Practices:
June – July Alerts on Regulatory Actions
Since our prior Funding Administration Replace, we’ve monitored plenty of important SEC actions affecting the mutual fund/funding administration trade, every of which we coated in a separate Alert. These Alerts are summarized beneath with a hyperlink to the total textual content of every Alert.
SEC Reverses Its 2020 Amendments to the Proxy Guidelines Governing Proxy Voting Recommendation; Rescinds Supplemental Steerage on the Proxy Voting Tasks of Advisers
July 26, 2022
On July 22, 2020, the SEC adopted amendments to its guidelines governing proxy solicitations and the submitting exemptions for proxy voting recommendation (the “2020 Amendments”). With Democratic Commissioner Lee dissenting, then Chairman Clayton and the 2 Republican commissioners closed the preliminary chapter in a greater than decade-long try and rein within the affect of “proxy voting recommendation companies.” The 2020 Amendments conditioned the exemptions for studies issued by Proxy Advisers from the submitting and data necessities of the federal proxy guidelines on compliance with disclosure and procedural necessities. As well as, the 2020 Amendments codified in Rule 14a-1(l)’s definition of “solicitation” the SEC’s long-standing view that Proxy studies are solicitations topic to the anti-fraud provisions of the federal proxy guidelines.
On November 17, 2021, Chair Gensler, joined by the 2 Democratic SEC commissioners, voted to suggest modifications to the 2020 Amendments, and the SEC issued a launch containing rule amendments (the “2021 Proposals”) that, if adopted, would eradicate a number of the 2020 Amendments’ necessities, whereas leaving others unchanged. On July 13, 2022, Chair Gensler, joined by the Democratic SEC commissioners, voted to undertake the 2021 Proposals. The modifications are efficient September 19, 2022.
SEC Proposes to Amend Rule 14a-Eight Shareholder Proposal Provisions Relating to Substantial Implementation, Duplication and Resubmission
July 25, 2022
Rule 14a-Eight below the Alternate Act requires issuers which are topic to the federal proxy guidelines to incorporate shareholder proposals of their proxy statements to shareholders, topic to sure procedural and substantive necessities. On July 13, 2022, the SEC issued a launch containing proposed amendments to, and looking for public touch upon, three of Rule 14a-8’s substantive bases for an issuer to exclude a shareholder proposal.
SEC Solicits Feedback on Whether or not Sure Service Suppliers Are Funding Advisers
June 28, 2022
On June 15, 2022, the SEC issued a launch (the “Launch”) centered on index suppliers, mannequin portfolio suppliers, and pricing providers (“Data Suppliers”) whose actions could trigger them to fulfill the definition of “funding adviser” below the Advisers Act.
The Launch states that Data Suppliers’ “operations additionally increase potential issues about investor safety and market threat, together with, for instance, the potential for front-running of trades the place the suppliers and their personnel have advance data of modifications to the knowledge they generate and potential conflicts of curiosity the place the suppliers or their personnel maintain investments they worth or which are constituents of their indexes or fashions.” The Launch goes on to debate different authorized issues which may be raised by every kind of Data Supplier’s actions as they relate to funding adviser standing points.
This Alert summarizes the Launch’s contents with respect to the three sorts of Data Suppliers.
The next summarizes different current authorized developments of notice affecting the mutual fund/funding administration trade.
William Birdthistle Addresses PLI Convention
On July 26, 2022, William Birdthistle, Director of the SEC Division of Funding Administration (the “Division”), delivered an deal with to attendees of the Practising Regulation Institute’s convention, Funding Administration 2022: Present Points & Tendencies, held in New York Metropolis.
Advanced Payment Buildings. Director Birdthistle said that investor safety issues require the Division to “take into account how we may also help traders higher perceive charges, which immediately scale back the life financial savings entrusted to funds.” Particularly, he mentioned, the “expectation that traders should intently monitor (and independently perceive) advanced payment preparations and prices which will embrace something from income sharing to smooth {dollars}, is probably lower than real looking.” Due to this fact, the Division’s concentrate on charges will embrace not “merely the shape and content material of disclosure” however, as well as, “serving to to make sure that advisers adjust to their fiduciary obligations.”
