SEC Issues No-Action Letter Addressing Non-Shareholder Approval of a Sub-Advisory Contract

March 6, 2014

The SEC granted no-action relief under Section 15(a) of the 1940 Act to RS Global Natural Resources Fund, SailingStone Capital Partners LLC (SailingStone) and RS Investment Management Co. LLC. (Adviser) permitting the Adviser to enter into an interim sub-advisory agreement with SailingStone that had not been approved by the vote of a majority of the outstanding voting securities of the Fund.


The Fund currently is managed by members of the Adviser's "Global Natural Resources Team" (GNR Team) pursuant to certain strategies (GNR Strategies). Although the Adviser does not currently utilize sub-advisers to manage the Fund, the investment management agreement authorizes the Adviser to retain one or more sub-advisers at its own cost to provide advisory services to the Fund. On January 7, 2014, the Adviser and certain members of the GNR Team entered into a separation agreement that provides for the separation of the investment management business of the GNR Team from that of the Adviser (Separation Transaction) on an upcoming closing date (Closing Date). The GNR Team formed a new legal entity, SailingStone.

The Adviser and the GNR Team proposed that (i) the GNR Team continue to advise the Fund and (ii) there to be no interruption of those advisory services after the closing date of the Separation Transaction. The Adviser and the GNR Team stated that the best and most practical solution for the Fund would be to engage SailingStone to serve as a sub-adviser to the Adviser with respect to the Fund after the Closing Date, but before the date when a definitive sub-advisory agreement is approved by Fund shareholders.

Section 15(a) of the 1940 Act prohibits a person from serving as an investment adviser or sub-adviser to a registered investment company except pursuant to a written contract that has been approved by the vote of a majority of the outstanding voting securities of the registered investment company. Rule 15a-4 under the 1940 Act provides a temporary exemption from the shareholder approval requirement in Section 15(a) in circumstances in which the previous advisory contract was terminated by the board of directors or by the vote of a majority of the outstanding voting securities of the registered investment company, by a failure to renew the previous advisory contract, or by an assignment of the previous advisory contract, as defined in section 2(a)(4) of the 1940 Act.

The SEC staff stated that under section 15(a) of the 1940 Act, an investment sub-advisory agreement with SailingStone (New Sub-Advisory Agreement) would require approval by a majority of the Fund's outstanding voting securities. The incoming letter argued that the Separation Transaction and related resignation of the GNR Team would not involve a Rule 15a-4 eligible event and thus the Fund, the Adviser, and SailingStone may not rely on the temporary exemption provided by Rule 15a-4.

The SEC staff granted no-action relief allowing SailingStone serves as investment adviser to the Fund pursuant to an interim sub-advisory agreement (Interim Sub-Advisory Agreement) that has not been approved by the vote of a majority of the Fund's outstanding voting securities even though Rule 15a-4 was not available.  The incoming letter successfully argued that their circumstances were within the spirit of Rule 15a-4. The Fund and the Adviser needed a reasonable period of time to perform sufficient due diligence regarding SailingStone and to provide the Fund's board with sufficient information and opportunity to consider approval of the New Sub-Advisory Agreement. The incoming letter stated that the Adviser and the Fund do not have a sufficient opportunity prior to the Closing Date of the Separation Transaction to obtain shareholder approval of a New Sub-Advisory Agreement for the Fund. It further stated that service by the SailingStone under the Interim Sub-Advisory Agreement would facilitate the orderly and reasonable consideration of the New Sub-Advisory Agreement by the Fund's shareholders while minimizing disruption of the Fund's operations.

Click here to access the no-action letter.


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