January 18, 2017
OCIE Multi-Branch Adviser Initiative Risk Alert
The SEC's Office of Compliance Inspections and Examinations ("OCIE") has issued a Risk Alert regarding the launch of its Multi-Branch Adviser Initiative (the "Initiative"). In recent years, the OCIE staff (the "Staff") has observed an apparent increase in investment advisers with multiple branch offices and operations located outside of the adviser's principal or main office. The Initiative will examine whether such advisers are in compliance with the federal securities laws given the additional and unique risks of a multi-office operating structure.
January 13, 2017
Division of Investment Management Provides Interpretive Guidance on Section 22(d) Restrictions
In an interpretive letter dated January 11, 2017 (the “Staff Letter”), the Office of Chief Counsel of the Division of Investment Management stated its view that, under certain circumstances the restrictions of Section 22(d) of the Investment Company Act of 1940, as amended (the “1940 Act”), do not apply to a broker when the broker acts as agent on behalf of its customers and charges its customers commissions for effecting transactions in “Clean Shares” (i.e., a class of fund shares without any front-end load, deferred sales charge, or other asset-based fee for sales or distribution).
January 13, 2017
SEC Issues No-Action Relief in Connection with the Reallocation of a Unitary Fee without Shareholder Approval
In a recent no-action letter, the staff of the Division of Investment Management (the “Staff”) indicated that it would not recommend enforcement under Section 15(a) of the 1940 Act against American Century Funds or the investment adviser, American Century Investment Management, Inc. (“ACI” or the “Adviser”), if the Adviser reallocates (“brings up”) the unitary fee that it collects from the underlying funds to the target-date investing funds (“Investing Funds”) without shareholder approval.
December 20, 2016
SEC No-Action Position on use of Affiliated Person as Broker to execute FX Transactions
In a recent no-action letter, the SEC provided assurances that it would not recommend enforcement action under Section 17(e) of the 1940 Act if certain registered open-end management investment companies utilize a broker that is an “affiliated person” of the Funds’ investment adviser to effect foreign currency transactions as agent for the Funds in return for the receipt of remuneration (within the parameters of Section 17(e)(2) of the Act). Section 17(e) was designed to eliminate the potential for self-dealing that exists when a person affiliated with a RIC receives compensation in connection with transactions involving the RIC.
December 20, 2016
Two Firms Settle with SEC over Improper Valuations of Bonds
Two recent settlements between investment advisers and the Securities and Exchange Commission (“SEC”) demonstrate the importance of correctly valuing bonds within a fund’s portfolio and ensuring that the valuation methods used take into account all factors that affect a bond’s value. Failure to do so can result in an inflated NAV, which can lead to disgorgement, heavy penalties and shareholder reimbursements.
December 19, 2016
December 2016 Compliance Flash
Attached please find the December 2016 edition of the Compliance Flash. If you have any questions or comments, please contact your primary Investment Management attorney at Seward & Kissel LLP. Download Compliance Flash – December 2016…
December 15, 2016
Division of Investment Management Provides Guidance on “Mutual Fund Fee Structures”
In light of the Department of Labor’s adoption of the “DOL Rule”, which is designed to address conflicts of interest in retirement advice, the SEC’s Division of Investment Management (“IM”) has provided guidance on how to approach the related disclosure issues and procedural requirements associated with offering variations in Fund sales loads and new Fund share classes. Variations in Sales Loads IM confirms that a Fund may sell shares at prices that reflect scheduled variations in, or elimination of, sales loads as long as each sales load variation is disclosed in the prospectus. If Funds are considering new variations to sales loads that would apply uniformly to investors that purchase Fund shares through a single intermediary (or category of multiple intermediaries), the prospectus must: (1) briefly describe the arrangements that result in breakpoints in, or elimination of, sales loads; (2) identify each class of individuals or transactions to which the arrangements apply; and (3) state each different breakpoint as a percentage of both the offering price and net amount invested. Therefore, the disclosure should specifically identify each intermediary whose investors receive a sales load variation. This information must be presented in a clear, concise, and understandable manner, and should include tables, schedules, and charts where doing so would facilitate understanding. In addition, the narrative explanation to the Fund fee table must alert investors to the existence of sales load discounts or waivers and provide a cross-reference to the section and page of the prospectus and SAI that describes these arrangements. Appendix Approach To address the expected resulting lengthy prospectus disclosure, IM will allow this disclosure to be presented in an appendix to the statutory prospectus. In adopting the “appendix approach” however, the following requirements must be met: The applicable section of the prospectus should include a prominent statement to the effect that different intermediaries may impose different sales loads and that these variations are described in an appendix to the prospectus (NOTE: The specific appendix should be named) The cross-reference in the narrative explanation to the fee table must cite to the appendix The appendix must specifically identify the name of the