One of the most important responsibilities of fund independent directors is to annually review and approve their fund’s advisory contract, including the advisory fees. This is called the 15(c) process, named after the section of the Investment Company Act of 1940 (1940 Act) that requires a majority of a fund’s independent directors to annually approve the fund’s advisory contract at an in-person meeting called for that purpose. Section 15(c) requires the board to “request and evaluate,” and the adviser to furnish, “such information as may reasonably be necessary” for the board “to evaluate the terms” of the advisory contract.
Boards consider a number of factors when reviewing an advisory contract, including those considered by federal courts in “excessive fee” cases. These cases are also known as 36(b) cases, after the section of the 1940 Act that allows the U.S. Securities and Exchange Commission (SEC) or a shareholder to sue a fund’s adviser for breach of fiduciary duty with respect to the receipt of compensation. The SEC has incorporated these Gartenberg factors—named for the court decision that first articulated them— into a disclosure rule requiring funds to discuss the basis for the board’s approval of the advisory contract. In 2010, the U.S. Supreme Court upheld the Gartenberg framework in the landmark Jones v. Harris Associates decision.
