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Voting Rights II: How Funds Raise Fees Without a Shareholder Vote, TheStreet.com (Feb. 15, 2001).

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(See the lead article, A Voting Rights Issue that Hits Home for Investors, TheStreet.com (Feb. 13, 2001)(article abstract))

Abstract: As discussed immediately above, the SEC exempted hundreds of so-called multimanager funds from having to obtain shareholder approval to replace subadvisers.

One problem with the exemptions, as I explained in the column described above, is that they have been granted to dozens of "multimanager" funds that never actually hire more than one subadviser.

Another problem with the exemptions is that they effectively strip shareholders of their right to approve increases in managers' advisory fees. Interestingly, many of these exemptions themselves may be legally invalid.

Multimanager funds pay the manager a percentage of assets in the fund, and subadvisers are paid out of the manager's fee. The manager thus can increase its fee simply by reducing the subadviser's fee and pocketing the difference. Because the total fee paid by shareholders does not change, their approval is not required.

American Skandia exploited this loophole when it replaced subadvisers for eight multimanager funds last year. On a net basis, Skandia stands to collect $342,000 more annually as a result of changes in subadviser fees, based on the funds' asset sizes on the date the new fees went into effect. As the funds' assets increase, the net gain to Skandia during that period will be approximately $2.5 million over a five year period.

Ironically, the explanation for the SEC's willingness to strip shareholders of their voting rights may be that the agency itself was denied its right to exercise its voting rights.

After SEC commissioners approve a particular type of exemption, the SEC staff can grant similar exemptions without putting them to a vote if the exemptions "present no significant issues that have not been previously settled by the Commission."

Multimanager funds offered by Equitable, Skandia and others bear only a vague resemblance to original exemption granted to Frank Russell in 1995, and raise issues that the SEC Commissioners have never considered, much less previously settled.

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