intermediary, and should include sufficient information to allow an investor that purchases Fund shares through a specific intermediary to determine which scheduled variation applies to its investment Further, the appendix may be created as a standalone document as long as the Fund provides for the following: Incorporates the appendix into the prospectus by reference and files the appendix with the prospectus Includes a legend on the front cover page of the appendix explaining that the information disclosed in the appendix is part of, and incorporated in, the prospectus Includes a statement on the outside back cover page of the prospectus that information about the different sales loads variations is provided in a separate document that is incorporated by reference into the prospectus Delivers the appendix with the prospectus Posts the appendix on the Fund website consistent with Rule 498(e) under the Securities Act, if the Fund uses a summary prospectus Rule 485(a) Filing If a Fund is adding prospectus disclosure about sales load variations, the Fund will need to file the amendment to its registration statement under Rule 485(a) under the Securities Act. If a Fund is considering new share classes that differ with respect to sales loads, transaction charges, and certain ongoing expenses, the addition of this new class of shares will require a filing under rule 485(a). With such a filing, the Staff will then focus on the disclosure of Fund fees, performance, and distribution arrangements. Administrative Procedures The Guidance provides additional insight into undertaking filings for staff review, encouraging Funds to consider seeking either (or both) of the following: Selective Review – Consider if only certain disclosures about the Fund are changing. Specifically, this option should be considered for a filing that contains disclosure that is not substantially different from the disclosure contained in one or more prior filings by the Fund or other Funds in the complex. Thus, the Guidance notes that a request for selective review may be appropriate for a Rule 485(a) filing of a Fund that first reflects a new share class or sales load variation that is expected to be introduced for other Funds in the complex. A request for selective review should be made in the cover letter accompanying the filing and should provide: A statement as to whether the disclosure in the filing has been reviewed by the staff in another context A statement identifying prior filings that the registrant considers similar to, or intends as precedent for, the current filing A summary of the material changes made in the current filing from the previous filings Any specific areas that the registrant believes warrant particular attention Template Filing Relief – Consider requesting relief under rule 485(b)(1)(vii) of the Securities Act if sales load variation disclosures will be substantially identical across multiple Funds within a fund complex. Thus, the Guidance notes that a Template Filing Relief request may be appropriate to avoid the need to file multiple rule 485(a) filings so that a registrant could file a single “Template filing” for staff review, together with a Template Filing Relief request for those other Funds with substantially identical disclosure. To request Template Filing Relief, the filing should be made in correspondence filed on the EDGAR system under the CIK of the Template filing, and the request should provide: The reason for making the post-effective amendment The identity of the Template filing The identity of the registration statements that intend to rely on the relief (“Replicate filings”) The Template Filing Relief request must include the following representations: The disclosure changes in the Template filing are substantially identical to disclosure changes that will be made in the Replicate filings The Replicate filings will incorporate changes made to the disclosure included in the Template filing to resolve any staff comments thereon The Replicate filings will not include any other changes that would otherwise render them ineligible for filing under rule 485(b) NOTE: Any rule 485(b) filing relying on Template Filing Relief should include a cover letter or an explanatory note in the filing explaining that it is relying on this relief. Click here to access the Guidance:
October 21, 2016
SEC Adopts Liquidity Risk Management Program Requirements
The Securities and Exchange Commission (the "SEC") voted recently to adopt new Rule 22e-4 under the Investment Company Act of 1940, as amended (the "1940 Act"), (the "Rule")1 that will require registered open-end management investment companies, including mutual funds and exchange-traded funds ("ETFs")2 (each a "fund") (but excluding money market funds), to adopt and implement written liquidity risk management programs designed to assess and manage liquidity risk.3
October 13, 2016
SEC Proposes Rule Amendment to Expedite Securities Transaction Settlement Process
The Securities and Exchange Commission (“SEC”) recently proposed an amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934 (“Exchange Act”) to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The proposed amendment would prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers’ acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than two business days after the trade date, unless otherwise expressly agreed to by the parties at the time of the transaction.
September 29, 2016
New IRS Regulations Would Require RIC Commodity Subsidiaries To Distribute Income
On September 27, the Internal Revenue Service (the "IRS") issued Proposed Regulations that would require "commodity subsidiaries" of regulated investment companies ("RICs") to currently distribute their income in order for such income to be treated as qualifying income for purposes of Subchapter M of the Internal Revenue Code.