Investment Company Act of 1940 — Section 15(a)
American Century Investment Management
December 20, 2016
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Your letter dated December 19, 2016 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 the American Century family of investment companies (the “Funds”) or American Century Investment Management, Inc. (“ACI”), the Funds’ investment adviser, if, as more fully described in your letter, ACI reallocates to an “Investing Fund” the unitary fee that is paid to ACI by an “Underlying Fund,” as those terms are defined below, without obtaining the approval of the shareholders of the Investing Fund.
You state the following:
Each Fund is registered as an open-end management investment company under the 1940 Act. ACI is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940 (“Advisers Act”) and serves as investment adviser to each of the Funds pursuant to their respective management agreements (“Management Agreements”). Certain of the Funds operate as funds of funds (each, an “Investing Fund”), whereby they seek to achieve their investment objectives by investing in other ACI-managed funds (the “Underlying Funds”). The Investing Funds, which include but are not limited to target date funds, currently invest in 13-20 Underlying Funds. Each target date Investing Fund engages in what is called a “glidepath roll-down,” which is dictated by the target date Investing Fund’s investment objectives and policies. For instance, a target date Investing Fund will allocate more assets to fixed income focused Underlying Funds as it moves toward its target date, which is expected to reduce fees over time.
The Funds generally operate under a unitary fee structure whereby ACI is paid a single fee per class for providing or obtaining all of the services that are necessary for fund operations, including, but not limited to, investment advisory, custody, audit, administrative, compliance, recordkeeping, and shareholder services. The amount of the fees that any Fund pays ACI pursuant to its Management Agreement varies by class of shares, in accordance with the different levels of shareholder and other services that are provided in connection with the class of shares. The amount of the fees paid to ACI by the Investing Funds does not include a component for investment management services, although the Management Agreements specifically call for ACI to provide such services, including asset allocation services. As a result, most of the fees that ACI receives in connection with the Investing Funds consist of the unitary fees that are paid by the Underlying Funds to ACI, and are borne indirectly by the Investing Funds, as investors in the Underlying Funds. Those fees are reflected in the Investing Funds’ Fee Tables in the line item, Acquired Funds Fees and Expenses (“AFFE”).
ACI proposes to reallocate the fees it collects from the Underlying Funds by “bringing up” the unitary fees from the Underlying Funds to the Investing Funds without shareholder approval. The effect of this proposal would be that the Investing Funds pay ACI directly for investment advisory services, rather than indirectly through their investment in the Underlying Funds. It would also enable ACI to waive fees at the Investing Fund level, which it cannot currently do so long as the fees are reflected as AFFE. To accomplish this, ACI intends to assess a new unitary fee on each class of each Investing Fund (a “New Fee”). The New Fee would appear in the Investing Fund’s “Management Fee” line item in the Fee Table. Specifically, each Underlying Fund would create a new class of shares, and ACI would contractually agree to waive the entire unitary fee of that class (the “New Class”). New Class shares would be available only to the Investing Funds and other ACI advisory clients. An Investing Fund would then exchange its shares of the class of the Underlying Funds then held for those of the New Class.
You state that the New Fee is likely to vary year-to-year, and it is possible for the New Fee for an Investing Fund to increase from one year to the next, depending upon the target allocations. You represent that each year, however, the New Fee will be less than or equal to the amount that the Investing Fund would have paid absent the reallocation of fees as described more fully in the incoming letter.
You state that there are several benefits that would result from the proposed fee change. For instance, you believe that Investing Fund shareholders will have greater clarity of the fees they bear if the unitary fees currently borne indirectly through AFFE are eliminated and will have greater certainty regarding the management fee they will be charged during the year as a result of the annual Fee Cap (defined below). The New Fee will not increase the amount of the total fees to be borne by Investing Fund shareholders, including for asset management services. In addition, the New Fee would not fluctuate on a daily basis, as does the current amount of AFFE that is attributable to the applicable Underlying Funds. As a result, the Investing Funds will be able to invest in Underlying Funds with higher annual operating expenses, without increasing the costs to their shareholders. Accordingly, you believe that the proposed fee change is in the best interests of the Investing Fund shareholders.
You represent that the New Fee will be equal to or less than the aggregate costs that a shareholder in an Investing Fund would experience under the current fee structure, and that ACI will not reduce or modify in any way the nature and level of its services with respect to the Funds. You also represent that if no-action assurance is granted, the Investing Funds will provide appropriate notice concerning the amendments to their existing and prospective shareholders.
