Advisers

FYI: Rules Proposed to Govern Use of Derivatives by RICs and BDCs

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FYI: Today the SEC voted to propose a series of new rules and amendments aimed at better regulating the use of derivatives by business development companies and registered investment companies, including mutual funds, exchange-traded funds (ETFs) and closed-end funds. The major components of the proposal are: Proposed new Investment Company Act Rule 18f-4, which would allow a fund to enter into derivatives and certain other transactions, notwithstanding the restrictions under Sections 18 and 61 of the Investment Company Act, provided that the fund complies with the conditions of the rule, including the adoption of a derivatives risk management program and […]

Advisers

FYI: ‘Dear CFO’ Letters Revived

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FYI: Starting with a letter issued on November 22, 2019, the Chief Accountant’s Office of the Division of Investment Management has revived its practice of issuing ‘Dear CFO’ letters from time to time, addressing matters relating to accounting, auditing, financial reporting and related disclosure for investment companies and BDCs. Numerous ‘Dear CFO’ letters were issued in the period from November 1994 to February 2001, but since then accounting matters have been addressed by the SEC Staff via other means, such as IM Guidance Updates, IM Information Updates, Accounting and Disclosure Information publications and IM Staff Issues of Interest, as well […]

Funds

FYI: Risk Alert on Investment Company Compliance

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FYI: OCIE has issued a Risk Alert highlighting compliance deficiencies and weaknesses observed during examinations of nearly 300 investment companies, as well as specific issues observed during examinations of money market funds (MMFs) and target date funds (TDFs). Investment Companies Generally The most often cited deficiencies and weaknesses observed over a 2-year period included: Fund compliance rule, in particular designing a compliance program without taking into account the nature of the fund’s business, not following or enforcing policies and procedures, inadequate service provider oversight, and annual reviews not performed or not addressing (or not adequately documenting) a review of the […]

Advisers

FYI: SEC Enforcement Report for 2019

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FYI: The SEC’s Division of Enforcement has released its Annual Report on enforcement activity during Fiscal Year 2019 (the year ended September 30, 2019). Much of the report pertains to enforcement activity in areas outside of the financial services industry. However, interesting points summarized in the report involving or impacting financial services include: The report recaps the 2 waves of settled cases brought under the mutual fund Share Class Selection Disclosure Initiative, where a total of 95 IA firms voluntarily self-reported and were ordered to return a total of over $135 million to primarily retail investors. Standardized settlement terms were […]

Advisers

FYI: Amendments Proposed to IA Advertising and Cash Solicitation Rules

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FYI: Today the SEC voted to propose amendments to the Advisers Act Advertising Rule (Rule 206(4)-1) and the Cash Solicitation Rule (Rule 206(4)-3). Both of these rules have been largely unchanged for decades and the proposals are aimed at updating the rules and incorporating no-action and other interpretive positions that IAs have been relying on for years governing these areas. A summary Fact Sheet included the following among the many interesting proposals: Advertising Rule Jettisoning the oddly technical, outdated prohibitions in the current Advertising Rule, the proposed Rule amendments would take a principles-based approach, including a broad definition of “advertisement” […]

Advisers

FYI: Another 36(b) Victory for Adviser

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FYI: A September 30, 2019 ruling from the US District Court for the Southern District of NY resulted in a victory for the adviser against Section 36(b) excessive fee claims brought by plaintiffs. The court’s 111-page opinion thoroughly analyzed the six ‘Gartenberg’ factors affirmed applicable to 36(b) cases by the Supreme Court in Jones v. Harris (2010). Two of the factors had been dismissed from the case in a partial summary judgment granted to the adviser in 2018. The other four factors were considered by the court in a bench trial, after which the court concluded that only one factor […]

Funds

FYI: Funds Warned About Inaccurate Performance and Fee Disclosures

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FYI: The Division of Investment Management has warned funds to verify the accuracy of their performance and fee disclosures prior to filing them with the SEC and providing them to investors. The warning was prompted by several disclosure issues observed by the staff, including funds: failing to reflect sales loads in the fund’s average annual returns table. making other performance errors in prospectuses, such as showing negative performance as positive and transposing performance of share classes or multiple indexes. incorrectly showing net expenses that exceed gross expenses in the expense table, resulting from the inaccurate reflection of fee waiver recoupments […]

Advisers

FYI: More Advisers Charged with Share Class Selection Disclosure Violations

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FYI: We learned more today about the SEC’s intended handling of advisory firms both inside and outside the ambit of its 2018 Share Class Selection Disclosure Initiative. Today the SEC announced settlements with an additional 16 advisers that self-reported under the Initiative, who together were ordered to pay disgorgement and prejudgment interest totaling nearly $10 million. These 16 advisers were in addition to the 79 self-reporting advisers who settled earlier this year under the Initiative for an aggregate of over $125 million in disgorgement and prejudgment interest. So far, none of the firms that have self-reported have been ordered to […]

Advisers

FYI: Significant Disclosure Guidance

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FYI: Three significant items have been posted on the SEC’s website explaining certain disclosure requirements for BDs, IAs and funds: 1) A small entity compliance guide has been posted addressing requirements for BDs and IAs under newly adopted Form CRS. The guide provides a helpful summary highlighting the drafting, filing and updating requirements for the form. While it is a summary intended to assist small firms, the guide provides a helpful, succinct explanation of requirements applicable to all BDs and IAs using Form CRS. Form CRS Relationship Summary and Amendments to Form ADV — A Small Entity Compliance Guide: https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary. […]

Advisers

FYI: SEC Issues Proxy Voting Guidance for Advisers

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FYI: At its open meeting today, the SEC voted (3 to 2, Commissioners Jackson and Lee voting ‘no’) to publish guidance regarding the proxy voting responsibilities of investment advisers under Advisers Act Rule 206(4)-6 and related registration and reporting forms under the Investment Company Act. It is worth noting that the SEC has been discussing proxy voting issues from many angles for quite some time. Importantly, last fall, the Division of Investment Management withdrew two previously issued no-action letters — Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004) — addressing advisers’ use of proxy […]