This page provides materials on the requirements applicable to investment advisory contracts. These requirements arise both under the Investment Advisers Act (the "IAA") and for advisers to SEC-registered investment companies, the Investment Company Act (the ICA"). Advisers subject to state regulation are also subject to state law requirements.
The most significant of the advisory contract requirements is likely the limitation on the ability of investment advisers to charge performance compensation or incentive compensation fees. These fees are, however, permissible, as to certain types clients, and in some cases subject to limits on their amount; e.g., in the case of fees charged to business development companies.
In addition, a number of other requirements apply including restrictions on the assignability of investment advisory contracts without the approval of the client. Historically, the SEC took the view that acquisitions, mergers or even internal reorganizations of an advisory entity could be deemed to constitute an assignment of any advisory contract entered into by the relevant entity. This required advisers frequently to seek either no-action or exemptive relief from the SEC. However, the SEC now generally takes a less formalistic view of the term "assignment," not requiring relief unless the relevant transaction results in an actual change of control or management.
Advisory contracts with registered investment companies must be approved by the board and by a shareholder vote. There are a number of requirements applicable to advisory contracts including that a registered adviser, if a partnership, will notify its clients of any change in membership within a reasonable time after such change.
In a 2019 release, the SEC also declared that investment advisers are not permitted to include in their contract so-called "hedge clauses" in the contracts, which limit the adviser's liability to its clients to acts of gross negligence or willful malfeasance.
IAA Section 202(a)(1) (Definition of "assignment")
IAA Rule 202(a)(1)-1 (Transactions not deemed "assignments")
ICA Section 2(a)(4) (Definition of "assignment")
ICA Rule 2a-6 (Transactions not deemed "assignments")