Credit Suisse Trips Up on Advisory Renewal
February 10, 2003
An inadvertent administrative glitch can be a fund advisor's worst nightmare, especially when the renewal of a fund's advisory contract is botched.
Credit Suisse Asset Management (CSAM) of New York is the latest to learn this lesson firsthand, multiplied seven times. Through an administrative oversight, the advisory contract for seven Credit Suisse funds was inadvertently allowed to lapse, according to a proxy statement the fund group filed with the Securities and Exchange Commission.
What's worse, the automatic expiration of the advisory contract wasn't picked up until almost 2-1/2 years after the fact, leaving Credit Suisse without the official authority to act as the funds' advisor, although it continued uninterrupted management of the funds.
$10M Under the Radar
In addition, more than $9.9 million dollars in past advisory fees that Credit Suisse received, but wasn't legally entitled to, are now under consideration, as are the advisory fees that Credit Suisse has earned since the error was detected this past fall. The latter fees are currently being escrowed until the matter is resolved.
A meeting at which fund shareholders will be asked to approve a new identical advisory contract and allow Credit Suisse to retain past dubious management fees, as well as the management fees earned since last fall, is scheduled for early April - a full three years after the original agreement expired.
In an unrelated incident, FBR Fund Advisers, a unit of Friedman, Billings, Ramsey Group of Arlington, Va., and adviser to the FBR Family of Funds, faced a triple whammy last year when it not only botched the renewal of its funds' advisory contract, but at the same time bungled a related sub-advisory agreement, and missed renewing the funds' 12b-1 distribution plan.
Through a multi-step evaluation process, the independent trustees who sit on mutual funds' boards of directors must annually review the scope and adequacy of all investment advisory contracts, as well as 12b-1 distribution plans, between fund companies and the individual mutual funds they manage. Without the board's official annual advisory seal of approval, fund companies cannot legally manage their funds.
"The advisory contract should be on radar at all times," said Jeff Keil, VP with Lipper, Inc.'s Denver office. "Without it, funds are out of business."
While fund boards can expect to address their once-a-year obligation to consider funds' advisory contracts, sometimes things can go horribly wrong. Even when boards meticulously carry out their all-important contract duties, timing is everything.
"Lack of approval of the advisory contract is a fund advisor's worst nightmare. The nightmare is that you blow the renewal and pick it up weeks or months later," said Carl Frischling, partner with the New York law firm of Kramer Levin Naftalis & Frankel. "But it is grossly negligent to let it go for so long."
M&A Red Tape
In Credit Suisse's case, the snafu arose because of the multiple fund acquisitions the firm had executed. The seven funds were originally known as the BEA Legacy Funds and were managed by BEA Associates, a predecessor to CSAM. After CSAM acquired Warburg Pincus Asset Management of New York in 1999, it sought to envelope the Warburg Pincus Funds into the CSAM complex, subsequently rebranding the BEA Legacy Funds as well as the Warburg Pincus Funds with the Credit Suisse moniker.
Each of the original BEA Legacy Funds was governed by an investment advisory agreement dated Oct. 26, 1998, and each contained a provision that the agreement would be effective until April 17, 2000, at which time the funds' board of directors would consider a one-year renewal.
With those contracts intact and no immediate reconsideration of the BEA funds' contracts necessary until April 2000, in July of 1999 Credit Suisse won shareholder approval for each of the Warburg Pincus funds to be managed by Credit Suisse by virtue of its acquisition of the firm. The advisory contract for the Warburg Pincus group of funds was inked on July 9, 1999.
Nightmare Far From Over
The BEA Funds' board of directors next considered and approved the continuation of CSAM as the BEA Legacy Funds' advisor in November of 2000, and then, conscientiously, again one year, later in November of 2001 -never realizing that the original investment management contract for the funds had already expired in April of 2000 because the funds were on a different renewal cycle, explained Linda Moore, director, product management group at Credit Suisse.
"When we found the error this last quarter, the board unanimously voted to approve a new contract and voted to have all fees paid," Moore said. "There is no impact on the funds or shareholders," she added.