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SEC Allows Interim Advisers in Mergers


The SEC has finalized amendments to a rule which governs the appointment of an interim investment adviser to a mutual fund. The rule clarifies the procedure to be followed when there is a merger of a fund's investment adviser. The revised rule 15a-4, originally adopted in 1980, permits a fund to be advised under a short-term contract until shareholders can vote on a new contract.

An interim adviser usually serves as the temporary investment manager to a mutual fund before fund shareholders have had a chance to approve a new adviser.

The amendments, similar versions of which were first proposed by the SEC in July 1998, will take effect on December 13 and will give both fund managers and fund board members extra time and flexibility.

The SEC proposed the changes in light of the growing number of firms merging. But the SEC also responded to fund advisers' concerns that the current regulation did not provide enough time for all shareholders to be solicited to vote on a proposal to install a new fund adviser. In some cases, funds have to reach many thousands of shareholders- a potentially daunting task, fund companies said.

One of the SEC's amendments will allow an interim adviser appointed by the fund's board of directors to serve for as long as 150 days, 30 days longer than is now permissible without formal shareholder approval. That allows the adviser and board of trustees more time to obtain shareholder votes on the hiring of the new manager. The 150-day period starts from the date the original investment contract terminates.

Previously, advisers had to obtain SEC approval for additional time to get shareholder approval. The SEC granted "exemptive relief" approval on a case-by-case basis. According to the SEC, in 1998, 20 advisers requested exemptive relief, up from 13 in 1997 and only five in 1996.

That regulatory change only applies in the event of a fund adviser's merger or acquisition. By law, in the case of a change of control of an advisory firm, an advisory management agreement between a fund and its original investment adviser cannot be assigned to the resulting company. In these cases, the fund's advisory contract must automatically terminate.

To be sure that the fund's operation continues uninterrupted, fund trustees are charged with appointing a new fund adviser to temporarily serve as the investment manager. Trustees must approve the new interim manager before or at the same time that the fund's current management agreement terminates. Fund shareholders may then vote. In many cases, the newly merged firm is subsequently hired to manage the fund.

The SEC has also adopted changes for situations in which an unforeseen event causes the fund's investment contract to be terminated, lapse or not be renewed by the board. In these non-merger situations, fund trustees will be given 10 days to assemble to consider potential candidates and hire a new adviser.

The SEC has also eased requirements on how board trustees must communicate with one another when considering a new interim adviser. In non-merger situations, board members will now be permitted "to participate in a meeting to approve an interim contract by any means of communication that allows all participants to hear each other at the same time, such as a tele-conference." Previously, board members were required to physically be present at a board meeting. Fund trustees must still meet in person to discuss a new adviser in the event of a merger or acquisition.

A final change in regulations requires the appointed interim adviser to place any interim management fees earned in an interest-bearing escrow account pending shareholder approval of the new contract. If shareholders do not approve the new investment adviser, the interim adviser will still be entitled to receive reasonable fees for temporary investment management services provided.