Investment Companies, 2019

Chapter 8 Other Accounts and Considerations

Investment Advisory (Management) Fee Expense

8.01 As discussed in chapter 1, “Overview of the Investment Company Industry,” of this guide, an investment company usually engages an investment adviser for a fee, which is generally the largest expense incurred by the investment company. This fee is usually reflected in the periodic net asset value calculation (daily, weekly, monthly, quarterly or less frequently) at rates established by the investment advisory agreement. Certain agreements may provide for performance fee adjustments based on a comparison of the investment company’s performance against an index specified in the agreement.

8.02 As stated in FASB Accounting Standards Codification (ASC) 946-20-25-10, performance fees by an investment adviser under an advisory agreement should be accrued by an investment company at interim dates based on actual performance through the accrual date. As discussed in paragraph 7.125 of this guide, Technical Questions and Answers (Q&A) section 6910.29, “Allocation of Unrealized Gain (Loss), Recognition of Carried Interest, and Clawback Obligations,”^1,2 addresses situations in which governing documents contain provisions that do not require the payment of performance fees until a specified date or time.

8.03 However, according to the SEC's policy, interim payments to the adviser should be based on the minimum fee provided in the agreement because if performance for the year yields a fee that is lower ...