Investment Companies and Investment Advisers

Section 205 under the Investment Advisers Act of 1940 generally prohibits a federally registered investment adviser (RIA) from receiving compensation based on a share of the capital gains on or appreciation of the assets of an advisory client (i.e., performance fees). Rule 205-3 under the Advisers Act provides an exemption from this prohibition for clients that meet the definition of “Qualified Client” found in the rule.
Continue Reading SEC Increases Dollar Amount of the Net Worth Threshold Test for ‘Qualified Clients’ in Rule 205-3 Under the Investment Advisers Act of 1940

On January 19, the Securities and Exchange Commission announced that it had settled with Equinox Fund Management LLC (Equinox). The SEC order found that Equinox, with respect to its managed futures fund (the Fund), had overcharged management fees to investors and failed to follow its valuation methods as disclosed to investors.
Continue Reading SEC Settles With Adviser That Allegedly Overcharged Management Fees and Misled Investors

On January 11, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) released its 2016 examination priorities for investment companies, investment advisers, broker-dealers and transfer agents. The examination priorities highlight new and continuing areas of interest.
Continue Reading SEC 2016 Examination Priorities Focus on ETFs, Cybersecurity and Liquidity Controls for Fixed-Income Funds

On December 4, President Obama signed the “Fixing America’s Surface Transportation Act’’ or the ‘‘FAST Act.” In addition to providing for highway and transportation spending, section 750001 of the FAST Act amended Section 503 of the Gramm-Leach-Bliley Act (GLBA) by eliminating under certain circumstances the GLBA requirement that financial institutions provide annual privacy notices (new GLBA Section 503(f)). For a more general look at the FAST Act, see “FAST Act Legislation and Impact on Securities Law” in the SEC/Corporate section.
Continue Reading Federal Highway Bill Eliminates Annual Privacy Notice Requirement for Financial Institutions

On September 22, the Securities and Exchange Commission proposed a comprehensive package of rule reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs). Under the proposal, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The proposal is designed to better ensure investors can redeem their shares and receive their assets in a timely manner.

Continue Reading SEC Proposes Liquidity Management Rules for Mutual Funds and ETFs

On September 14, the Internal Revenue Service (IRS) issued final regulations under Internal Revenue Code Section 851 clarifying that control groups under the regulated investment company (RIC) rules may consist of two entities (i.e., the RIC and one subsidiary), rather than two levels of entities, settling a decades-long debate. The IRS also issued Rev. Proc. 2015-45, 2015-39 IRB 1, which provides a safe harbor for fund of funds structures.
Continue Reading IRS Addresses RIC Asset Diversification Requirements

Every five years, the US Commerce Department’s Bureau of Economic Analysis (BEA) conducts a survey concerning financial services transactions between US “Financial Services Providers” (defined below) and entities domiciled or incorporated outside the United States (Foreign Persons). Each US entity that (1) is a Financial Services Provider; and (2) either was contacted by the BEA or had combined sales to or purchases from Foreign Persons in excess of $3 million during its 2014 fiscal year is required to file a report (US Reporter) using the Form BE-180.


Continue Reading US Reporter Deadlines for Bureau of Economic Analysis BE-180 Report

On June 29, the Securities and Exchange Commission charged Kohlberg Kravis Roberts & Co. (KKR) with violations of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, as amended, and Rule 206(4)-7 thereunder for the misallocation of broken deal expenses. The charge addressed KKR’s failure to disclose in its flagship funds’ offering materials that it did not attribute broken deal expenses to co-investor funds.
Continue Reading SEC Enforcement Action Signifies the Need for Investment Advisers to Adopt Written Expense Allocation Policies

In June, the Securities and Exchange Commission’s Division of Investment Management issued a Guidance Update relating to Rule 204A-1 under the Investment Advisers Act of 1940. Rule 204A-1 provides that a registered investment adviser must establish, maintain and enforce a written code of ethics that requires, among other things, its directors, officers and supervised persons who have access to nonpublic information regarding securities transactions of clients or who are involved in making securities recommendations to clients or who have access to such recommendations that are nonpublic (access persons) to report their personal securities holdings and transactions. Subsection (b)(3)(i) of the rule (reporting exception) provides an exception to the reporting requirements when an access person’s securities are held in accounts over which he or she had “no direct or indirect influence or control.”
Continue Reading SEC Division of Investment Management Issues Guidance Update Relating to Rule 204A-1 of the Investment Advisers Act