SEC’s Proposed Non-public Fund Reforms. Director Birdthistle famous that the SEC has “made nice progress not too long ago within the space of capital formation by means of its proposed guidelines regarding non-public fund advisers.”1 He said that, if adopted, these guidelines “would shine a number of wholesome gentle upon a darkened nook of our markets, which not directly manages the cash of many atypical pensionholders.” Director Birdthistle mentioned that the proposed guidelines “would prohibit non-public fund advisers from partaking in sure practices which are opposite to the general public curiosity and safety of traders.” Particularly, he famous, the proposed guidelines would (i) require non-public fund advisers to supply traders with quarterly statements, (ii) require non-public fund advisers to acquire annual audits, (iii) deal with the chance for conflicts ensuing from adviser-led secondary transactions with out, amongst different issues, acquiring a equity opinion from an unbiased opinion supplier, and (iv) prohibit an funding adviser to a personal fund from partaking in sure enumerated practices listed in proposed Rule 211(h)(2)-1 below the Advisers Act.
Proxy Voting. Director Birdthistle said that fund shareholders “will not be all the time conscious how portfolio shares are voted by the funds during which they’re invested.” He said {that a} state of affairs due to this fact outcomes during which “traders’ voices are being completely delegated and used not directly to affect portfolio firms’ habits with out traders’ consciousness, consideration, or, even perhaps curiosity.” He deemed this a “noteworthy phenomenon” in gentle of the scale of the “$30-trillion fund trade.”
Director Birdthistle mentioned that he sees “proxy voting as one of many principal areas the place markets may goal for elevated democratization, which might, in flip, promote markets that extra pretty mirror the views and priorities of American traders, not simply massive asset managers.” He didn’t specify any explicit regulatory treatment.
LIBOR Cessation. The administrator of LIBOR ceased publication of most LIBOR settings on a consultant foundation on the finish of 2021 and is anticipated to stop publication of a majority of U.S. greenback LIBOR settings on a consultant foundation after June 30, 2023. Director Birdthistle famous that “[m]any advisers and funds have made substantial progress in making ready for the transition, however for others, extra work is required.” He mentioned {that a} remaining concern, “even among the many well-prepared, is operational readiness,” and that operational readiness is the main focus of the Various Reference Fee Committee’s Operations and Infrastructure Working Group. He added that “[a]sset managers – and their legal professionals – must be conscious of their disclosure obligations with respect to LIBOR in addition to any valuation dangers arising from the transition.”
MiFID II No-Motion Letter. Director Birdthistle famous that, with MiFID II’s creation in January 2018, the Division workers supplied three no-action letters (described on this Ropes & Grey November 2017 Alert), together with a short lived no-action letter stating that the SEC workers wouldn’t advocate enforcement motion if a broker-dealer supplies analysis providers that represent funding recommendation below Part 202(a)(11) of the Advisers Act to an funding adviser topic to EU MiFID II regulation (immediately or by contract) (every, a “MiFID II Adviser”). This no-action letter (the “SIFMA Letter”) permits a broker-dealer to be compensated for offering analysis to a MiFID II Adviser with out the funds being deemed to be “particular compensation” below Part 202(a)(11) merely as a result of the funds are made in a fashion required by MiFID II. The assurances within the SIFMA Letter had been set to run out in July 2020, however had been prolonged to July 3, 2023 in a 2019 no-action letter.
Director Birdthistle introduced that the Division doesn’t intend to increase the short-term place within the SIFMA Letter past its present expiration date on July 3, 2023. He famous that, to the extent that the three no-action letters embrace statements or positions which are “unbiased of the short-term adviser standing place, resembling these concerning consumer fee preparations, they aren’t being rescinded.”
Cash Market Funds. Director Birdthistle mentioned the market stress of March 2020 as traders, “significantly institutional traders,” sought liquidity and security. He famous that authorities cash market funds loved report inflows of $838 billion in March 2020 and an extra $347 billion in April 2020. In distinction, through the “fortnight of March 11 to 24, publicly provided institutional prime funds skilled a 30% redemption charge (representing about $100 billion), which included outflows of roughly 20% of belongings through the week of March 20 alone.” He acknowledged that redemption charges and gates didn’t cease cash market fund redemptions however, he maintained, institutional cash is “unlikely to return to financial institution accounts and extra prone to discover its option to ultrashort bond funds.” Funds, he said, now play a job within the markets that “financial institution accounts would have a tough time changing” as a result of banks don’t supply “diversified publicity or a market charge in non-zero charge environments.”
