The in-person meeting requirement is so archaic that it feels like it was adopted in 1940, although it was actually adopted in 1970. As a statutory requirement, the SEC cannot completely strike the in-person requirement without an act of Congress (which is not a bad idea). The SEC deserves some credit for adapting the rules to modern realities, and we would urge them to further liberalize the rules to the extent legally permissible.
OUR TAKE: The no-action position reflects the reality of how most funds operate. The Board has very little ability to perform due diligence independent of the work performed by the Chief Compliance Officer, so it makes sense to rely on the representations. The big open question is whether this position increases CCO liability, thereby creating additional due diligence requirements.
OUR TAKE: This case reads like a cautionary tale for large firms trying to quickly roll out a product. It appears that the portfolio management, marketing, legal, operations, and legal functions worked in silos, and, as a result, failed to properly vet or describe the products. We recommend that firms create a cross-functional product assessment team that can ask the hard questions before launching a product.
The SEC fined and barred the portfolio manager of a registered mutual fund for failing to disclose to the Board and shareholders significant changes in investment strategy. The fund operated as part of a platform series trust sponsored by a third party fund administrator that was responsible, along with the Board, for compliance oversight, although each adviser was responsible its own tailored compliance program. As the SEC alleged, the PM altered the fund’s strategy and began investing the vast majority of assets in derivatives, which ultimately led to the fund’s demise. Although the PM did ask for permission to invest in derivatives, he did not disclose that engaging in derivatives and short selling would become the principal investment strategy. The SEC also accuses the respondent with failing to properly disclose the changes in investment strategy in the prospectus and shareholder reports and for causing the series trust’s Investment Company Act violations.