compensation paid by the fund to affiliates of
  the adviser
• Review of Fund agreements with related parties
  separately advisory, transfer agent,
  broker-dealer, administration
• Terms and profitability should be evaluated for
  each related party agreement
• Scope and quality of services provided by the
  adviser
• Resource adequacy
• Consideration of indirect benefits (e.g.
  soft-dollars)

5
Contract Renewal Considerations

• Investment Performance
• Total Return
• Minimum 3 years history
• Comparison to market indices Fund benchmarks
• Comparison to similar funds (e.g. Lipper)
• Industry ratings (e.g. Morningstar)
• After-tax performance, where applicable
• Risk/Reward tradeoff of portfolio management
• Portfolio Statistics
• Portfolio turnover and related brokerage
  commissions
• Qualitative Factors
• Depth of resources
• Team versus Star system
• Turnover of the investment team
• Quality and frequency of reporting

6
Contract Renewal Considerations

• Regulatory and Operational Considerations
• ADV review
• Results of regulatory exams
• Review of responses to regulatory inquiries
• Policies and Procedures Results of ongoing
  oversight
• Tone at the Top
• Company code of ethics and employee trading
• Broker Selection, Best Execution, use of ECNs
• Soft Dollars and Directed brokerage
• Pricing and fair valuation support
• IPO and Block Trade Allocation
• Information Barriers
• Review of overall efficacy of compliance program,
  including operational effectiveness
• Management's plans for class B shares, given new
  trend towards discontinuance
• Ask management to describe how this will impact
  distribution fees in future

7
Cost Allocation Methodologies

• Multiple cost allocation methodologies are
  acceptable and employed in the industry. Examples
  include

8
Process Considerations Board of Directors

• Designate an advisory contract review oversight
  committee, with a written charter, consisting of
  independent directors
• Establish a formal process
• Contractually commit adviser to provide all
  relevant information for review
• Prepare a formal written request to obtain
  relevant information from adviser
• Contract review committee should meet, without
  management, to formulate a recommendation
• Contract review committee to prepare
  recommendation to full board regarding
  continuation and adoption of the advisory
  contract
• Obtain from legal counsel a clear description of
  the boards legal obligations and
  responsibilities
• Consider engaging independent third parties to
  review aspects of the relevant information (e.g.
  profitability analysis prepared by the adviser)

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Disclosure Requirements

• Disclosure Regarding Approval of Investment
  Advisory Contracts by Directors of
  Investment Companies, Release No. IC-26486
• Disclose the material factors considered and the
  conclusions with respect to those factors that
  formed the basis for the boards approval of
  advisory contracts during the most recent fiscal
  half-year
• Factors relating to the boards selection of the
  adviser, and
• Factors relating to the boards approval of the
  advisory fee (and other fees to be paid to the
  adviser)
• Specific factors to disclose
• Nature, extent, and quality of services to be
  provided by the adviser
• Investment performance of the fund and the
  adviser
• Costs of services to be provided and profits to
  be realized by the adviser and affiliates
• Extent to which economies of scale would be
  realized as the fund grows
• Whether fee levels reflect the economies of scale
  for the benefit of fund investors

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Disclosure Requirements (continued)

• Other considerations
• Comparison of fees and services provided by the
  adviser with those rendered and paid under other
  advisory contracts
• Fund prospectus must disclose the availability of
  the required disclosure in the funds annual or
  semi-annual report to shareholders, as applicable
  
• Applies to open-end and closed-end mutual funds
  and insurance company managed separate accounts
  that offer variable annuities