As a possible answer, Director Birdthistle highlighted using swing pricing by European funds, noting that swing pricing “permits traders in a fund to go away at any time when they need however, in moments of tight liquidity, the departing shareholders should bear the upper prices of their exit.”2 He famous that the Division seems to be ahead to reviewing feedback on this side of the January 2022 cash market fund proposal, which incorporates swing pricing (described on this January 2022 Alert).
Director Birdthistle famous that swing pricing might not be sensible in the US as a result of the “monetary plumbing system” could not readily allow swing pricing. In distinction, “Europe has the advantage of comparatively youthful monetary infrastructure.” In his closing statements concerning cash market funds, Director Birdthistle mentioned:
I don’t suppose every thing must be a financial institution, nor am I sanguine about issues with cash market funds and different devices susceptible to liquidity mismatches. Quite the opposite, I share Chair Gensler’s place that the Securities and Alternate Fee has a accountability to guard for monetary stability and to extend the resilience of our monetary system. I’ve seen what occurs when companies disregard regulation in an unchecked pursuit of “innovation.” When some insist on transferring quick and breaking issues, generally that simply leaves issues damaged.
Delaware Enacts a Management Share Statute Tailor-made to Listed Closed-Finish Funds and Enterprise Growth Corporations
On July 27, 2022, with an efficient date of August 1, 2022, the State of Delaware amended the Delaware Statutory Belief Act3 so as to add a management share acquisition statute (the “Delaware Statute”).4 The Delaware Statute applies mechanically to any closed-end fund or enterprise improvement firm that’s organized as a Delaware statutory belief and that has a category of fairness securities listed on an alternate (every a “Fund”), and doesn’t apply to some other Delaware statutory belief. Thus, there isn’t a requirement for a Fund to decide in to the Delaware Statute.
Basically, management share statutes function a company protection towards self-interested conduct by concentrated minority shareholders, by imposing further necessities on any one who, immediately or not directly, acquires possession of, or the ability to direct the vote of, “management shares” of the corporate. The Delaware Statute units forth a collection of voting energy “thresholds” above which an buying individual’s shares are thought-about management share acquisitions:5
10% or extra, however lower than 15% of all voting energy;
15% or extra, however lower than 20% of all voting energy;
20% or extra, however lower than 25% of all voting energy;
25% or extra, however lower than 30% all voting energy;
30% or extra, however lower than a majority of all voting energy; or
a majority or extra of all voting energy.
The Delaware Statute’s voting restrictions are triggered at every of the voting energy thresholds above. As soon as a threshold is triggered, the buying individual’s capacity to vote its shares which are in extra of that threshold is conditioned upon receiving both the approval of two-thirds of all of the votes forged by the opposite useful homeowners or an exemption from this requirement by the board of trustees.
The Delaware Statute supplies {that a} Fund’s board of trustees, both by means of a provision within the Fund’s governing instrument or by motion of the board, could exempt software of the Delaware Statute to a management share acquisition “particularly, typically, or typically by sorts, as to particularly recognized or unidentified current or future useful homeowners or their associates or associates, or as to any collection or courses of useful pursuits.”6 Nevertheless, there isn’t a basic “decide out” provision within the Delaware Statute.
- As described on this June 2020 Ropes & Grey Alert, in Might 2020, the SEC’s Division of Funding Administration printed a press release that withdrew the 2010 Boulder Whole Return Fund no-action letter (the “Boulder Letter”), which involved the interplay between Part 18(i) of the 1940 Act and a state management share acquisition statute, and changed the Boulder Letter with a brand new no-action place. Part 18(i) requires that, “[e]xcept . . . as in any other case required by legislation, each share of inventory hereafter issued by a [Fund] . . . shall be a voting inventory and have equal voting rights with each different excellent voting inventory”
- Beneath the brand new no-action place, the SEC workers wouldn’t advocate enforcement motion to the SEC towards a closed-end fund below Part 18(i) for opting into and triggering a management share acquisition statute, supplied the fund’s board resolution to decide in was “taken with affordable care on a foundation per different relevant duties and legal guidelines and the responsibility to the fund and its shareholders typically.”
