In a cease-and-desist order entered on June 17, 2015, the U.S. Securities and Exchange Commission found that a fund adviser, two independent trustees and an inside trustee willfully violated Section 15(c) of the Investment Company Act of 1940 by failing to satisfy specific requirements for approving a fund’s investment advisory agreement. The SEC also found that the funds’ administrator caused one of the funds to violate Section 30(e) of the 1940 act, and Rule 30e-1 thereunder, by omitting disclosure related to the trustees’ evaluation of the advisory and subadvisory agreements under Section 15(c).

Section 15(c) of the 1940 act imposes a duty on the board members of a registered investment company to request and evaluate — and a duty on the adviser to furnish — such information as may reasonably be necessary for the directors to evaluate the terms of an advisory contract. Item 27(d)(6) of Form N-1A further requires that, if a fund’s board approved any investment advisory contract during the fund’s most recent fiscal half-year, the next shareholder report must contain a discussion, in reasonable detail, concerning “the material factors and the conclusions with respect thereto that formed the basis for the board’s approval.” The SEC said that the administrator violated Section 30(e) of the 1940 act and Rule 30e-1 by failing to disclose the information required in Item 27(d)(6) of form N-1A.

Originally published in Law360 on July 1, 2015.