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.” As a result of the proposed changes to the Management Agreements, the compensation section of the Management Agreements, if not amended, would no longer precisely describe the compensation to be paid under the agreement.
You contend that the proposed changes to the Management Agreements do not implicate the concerns that Section 15(a) of the 1940 Act was designed to address. You state that the shareholder approval requirement of Section 15 was intended to protect fund shareholders from “trafficking” in advisory contracts, or other material modifications that may harm shareholders, such as unwarranted fee increases or a decline in the services for which funds pay fees. You represent that the addition of the New Fees does not involve trafficking and will not affect the services provided to the Investing Funds by ACI. You believe that, consistent with previous no-action assurances, the nature and level of services provided under the contracts would not be reduced and the expense and other burdens associated with seeking shareholder approval would not be warranted. Furthermore, you represent that shareholders of the Investing Funds will not experience any increase in their expenses due to the fee reallocation.
In addition, you represent that the Management Agreements (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 each Investing Fund’s outstanding voting securities. You also represent that the New Fees have been considered by the Board, including a majority of the Independent Directors, and found to be in the best interests of the shareholders of the Investing Funds, and that each Investing Fund will provide appropriate notice of the amendments to existing and prospective shareholders. You state that the Board has a duty to request and evaluate, and ACI has a duty to furnish, such information as may be reasonably necessary to evaluate the terms of the Management Agreements. You represent that as part of that process, the Board of each Investing Fund will consider, among other things, the calculation of the New Fees along with the target allocations into the Underlying Funds for the coming year and the allocations made in the prior year in light of the investment objectives and policies of each Investing Fund.
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 Funds or ACI if the proposed changes are made to reallocate the unitary fee that is paid to ACI by an Underlying Fund to an Investing Fund without obtaining the approval of the shareholders of the Investing Fund. Our position is based particularly on your representations that:
- the New Fees will serve to annually cap the management fees payable by shareholders of the Investing Funds at or below the fees that would have been collected under the current fee structure;
- ACI will not reduce or modify in any way the nature and level of its services with respect to the Funds;
- the Management Agreements of each of the Investing Funds will be amended in accordance with Section 15 of the 1940 Act, other than the shareholder approval requirement, to reflect the allocation; and
- the Investing Funds will provide appropriate notice about the amendments to the existing and prospective shareholders.
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.
Elizabeth G. Miller
 Fund expenses not covered by the unitary fee include interest, taxes, brokerage commissions, extraordinary expenses, the fees and expenses of the trustees/directors who do not meet the definition of an “interested person” in Section 2(a)(19) of the 1940 Act (the “Independent Directors”) (including counsel fees), and expenses incurred in connection with the provision of individual shareholder services and distribution services under a plan adopted pursuant to rule 12b-1 under the 1940 Act. These expenses are reflected in separate line items in the Fees and Expenses Tables in the Funds’ prospectuses (each a “Fee Table”).
 AFFE, which is defined in Instruction 3(f) to Item 3 of Form N-1A, represents the indirect costs of investing in underlying investment companies.
 You state that each year, as part of the annual process for the consideration and renewal of the Investing Funds’ investment advisory agreements by the Boards of Directors/Trustees of such Funds (collectively, the “Board”) pursuant to Section 15(c) of the 1940 Act, the New Fees (the “annual Fee Cap”) would be set, based on the target allocations and fees of the relevant Underlying Funds (the “Target Allocation”), subject to the Board’s approval. If, during a contract year, ACI changes an Investing Fund’s Target Allocation to a mix of Underlying Funds with higher annual operating expenses, ACI will nevertheless maintain the present level of the New Fee and forgo an increase. If, during a contract year, the Target Allocation is changed to a mix of Underlying Funds with lower annual operating expenses, ACI will notify the Investing Funds’ Independent Directors and implement a fee waiver to eliminate the excess.
 In support of your contention, you note that we have granted no-action assurances under Section 15(a) in circumstances where (i) there was no increase in advisory fee rates charged to the fund and its shareholders; (ii) there was no reduction or modification in the nature and level of services provided by the adviser to the fund; (iii) the advisory agreement would be amended in accordance with the provisions of Section 15, other than the shareholder approval requirement; and (iv) the fund would provide appropriate notice about the amendments to existing and prospective shareholders. See, e.g., RiverNorth/DoubleLine Strategic Income Fund, SEC Staff No-Action Letter (July 28, 2014), Wells Fargo Bank, N.A., SEC Staff No-Action Letter (Mar. 31, 1998) and Invesco, SEC Staff No-Action Letter (Aug. 8, 1997).
The Incoming Letter is in Acrobat format.