- In February 2022, in a lawsuit introduced by a closed-end fund activist investor, the U.S. District Court docket for the Southern District of New York issued an opinion granting the investor’s movement to rescind management share acquisition bylaw amendments by a gaggle of closed-end funds organized as Massachusetts enterprise trusts. The court docket held that the bylaw amendments violated Part 18(i) of the 1940 Act. The court docket’s resolution has been appealed to the U.S. Court docket of Appeals for the Second Circuit.
REGULATORY PRIORITIES CORNER
The next transient replace exemplifies sure developments and areas of present focus of related regulatory authorities.
Odd-Tons and Sub-Adviser’s Pricing at Middle of SEC Settlement
On June 3, 2022, the SEC issued an order settling an administrative continuing arising from the alleged failures of AlphaCentric Advisors LLC (“AlphaCentric”), the funding adviser to a registered fund (i) to implement its insurance policies and procedures regarding the valuation of securities held by the fund and (ii) to undertake and implement insurance policies and procedures moderately designed to supervise the position of the sub-adviser to the fund in valuing the fund’s securities. Always, the fund’s investments centered totally on sub-prime non-agency residential mortgage-backed bonds (“RMBS”).
Odd-Lot Pricing Issues. The SEC alleged that, in accordance with the fund valuation procedures, the fund administrator obtained pricing vendor evaluated costs to worth the fund’s RMBS portfolio holdings previous to calculating and publishing the day by day NAV. The pricing vendor disclosed to the fund, and the fund disclosed to its shareholders, that its marks had been reference costs primarily based on costs for institutional spherical tons, which the pricing vendor typically outlined as these bonds with not less than $1 million present face worth. Because the sub-adviser bought odd-lot bonds for the fund, the fund routinely valued these securities on the increased marks supplied by the pricing vendor.
Sub-Adviser Video games the Pricing Vendor. The SEC additional alleged that:
- From the inception of the fund in 2015 by means of January 2017, when the sub-adviser believed that the pricing vendor evaluated worth on bonds held by the fund had been too low, it supplied the pricing vendor with its evaluation of the bond’s elementary traits and sought an upward worth adjustment primarily based on this “market shade.” The pricing vendor typically didn’t modify its marks upward in response to those submissions, which carried much less weight with the pricing vendor than submissions supported by new market info, resembling bids and trades.
- From January 2017 into February 2019, the sub-adviser submitted bids to broker-dealers, providing to buy sure RMBS held by the fund at costs increased than the pricing vendor evaluated costs when it believed the pricing vendor evaluated costs undervalued these bonds. The sub-adviser then submitted these bids to the pricing vendor, noting that it was submitting bids on RMBS it owned, in help of upper costs for these RMBS. In response, the pricing vendor persistently raised its marks to the degrees mirrored within the sub-adviser’s bids.
- Between January 2017 and February 2019, in a number of situations, the sub-adviser submitted bids on RMBS for which the fund already owned your complete tranche and thus couldn’t buy further bonds out there. In these conditions, the sub-adviser famous in its bids that it owned the entire tranche however can be fascinated about different bonds with comparable profiles. From not less than February 2018, the sub-adviser forwarded its bid submissions to AlphaCentric along with the fund administrator.
- AlphaCentric typically didn’t reply to or analyze these submissions.
SEC Assertions. The SEC asserted that:
- AlphaCentric was chargeable for reviewing day by day the pricing of the fund’s holdings for reasonableness. AlphaCentric didn’t moderately implement these procedures to find out whether or not the pricing vendor evaluated costs represented the truthful worth or “exit worth” for odd-lot securities that traded at a reduction to institutional round-lot securities when the pricing vendor evaluated costs had been primarily based upon the costs for institutional round-lots of comparable bonds.
- Beneath its compliance insurance policies and procedures, AlphaCentric was chargeable for monitoring the sub-adviser’s compliance with the fund’s funding tips and figuring out that the sub-adviser maintained ample controls in gentle of the fund’s funding actions. AlphaCentric didn’t undertake and implement insurance policies and procedures moderately designed to supervise the sub-adviser’s position in valuing securities held by the fund and didn’t implement its insurance policies and procedures regarding the valuation of securities held by the fund.
