Covenants of the subadviser: Overview, definition, and example
What are covenants of the subadviser?
Covenants of the subadviser refer to the promises or obligations made by a subadviser in a financial or investment management agreement. A subadviser is a third-party firm or individual that is hired by the primary adviser (such as a mutual fund manager) to provide specific investment management services, often related to a portion of the assets in a fund or portfolio.
The covenants in the agreement typically outline the specific duties, responsibilities, and standards the subadviser must follow in managing the assets. These covenants often include the subadviser’s commitment to act in the best interests of the clients, maintain compliance with regulations, and report on the performance of the assets under management. They can also include clauses about confidentiality, risk management, and performance benchmarks.
Why are covenants of the subadviser important?
Covenants of the subadviser are important because they establish clear expectations for the subadviser’s role in the investment management process. These covenants ensure that the subadviser is accountable for their actions and that they manage the assets in line with the goals and policies of the primary adviser or the investors.
For clients, the covenants offer protection, ensuring that the subadviser will act with due diligence, integrity, and in compliance with applicable laws. For the primary adviser, these covenants are important for safeguarding the overall quality of the investment strategy and managing any potential risks associated with outsourcing part of the investment management responsibilities.
Understanding covenants of the subadviser through an example
Imagine a large investment firm that manages a mutual fund. The firm hires a subadviser to manage a portion of the fund’s assets, specifically focusing on international equities. The agreement between the primary adviser and the subadviser includes several covenants, such as:
- The subadviser will manage the international equities portfolio in line with the fund's overall investment strategy.
- The subadviser will provide regular performance reports to the primary adviser.
- The subadviser agrees to comply with all relevant securities laws and regulations.
If the subadviser fails to meet these covenants—such as not adhering to the fund's investment strategy or failing to provide required reports—the primary adviser may take action, including terminating the agreement.
An example of a covenants of the subadviser clause
Here’s how a covenant of the subadviser clause might appear in an investment management agreement:
"The Subadviser agrees to manage the assets entrusted to it in accordance with the guidelines set forth by the Adviser. The Subadviser shall exercise its best judgment in managing the portfolio, ensuring compliance with applicable laws, and providing quarterly performance reports to the Adviser. The Subadviser shall also maintain the confidentiality of all proprietary information related to the assets under management."
Conclusion
Covenants of the subadviser are a crucial component of agreements between primary advisers and subadvisers. These covenants ensure that the subadviser manages the portfolio responsibly and in alignment with the overall goals of the investment strategy. By outlining clear duties and responsibilities, the covenants help protect clients, ensure legal compliance, and maintain the integrity of the investment management process.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.