40 Act Blog

Seward & Kissel participates in Washington, DC Compliance Roundtable

Click here for notes from June 15, 2017 members meeting with Mark J. Dowdell, Assistant Regional Director of Securities and Exchange Commission (Philadelphia Regional Office).

New Rules to Modernize Reporting Obligations of Registered Investment Companies

In October 2016, the Securities and Exchange Commission ("SEC") adopted new rules and forms, as well as amendments to existing rules and forms, to enhance transparency and modernize reporting requirements for registered investment companies.  The SEC adopted new Form N-PORT (and rescinded Form N-Q), which requires registered investment companies and exchange-traded funds organized as unit investment trusts, but not money market funds and small business investment companies, to report information about their monthly portfolio holdings to the SEC in a structured data format. The SEC also adopted new Form N-CEN (and rescinded Form N-SAR), which requires registered investment companies, other than face-amount certificate companies, to annually report certain census-type information to the SEC in a structured data format.  In addition, the SEC adopted amendments to Regulation S-X, which require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments.

The DOL Fiduciary Rule - Action Steps for Investment Managers

The new Department of Labor fiduciary rule (the "Fiduciary Rule") will be applicable on June 9, 2017. If you have not already done so, you need to address these rule changes as they relate to ERISA plans and individual retirement accounts (IRAs) regarding:

• Post June 9th subscriptions for private fund investments;
• Separately Managed Accounts that use brokers/dealers affiliated with the investment manager, or invest in mutual funds affiliated with the investment manager; and
• Holistic advice that advises on ERISA plan rollovers to an IRA.

The Department of Labor Delays the New Fiduciary Rule

On Friday April 7th, the Department of Labor published in the Federal Register amendments to its fiduciary regulation (the "New Fiduciary Rule") and related prohibited transaction exemptions (the "Exemptions"). The amendments delay until June 9, 2017 the "Applicability Date" of the New Fiduciary Rule and the Exemptions.

SEC Issues Guidance Update on Robo-Advisers

The staff (the "Staff") of the SEC's Division of Investment Management recently issued a Guidance Update regarding automated advisers, which are often colloquially referred to as "robo-advisers."1 Robo-advisers typically are registered investment advisers that use innovative technologies to provide discretionary asset management services to their clients through online algorithmic-based programs. The Staff has been monitoring and engaging with robo-advisers in order to determine how robo-advisers meet their obligations under the Investment Advisers Act of 1940 (the "Advisers Act").

Investment Adviser Sanctioned for Failure to Disclose Conflicted Revenue Arrangements

The SEC recently settled charges against an investment adviser (the "Adviser") for failing to disclose to its clients compensation it received through arrangements with a third-party broker-dealer (the "Broker") and the resulting conflicts of interest.

According to the SEC's order, the Adviser retained the Broker to provide clearing and custody services for most of the Adviser's advisory clients. The Adviser subsequently entered into an arrangement with the Broker to share with the Adviser revenues that the Broker received from its no-transaction-fee mutual funds ("NTF Funds") program. Separately, the Adviser entered into an agreement to provide certain administrative services to the Broker in exchange for a percentage of service fees received by the Broker from certain NTF Funds. The SEC concluded that these payments created a conflict of interest in that they provided a financial incentive for the Adviser to favor NTF Funds over other investments when advising its advisory clients.

Client Alert: SEC Adopts T+2 Settlement Cycle for Securities Transactions

On March 22, 2017, the Securities and Exchange Commission (“SEC”) adopted an amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934 (“Exchange Act”), shortening the standard settlement cycle (i.e., the length of time between trade execution and delivery of cash and securities to the seller and buyer) for most securities transactions effected through broker-dealers from three business days (“T+3”) to two business days (“T+2”). 

 

The change means that when an investor buys a security, the brokerage firm must receive payment from the investor no later than two business days after the trade is executed; and, when an investor sells a security, the investor must deliver the security no later than two business days after the sale.

SEC Clarifies Application of the Custody Rule

Recently, the staff (the "Staff") of the SEC's Division of Investment Management issued guidance on three scenarios in which a registered investment adviser is deemed to have custody of clients assets under Rule 206(4)2 (the "Custody Rule") of the Investment Advisers Act of 1940 (the "Advisers Act") and therefore is required to comply with the provisions of the Custody Rule, including the requirement to undergo an annual surprise examination by an independent public accountant to verify client assets.  Specifically, the Staff clarified that an investment adviser is deemed to have custody of client assets by virtue of:

1. Standing letters of instruction established by a client with a qualified custodian that grant the investment adviser the authority to disburse client assets to one or more third parties specifically designated by the client ("SLOAs");
2. Arrangements that grant the investment adviser the authority to transfer a client's assets between the client's accounts maintained at one or more qualified custodians (unless the client has authorized the investment adviser in writing to make such transfers and a copy of that authorization is provided to the qualified custodians, specifying the client accounts maintained with qualified custodians) ("First-Person Transfers"); or
3. Provisions in a custodial agreement between a client and a qualified custodian that grant the investment adviser access to client assets even though the investment adviser did not otherwise intend to have such access ("Inadvertent Custody").

Division of Investment Management Provides Information Update on Tax Claims in Foreign Jurisdictions

The Division of Investment Management (the "Division") recently issued an Information Update dated March 2017 (the "Update") to provide U.S.-registered funds with guidance for requesting assistance from the Division when seeking to obtain refunds of any foreign taxes that were inappropriately withheld. The Update relates to a 2014 determination by the Court of Justice of the European Union and certain European Union ("EU") member state courts that EU member states may not impose withholding taxes on certain foreign investors if substantially similar domestic investors were not subject to tax.

In the Update, the Division states that a fund seeking Division assistance with an outstanding tax claim should provide the Division with a draft letter to the relevant foreign jurisdiction that includes the following information:

* the name of the registrant and registration statement file numbers (and series number, if applicable);

* the first date of the fund's first fiscal year to which the claim relates;

* a statement that the fund is an open-end registered investment company; and

* the date and state of organization of the fund.
The Update also states that funds should provide the Division with documentation confirming this information.

DOL Issues Temporary Enforcement Policy on Fiduciary Rule

On March 10, 2017, the U.S. Department of Labor (DOL) issued a field assistance bulletin announcing a temporary enforcement policy for the new Fiduciary Rule and the related prohibited transaction exemptions (collectively PTEs), which were originally scheduled to take effect on April 10. The bulletin comes in the wake of a proposed rule to delay the effective date of the Fiduciary Rule and PTEs by 60 days, and aims to address investor confusion and marketplace disruptions relating to the possible delay.