The SEC concluded that AlphaCentric willfully violated provisions of the Advisers Act and guidelines thereunder that require registered funding advisers to undertake and implement written insurance policies and procedures moderately designed to forestall violations of the Advisers Act and guidelines thereunder. With out admitting or denying the SEC’s findings and allegations AlphaCentric agreed to be censured and to pay a civil cash penalty of $300,000.
Upcoming Compliance Dates
The next is a reminder of the upcoming compliance dates of great SEC rulemakings.
August 19, 2022 – Funds’ Use of Derivatives. Rule 18f-4’s efficient date was February 19, 2021. The adopting launch supplies for an 18-month transition interval following the rule’s efficient date (i.e., till August 19, 2022) for funds to organize to come back into compliance with Rule 18f-4. As well as, on that date, Launch 10666 will likely be rescinded, and associated no-action letters and different workers steering (or parts thereof) will likely be withdrawn. On August 19, 2022, the SEC additionally will rescind the exemptive orders supplied to leveraged/inverse ETFs, which will likely be permitted to depend on Rule 6c-11, as amended by the Rule 18f-Four adopting launch. See Ropes & Grey’s November 2020 Alert.
September 8, 2022 – Good Religion Determinations of Honest Worth. The efficient date for Guidelines 2a-5 and 31a-Four was March 8, 2021. The compliance date is September 8, 2022. Funds have the choice of complying with the Guidelines earlier than the compliance date and after March 8, 2021. Nevertheless, the adopting launch states that any fund that elects to depend on Guidelines 2a-5 and 31a-Four earlier than the compliance date could rely solely on these guidelines, and will not additionally depend on different SEC steering and workers letters and different steering that will likely be withdrawn or rescinded on the compliance date. See Ropes & Grey’s December 2020 Alert.
ADDITIONAL ROPES & GRAY ALERTS AND PODCASTS SINCE OUR APRIL – MAY UPDATE
These Alerts and podcasts are along with the Alerts listed at the start of this Replace.
Absolutely Invested: Non-public Credit score Funds
August 9, 2022
On this episode of Absolutely Invested, Ropes & Grey asset administration attorneys Laurel FitzPatrick and Jessica Marlin launched listeners to non-public credit score funds and the several types of debt during which such funds make investments. They additional mentioned how a credit score fund’s underlying belongings have an effect on fund phrases and construction.
State Regulation of ESG Funding Choice-making by Public Retirement Plans: An Up to date Survey
August 9, 2022
Final 12 months, Ropes & Grey printed an Alert that described the totally different approaches states had been contemplating (or had applied in a number of instances) concerning the regulation of ESG investments by state retirement techniques. The rising divide within the ESG regulatory panorama in several states turned clear with the passage of laws in Maine and Texas in 2021, which adopted contradictory ESG insurance policies for state pension fund investments. This converse method deepened over the previous 12 months, as greater than a dozen states launched new initiatives both to divest state pension funds from gun and ammunition firms or oil and fuel firms and coal firms or, conversely, to require state pension fund divestment from firms that boycott fossil gasoline firms. Whereas many state pension divestment payments expressly exclude managed funding funds and personal fairness funds, some don’t. Some initiatives additional require that the pension fund board request that funding fund managers create comparable funds with out the focused holdings. Past laws on divestment and state contracts, states are deploying process forces, investigations and report committees to encourage or discourage ESG investing, whereas some pension funds are adopting their very own funding and proxy voting insurance policies that incorporate ESG.
On this Alert, we described the state initiatives adopted thus far in addition to different initiatives, together with the American Legislative Alternate Council Mannequin Insurance policies, State Monetary Officers Basis and the U.S. Division of Labor.
DOL Proposes Stricter Necessities for All Managers Counting on the Certified Skilled Asset Supervisor (QPAM) Exemption
August 1, 2022
On July 27, 2022, the U.S. Division of Labor (the “DOL”) printed within the Federal Register a proposed modification to the certified skilled asset supervisor (“QPAM”) class prohibited transaction exemption 84-14 (the “QPAM Exemption”), which might make it harder to depend on the exemption in sure circumstances, together with when the QPAM, its associates or any 5% or extra homeowners have been convicted of sure crimes. The proposed modification has been launched towards the backdrop of quite a few world monetary establishments having sought particular person exemptive reduction from the DOL over the previous decade because of prison convictions stemming from the actions of their overseas associates. Past this anticipated concentrate on crimes, the proposed modification consists of a number of modifications to the QPAM exemption necessities that, if finalized, would affect any entity looking for to make the most of the exemption, together with a brand new requirement to register with the DOL. This Alert supplies a high-level abstract of those non-crime associated provisions, which we anticipate to have widespread implications for many asset managers. These modifications would impose new compliance duties on managers and will trigger higher use of different obtainable prohibited transaction exemptions, such because the 2006 service supplier exemption below Part 408(b)(17) of ERISA, as applicable.
