The Securities and Exchange Commission may be ready to simplify the hiring and firing of subadvisors. Wednesday the Commission offered up proposed rules that would wave the now required shareholder vote in these cases. The commissioners' vote on the proposed rule was 5 to 0.

The proposal would modify Rule 15a-5 under the Investment Company Act. It would also amend Form N-1A under the Securities Act of 1933 and the Investment Company Act.

In the past fund firms seeking to change advisors without a shareholder vote would need special permission from the SEC on a case-by-case basis. The proposed rules essentially codify those exemptive orders. Since 1995 the SEC has granted more than 100 exemptive orders covering subadvisors.

"It's very healthy to take these exemptive orders and get them into a rule," explained SEC commissioner Harvey Goldschmid. "This is a sensible, efficiency-enhancing proposal."

The updated rules reflect an evolution in how funds are managed and sold. Over the past decade financial services firms have evolved along two paths with some firms specializing in distribution while others focus on building investment management expertise.

If approved following the public comment period the rules would effectively lower the costs for distribution specialist seeking to offer subadvised funds as long as they are not seeking to raise the management fees they pay in the fund. It would also streamline and speed up the process they need to go through to swap subadvisors.

Even under the proposed rules the fund advisor will still need to inform shareholders of any changes in subadvisors in a statement sent to them within 90 days of the change. Advisors would also have to put the matter up for a vote if the new subadvisory agreement calls for an increase in fees. Finally, advisors must obtain shareholder approvals to generally hire subadvisors for the fund.

The rules would only apply to advisors hiring or firing subadvisors with an "arms-length" relationship. Changes to captive or affiliated subadvisors would still require shareholder votes.  

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