July 28, 2014
Your letter dated July 28, 2014 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (“Commission”) under Section 15(a) of the Investment Company Act of 1940 (the “1940 Act”) against RiverNorth/DoubleLine Strategic Income Fund (the “Fund”), a series of the RiverNorth Funds, a registered investment company (the “Trust”), RiverNorth Capital Management, LLC, the Fund’s investment adviser (“RNCM”), or Doubleline Capital, LP (“Doubleline”), which serves as the Fund’s sub-adviser if, as more fully described in your letter, RNCM and Doubleline reallocate the advisory fee paid by the Fund without obtaining the approval of the shareholders of Fund.
You state the following: the Trust is an Ohio business trust registered as an open-end, management investment company under the 1940 Act with five series. RNCM is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940 (“Advisers Act”) and serves as investment adviser to the Fund pursuant to an investment advisory agreement between RNCM and the Trust on behalf of each series of the Trust (the “RNCM Management Agreement”). The RNCM Management Agreement was approved in accordance with Section 15(a) of the 1940 Act under which RNCM is responsible for the investment program of each series of the Trust. Pursuant to the RNCM Management Agreement, RNCM may delegate any or all of the responsibilities, rights or duties under the RNCM Management Agreement to one or more sub-advisers, provided such delegation is approved or ratified by the Board of Trustees of the Trust (“Board”), the Trust’s shareholders or unless, in addition to the Board’s approval, the Trust has obtained from the staff of the Division of Investment Management (“Staff”) an exemption from the provisions of Section 15(a) of the 1940 Act.
Doubleline is registered with the Commission as an investment adviser under the Advisers Act and serves as sub-adviser to the Fund pursuant to an investment sub-advisory agreement between RNCM and Doubleline (the “Doubleline Sub-Advisory Agreement”), which was approved in accordance with Section 15(a) of the 1940 Act, including being approved by the Fund’s sole shareholder. RNCM allocates a portion of the Fund’s assets (a “sleeve”) to Doubleline to be managed in accordance with the Fund’s particular investment strategy, and RNCM manages the remaining assets of the Fund. Pursuant to the Doubleline Sub-Advisory Agreement, Doubleline is currently compensated based on the net assets1 of the Fund it manages.
You state that RNCM would like to amend the Doubleline Sub-Advisory Agreement to compensate Doubleline based on Doubleline’s gross assets under management (rather than net assets). You state that this change would result in a slight increase in the advisory fees earned by Doubleline and a corresponding decrease in the advisory fees paid to RNCM, but no change in the overall advisory fees paid by the Fund itself.2 You represent that the services provided under the RNCM Management Agreement and Doubleline Sub-Advisory Agreement will not be affected by the proposed reallocation of fees. You represent that there will be no other changes to the Doubleline Sub-Advisory Agreement. You state that from an accounting standpoint, the operating expenses of the Fund will be calculated on the total assets of the Fund but deducted only from the sleeves managed by RNCM rather than the sleeves managed by Doubleline. Accordingly, you believe that when calculating the compensation to be paid to Doubleline, the fee should be based on the assets actually managed by Doubleline rather than the assets minus operating expenses over which Doubleline has little control.
You state that the proposed amendments to the Doubleline Sub-Advisory Agreement have been considered by the Trust’s Board and have been approved by a majority of the Board’s Trustees, including a majority of trustees who are not interested persons of RNCM, pending receipt of assurance from the staff. You represent that if no-action relief is granted, RNCM will ensure that existing and prospective shareholders of the Fund receive appropriate notice of the amendments.
Section 15(a)(1) of the 1940 Act provides, in relevant part, that it is unlawful for any person to serve or act as investment adviser of a registered investment company, except pursuant to a written contract, which contract … has been approved by the vote of a majority of the outstanding voting securities of such registered company, and precisely describes all compensation to be paid thereunder.” You acknowledge that, as a result of the proposed changes to the Doubleline Sub-Advisory Agreement, which would result in a slight increase in advisory fees paid to Doubleline and slight reduction in the advisory fees paid to RNCM, the compensation sections of the Doubleline Sub-Advisory Agreement, if not amended, would no longer precisely describe the compensation to be paid under the agreement.
You maintain, however, that the proposed changes to the Doubleline Sub-Advisory Agreement do not implicate the concerns that Section 15(a) of the 1940 Act was designed to address. You state that the central purpose of the shareholder vote requirement of Section 15(a) is to protect fund shareholders from abuses that may arise due to “trafficking” in advisory contracts, or other material modifications that may harm shareholders, such as unwarranted fee rate increases or a reduction in the quality or quantity of services for which funds pay fees. You believe that the proposed changes are immaterial and would meet with shareholder approval if submitted for a shareholder vote because the changes would result in no increase in fees paid by shareholders, and are not designed to, nor would they reduce or modify in any way the nature and level of services provided to the Fund by Doubleline or by RNCM.3
In addition, you represent that the Doubleline Sub-Advisory Agreement (as amended to reflect the proposed changes) will be entered into in accordance with the provisions of Section 15 of the 1940 Act, other than being approved by the vote of a majority of the Fund’s outstanding voting securities. You also represent that the Trust’s Board, including a majority of the trustees who are not interested persons (as defined by Section 2(a)(19) of the 1940 Act), has determined that the changes would be in the best interests of the Fund and its shareholders and has approved the implementation of the changes, pending receipt of assurance from the Staff. You further state that if granted no-action relief by the Staff, the Fund will provide appropriate notice of the amendments to existing and prospective shareholders.
Based on your facts and representations, we would not recommend enforcement action to the Commission under Section 15(a) of the 1940 Act against the Fund, RNCM, or Doubleline, if the proposed changes are made to the Doubleline Sub-Advisory Agreement as described without seeking shareholder approval. Our position is based particularly on your representations that:
This response expresses our view on enforcement action only and does not express any legal or interpretive position on the issues presented. Because our position is based upon all of your facts and representations, any different facts or representations may require a different conclusion.
Michael S. Didiuk
1 You define net assets as the gross assets in each sleeve, minus the sleeve’s pro rata share of the Fund’s operating expenses.
2 You state that the advisory fee, as a percentage of the assets under management, will not change. Rather, the only change will be that the Doubleline advisory fee will be calculated based on Doubleline’s gross assets under management, and operating expenses deducted only from the RNCM-managed sleeve.
3 You contend further that the Staff has granted similar assurances under similar circumstances. In INVESCO, SEC Staff No-Action letter (Aug. 5, 1997), we agreed not to recommend enforcement action under section 15(a) of the 1940 Act if the investment adviser and sub-advisers reallocated the advisory fees paid by the funds without obtaining the approval of fund shareholders, when aggregate fees would remain unchanged and neither the adviser or subadvisers would reduce the quality or quantity of their services.