40 Act Blog

SEC Staff Provides No-Action Relief to Mutual Funds and Transfer Agents That Temporarily Delay Disbursement of Redemption Proceeds Based on Reasonable Belief of Financial Exploitation of Seniors and Other Vulnerable Adults

On June 1, 2018, the SEC staff granted the ICI’s request for assurance that it would not recommend enforcement action under Section 22(e) of the Investment Company Act of 1940 against mutual funds or their SEC-registered transfer agents if they delay for more than seven days the disbursement of redemption proceeds under circumstances leading to the reasonable belief that financial exploitation of seniors and other vulnerable adults has occurred, is occurring, has been attempted, or will be attempted.

The grant of this relief allows funds and their transfer agents to protect seniors and other vulnerable adult investors in a manner consistent with that permitted for broker-dealers under recently adopted FINRA Rule 2165.

SEC Modernizes Delivery of Fund Reports and Seeks Public Comment on Improving Fund Disclosure

On June 4, 2018, the SEC adopted new rule 30e-3, which creates an optional “notice and access” method for delivering shareholder reports. Under the rule, a fund may deliver its shareholder reports by making them publicly accessible on a website, free of charge, and sending investors a paper notice of a report’s availability by mail. Investors who prefer to receive a full report in paper may choose that option at any time free of charge. Funds may rely on the new rule beginning on January 1, 2021.

The SEC is also seeking public comment on additional ways to modernize fund information. The input will help inform the SEC on how to modernize the design, delivery and content of fund information, including how to make better use of technology to provide more interactive and personalized disclosure.

Finally, the SEC is seeking comment on the framework for certain processing fees that broker-dealers and other intermediaries charge funds for delivering shareholder reports and other materials to investors.

SEC Division of Investment Management Director Makes Remarks at the PLI 2018 Investment Management Institute Program

Dalia Blass, the SEC’s Director of Division of Investment Management (“IM”), made remarks at the Practicing Law Institute’s 2018 Investment Management Institute program in New York on April 30, 2018. She discussed the recent SEC rule proposals on the standards of conduct for investment professionals, which she said seek to (1) provide clarity to retail investors about investment professionals, (2) enhance the standard of conduct for broker-dealers and (3) clarify the standards of conduct for investment advisers.

She also reported on recent actions taken by the SEC and the IM staff in connection with the liquidity risk management program rule adopted in 2016, including publication of frequently asked questions and responses by the IM staff, and release of the SEC’s proposal for targeted changes to the rule’s related public reporting requirement.

SEC Staff Updates FAQs on Upcoming Fund Reporting Changes to Address Form N-SAR Filing Obligations

The staff of the SEC Division of Investment Management (the "IM staff") recently updated its frequently asked questions and answers (“FAQs”) document related to the investment company reporting modernization reforms adopted in October 2016 and revised in December 2017.

Form N-SAR is scheduled to be rescinded on June 1, 2018. The updated FAQs document indicates that, if a fund’s fiscal year falls on October 31 or November 30 (and its mid-year falls on April 30 or May 31, 2018), the IM staff would not expect a fund to file a separate mid-year report on Form N-SAR for the mid-year period ending on April 30 or May 31, 2018 (which report would be due 60 days after the fund’s fiscal mid-year, after Form N-SAR is scheduled to be rescinded).

SEC Proposes Amendments to Auditor Independence Loan Rule

On May 2, 2018, the SEC proposed amendments to its rule regarding the analysis of auditor independence with respect to lending relationships between the auditor and certain shareholders of an audit client. The proposed amendments would (1) focus the analysis regarding auditor independence solely on beneficial ownership rather than on both record and beneficial ownership; (2) replace the current 10 percent bright-line shareholder ownership test with a “significant influence” test; (3) add a “known through reasonable inquiry” standard when identifying beneficial owners of the audit client’s equity securities; and (4) change the definition of “audit client” for a fund to exclude funds that otherwise would be considered affiliates of the audit client.

Standards of Conduct for Broker-Dealers and Investment Advisers

On April 18, 2018, the Securities and Exchange Commission (the “Commission”) voted to propose two rules and an interpretation relating to the standards of care for investment advice provided by broker-dealers and investment advisers. The proposals seek to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving retail customer access to transaction-based brokerage accounts and a broad range of investment products.

Reminder of Compliance Deadline for Financial Crimes Enforcement Network’s Customer Due Diligence Rule

As a reminder, May 11, 2018 is the deadline for compliance with the Financial Crimes Enforcement Network (FinCEN)’s customer due diligence rule (CDD Rule). The CDD Rule strengthens existing customer due diligence requirements and requires mutual funds as well as banks, brokers and other financial companies to identify and verify beneficial owners of legal entity customers.

OCIE Releases 2018 Examination Priorities

On February 7, 2018, the SEC's Office of Compliance Inspections and Examinations ("OCIE") released its 2018 National Exam Program Examination Priorities. The examination priorities are broken down into five categories:  (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB; (4) cybersecurity; and (5) anti-money laundering programs.

Reminder regarding Annual Amendment to Form ADV

As a reminder, an SEC-registered investment adviser (an "Adviser") with a December 31st fiscal year-end must submit an annual amendment to its Form ADV on or before March 31, 2018.  Since an Adviser will be required to complete the newly amended Form ADV, we recommend preparing the annual amendment as soon as possible. The following is a list of certain new items required by the amended Form ADV.

SEC sanctions Gemini Fund Services for inflated NAV

Last week, the SEC instituted cease-and-desist proceedings pursuant to Section 203(k) of the Investment Advisers Act against Gemini Fund Services for its calculation of an inflated NAV when it was aware of inconsistencies with the custodian bank’s records.