The Securities and Exchange Commission’s Rule 206(4)-5 (Pay-to-Play Rule) under the Investment Advisers Act of 1940, as amended, prohibits, among other restrictions, an investment adviser subject to the rule, and its covered associates, from providing or agreeing to provide, directly or indirectly, payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser, unless such third party is a “regulated person.” A regulated person is defined as (1) an SEC-registered investment adviser, (2) a registered broker or dealer subject to pay-to-play rules adopted by a registered national securities association such as the Financial Industry Regulatory Authority, or (3) a registered municipal advisor that is subject to pay-to-play rules adopted by the Municipal Securities Rulemaking Board (MSRB). In addition, the SECmust by order find that the national securities association and/or MSRB pay-to-play rules: (1) impose substantially equivalent or more stringent restrictions on broker-dealers or municipal advisors respectively than the Pay-to-Play Rule imposes on investment advisers; and (2) are consistent with the objectives of the Pay-to-Play Rule.
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Investment Companies and Investment Advisers
SEC Proposes Rules to Modernize and Enhance Information Reported by Investment Companies and Investment Advisers
On May 20, the Securities Exchange Commission proposed changes to rules affecting the reporting and disclosure obligations of registered investment companies and advisers.
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SEC 2015 Examination Priorities Focus on Liquid Alternatives and Fixed-Income Funds
By Janet M. Angstadt & James Van De Graaff on
On January 13, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) released its 2015 examination priorities for investment companies, investment advisers, broker-dealers and transfer agents. The examination priorities highlight new and continuing areas of interest, including, but not limited to, liquid alternatives, fixed‑income funds and retirement investing by retail investors.
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SEC Approves New Exchange Traded Mutual Fund Structure
The Securities and Exchange Commission has noticed Eaton Vance Corp.’s exemptive order application (Eaton Vance Notice) to offer a novel form of mutual fund that includes certain elements of an exchange-traded fund (ETF) to be called an “exchange traded mutual fund” or “ETMF.” Like all mutual funds, ETMFs will not publish daily disclosures of their portfolio holdings, and their shares will be sold at a price directly linked to their next-determined net asset value (NAV). Like all ETFs, ETMFs will list and trade on a national securities exchange and issue and redeem their shares only in Creation Units at NAV, primarily by exchanging portfolio holdings “in-kind” with authorized participants.
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SEC Investment Management Director Speech Focuses on Alternative Mutual Fund Disclosures
On October 29, Norm Champ, the director of the Securities and Exchange Commission’s Division of Investment Management, spoke before the SIFMA Complex Products Forum in New York. In the speech, Mr. Champ discussed SEC staff concerns regarding the adequacy and accuracy of alternative mutual fund disclosures to investors. The speech was the third since June that Mr. Champ has given to outline staff concerns with alternative mutual funds. On June 30, Mr. Champ spoke before the Practicing Law Institute (PLI) on the heightened risks faced by alternative mutual funds with respect to valuation, liquidity and leverage, and the role that fund boards play in the oversight and compliance programs of alternative mutual funds. On September 11, he spoke before a PLI Hedge Fund Management Seminar about the importance of a focus on compliance and the interests of investors for advisers launching alternative mutual funds.
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SEC Denies Two Proposed Applications for Non-Transparent Active ETFs
The Division of Investment Management (Division) of the Securities and Exchange Commission took an unprecedented action on Wednesday in issuing a preliminary denial to two exemptive relief applications under the Investment Company Act of 1940 for the operation of a non-transparent active exchange-traded fund (ETF). The exemptive relief applications, filed by Precidian Investments (Precidian) for …
SEC Issues Guidance on Proxy Voting
The Security and Exchange Commission’s Divisions of Investment Management and Corporation Finance issued Staff Legal Bulletin No. 20 (IM/CF) on June 30 (SLB 20). SLB 20 provides guidance regarding proxy voting responsibilities of investment advisers and proxy advisory firms’ exemptions from proxy rules. Rule 206(4)-6 under the Advisers Act requires advisers to have written proxy voting policies and procedures. SLB 20 states that advisers can ensure that proxies are being voted in their clients’ best interests if, for example, they periodically sample proxy votes to review compliance with the advisers’ policies and procedures or sample the voting on certain proposals. In any event, an adviser needs to be analyzing, at least annually, whether its proxy voting policies and procedures continue to be reasonably designed to ensure that proxies are voted in clients’ best interests.
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SEC Releases Guidance on Affiliated Transactions of Series Investment Companies
On June 6, the Securities and Exchange Commission’s Division of Investment Management released a Guidance Update clarifying that separate series of a series investment company are each considered an individual company for the purposes of determining whether such series have entered into affiliated transactions. A mutual fund typically operates as a “series company,” in which multiple investment portfolios are offered to investors as separate series, but the company has a single set of organizational documents and board of directors and is permitted to use a single registration statement. Each series, however, has its own investment objectives and set of shareholders and is considered a separate investment company under the Investment Company Act of 1940 (1940 Act).
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SEC Issues Guidance on Aggregate Advisory Fee Rates for Multi-Manager Funds
In February 2014, the Securities and Exchange Commission’s Division of Investment Management released a Guidance Update to clarify when a mutual fund using a “multi-manager structure” must obtain shareholder approval for primary and subadvisory advisory fee rates (aggregate advisory rates) paid by the fund. A multi-manager structure is one in which a primary investment adviser selects subadvisers that act as day-to-day portfolio managers. A mutual fund using a multi-manager structure may obtain relief from Section 15(a) of the Investment Company Act under an exemptive order from the SEC (multi-manager order). Section 15(a) requires an investment manager of a registered investment company to have a written contract approved by shareholders, and the contract must include all compensation terms for the investment adviser. Under a multi-manager order, a subadviser may serve under a contract that has not been approved by shareholders, though the primary adviser’s fee rate and the aggregate advisory rate remain subject to shareholder approval.
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SEC to Examine Never-Before Examined Registered Investment Advisers
By David Y. Dickstein on
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) announced that it is launching an initiative, as part of its existing National Exam Program, to examine investment advisers who have never-before been examined and who have been registered for three or more years (the Target Firms). The SEC press release on this initiative stated, “[a]s part of the initiative, OCIE will conduct examinations of a significant percentage of advisers that have not been examined since they registered with the SEC.” A letter directed at the target firms of this new initiative (Initiative Letter) outlines two distinct approaches that the SEC may take with respect to an exam of a Target Firm. The first approach is a “risk-assessment” approach, which is designed to allow OCIE to obtain a better understanding of the Target Firm. An exam under this approach may include a high-level overview of a Target Firm’s overall business activities with particular focus on the Target Firm’s compliance program and other documents essential to assess the representations in the Target Firm’s disclosure documents. The second approach is a “focused review.” Under this approach, the OCIE may conduct a comprehensive, risk-based examination of one or more of the following higher-risk areas of a Target Firm’s business and operations: compliance program, filings/disclosure, marketing, portfolio management and safety of client assets.
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