Mutual Fund Operates For Years Without Effective Advisory Contract
It all started with a routine SEC examination.
Going over board minutes, SEC examiners noted that during the Stratus Fundís July 20, 2001 board meeting, only two of the fundís four independent directors seemed to be present.
Lawyers were called.
Ultimately, the fundís board concluded that because a majority of independent directors were not present in person, the fundís contract had not been validly approved. The fundís board quickly approved a new advisory agreement, which was approved by fund shareholders in February 2004.
That solved the problem of the fund operating without a valid advisory agreement. But what to do about the $1.6 million in advisory fees paid by the fund to the adviser during the two and a half years when there was no valid contract in place?
The fund, its adviser, and its principal underwriter agreed that the adviser would place the $1.6 million in escrow. The adviser came up with $1.4 million as a good faith estimate of its costs in managing the fund during the time period. The difference ($295,802), representing the adviserís profit in providing the management services to fund during the period, was paid back to the fund. The fund, in turn, will pass it through to affected shareholders.
In a proxy vote scheduled for next month, fund shareholders will decide whether to return the $1.4 million, representing the adviserís estimated of cost of providing management services to the fund, back to the adviser. In recommending that shareholders approve the payment, the fund's board noted that the lapsed contract "occurred through no fault" of the adviser.