Absolutely Invested: Fund of Funds
July 26, 2022
On this episode of Absolutely Invested, Ropes & Grey asset administration companions Marc Biamonte and Lindsey Goldstein launched listeners to the “fund of funds” product, an alternate funding fund designed to put money into different privately provided different funding automobiles. They supplied an summary of the several types of investments usually made by a fund of funds (main, secondary and co-investment), the evolution of the fund of funds construction, and what each sponsors and traders ought to consider when contemplating offering or investing in a fund of funds product.
Ropes & Grey Crypto Quarterly: Digital Property, Blockchain and Associated Applied sciences Replace
July 21, 2022
The panorama of presidency enforcement, non-public litigation, and federal and state regulation of digital belongings, blockchain and associated applied sciences is consistently altering. Every quarter, Ropes & Grey attorneys analyze authorities enforcement and personal litigation actions, rulings, settlements, and different key developments on this area. We distill the flood of trade headlines with the intention to determine and handle threat extra successfully. This article consists of takeaways from this quarter’s overview.
Absolutely Invested: Derivatives Buying and selling Agreements
July 12, 2022
On this episode of Absolutely Invested, Ropes & Grey asset administration attorneys Molly Moore, Egan Cammack and Lindsey Jones supplied an summary of key areas of focus for GCs and asset managers when negotiating and getting into into derivatives transactions, together with credit score and counterparty threat, documentation, potential CFTC registration, and different regulatory issues.
Digital Property Dialogue: Crypto Particular Conditions and Dislocation Funds
July 8, 2022
In a follow-up to our current podcast concerning stablecoins, on this Ropes & Grey podcast, asset administration attorneys Melissa Bender, Glen Chen and Charlie Humphreville mentioned what is going on extra broadly within the crypto markets, together with the decline within the worth of bitcoin and different tokens, and the results of those developments on fundraising for crypto funds.
Current ETF Developments: Cryptocurrency ETFs and ETPs
July 7, 2022
On this installment of Ropes & Grey’s ETF podcast collection, asset administration companion Paulita Pike and counsel Ed Baer mentioned a number of the current developments regarding cryptocurrency ETFs and ETPs.
Absolutely Invested: Type ADV
June 28, 2022
On this episode of Absolutely Invested, Ropes & Grey asset administration attorneys Jason Brown, Bryan Hunkele, Joel Wattenbarger and Alyssa Horton supplied a quick introduction to Type ADV, together with the necessities for submitting, timing issues and the assorted elements of the doc. Additionally they mentioned regulatory and coverage necessities of Type ADV, in addition to some widespread misconceptions for first-time filers.
SEC Recordsdata First Enforcement Motion Alleging Violations of Greatest Curiosity Rule’s Care and Compliance Requirements
June 24, 2022
Within the first motion of its form, the SEC not too long ago charged registered broker-dealer Western Worldwide Securities, Inc. and 5 of its related individuals with violations of Regulation Greatest Curiosity, Rule 15l-1(a) below the Securities Alternate Act of 1934.
Digital Property Dialogue: Stablecoins
June 22, 2022
Within the shadow of TERRA/LUNA’s current collapse, this Ropes & Grey podcast, hosted by asset administration attorneys Melissa Bender and Charlie Humphreville, mentioned stablecoins, how they’re supposed to function and their significance to the general digital belongings markets. The podcast additionally coated potential regulatory developments which will affect stablecoins.
Current ETF Developments: Wrappers, Conversions and Exams
June 16, 2022
On this installment of Ropes & Grey’s ETF podcast collection, asset administration companion Jeremy Smith, counsel Ed Baer and litigation & enforcement companion Dan O’Connor mentioned a number of the current developments particular to the ETF wrapper itself, a possible twist on mutual fund to ETF conversions, and the current ETF income sharing sweep.
