Three CCS professionals – Jocelyn Dalkin, Jason Ewasko and Bridget Garcia – recently attended the IA Watch’s 21st Annual IA Compliance: The Full 360° View East conference in Washington. If you were unable to attend, you should review their summary of the most significant sessions including Dan Kahl’s summary of Enforcement Priorities, a top panel’s views on SEC rulemaking, and more specialized sessions on cybersecurity and custody. If you want more information, feel free to contact Jo, Jason or Bridget
SEC has proposed an overhaul of the registration and offering rules for business
development companies and closed-end funds. The proposal provides for a shelf registration
for funds with a public float of at least $75 Million and a more flexible
offering and communications scheme for Well-Known Seasoned Issuers with a
public float over $700 Million. The proposal
would allow interval funds to pay registration fees based on the issuance of
shares rather than paying an estimate at registration. The proposed new rules would change
disclosure rules to follow operating companies, utilizing Form 8-K for significant
events and management discussion of fund performance in annual reports. A 60-day comment period will begin upon
These changes are long overdue. The current rules shoehorn BDC and closed-end funds into the mutual fund regulatory regime, resulting in some unintended regulatory consequences. While we’re sure that industry pros will debate the specifics of the proposal, it’s hard to argue that the SEC shouldn’t revamp the rules.
SEC’s Investment Management Division Director, Dalia Blass, anticipates that
the Division will soon recommend changes to the adviser marketing and solicitation
rules. In her annual speech to the Investment
Company Institute membership, Ms. Blass also announced initiatives for a
summary shareholder report, updates to the valuation guidance, modernization of
the offering rules for business development companies and closed-end funds, and
changes to the rules for funds’ use of derivatives. Additionally, Ms. Blass wants the Division to
finalize the proposed ETF and fund-of-funds rules. She has also asked the staff to begin an
outreach to small and mid-sized fund sponsors about regulatory barriers. She announced that the Division is
considering the formation of an asset management advisory committee to solicit diverse
viewpoints on critical issues.
We applaud the reinvigorated Investment Management Division for tackling some of the thornier problems that have faced the industry for many years. For instance, the marketing rules haven’t changed for decades despite revolutionary change in the financial services industry.
Today, we offer our “Friday List,” an occasional feature
summarizing a topic significant to investment management professionals
interested in regulatory issues. Our
Friday Lists are an expanded “Our Take” on a particular subject, offering our
unique (and sometimes controversial) perspective on an industry topic.
As the partial federal government shutdown continues, the
investment management industry is beginning to feel the effects of reduced SEC
operations. The people most affected are those furloughed
SEC employees who lose compensation every day the shutdown continues. However, the entire industry has been affected. Below is our list of the top 10 effects of
the partial federal government shutdown.
Effects of the Government Shutdown
New product approvals. New products including registration statements must await approval until the furloughed workers return.
Exams. The OCIE staff has delayed ongoing exams until the shutdown ends. It is unclear whether the shutdown will reduce the total number of exams.
Enforcement litigation. While the SEC continues to conduct market surveillance, ongoing litigation that is not time-sensitive will be delayed.
Regulatory information. The SEC is not posting regulatory information or interpretations on its website during the shutdown
Exemptive applications/No Action Letters. Requested exemptive applications and no-action letters seeking relief from the black letter rules cannot go forward without SEC staff.
New rules. The SEC is not reviewing potential new rule initiatives or comments to current proposals.
Travel. Many of our clients and colleagues have delayed travel to discuss new initiatives or to attend meetings.
Service providers. With asset managers unable to launch new products, service providers such as lawyers and fund administrators must wait for their clients to go forward.
Conferences. It is unclear whether SEC officials will attend this winter’s industry conferences where they traditionally provide some guidance. Even if they do attend, any guidance will necessarily depend on how long the shutdown continues.
Industry outreach. The SEC will likely delay industry outreach to management, compliance professionals and boards.
The SEC Enforcement Division filed 32% more standalone enforcement cases against investment advisers and investment companies in fiscal 2018 (through September 30), as compared to 2017. Cases against investment advisers and investment companies (the second largest category) and broker-dealers (fourth largest) represented 35% of all standalone actions filed. Overall, the SEC Enforcement Division brought 490 standalone cases in fiscal 2018, a 10% increase over 2017. Excluding the municipal disclosure initiative, the Enforcement Division filed more cases than it did in 2016 and 2015, the last two years under the prior administration. The Enforcement Division obtained $3.9 Billion in penalties and disgorgement, which is consistent with amounts obtained during the prior several years. The Enforcement Division outlined five core principles, including a focus on individual accountability because “holding culpable individuals responsible for wrongdoing is essential to achieving our goals of general and specific deterrence and protecting investors by removing bad actors from our markets.”
The Enforcement Division continues to pursue its active litigation agenda, especially against the investment industry. Apparently, the Jay Clayton SEC is not much different from the Mary Jo White SEC when it comes to enforcement cases against adviser, funds, and broker-dealers.
Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues. Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.
Last month, SEC Chairman Jay Clayton said that SEC no-action letters and other staff statements “are nonbinding and create no enforceable legal rights or obligations.” He instructed the SEC staffs to “review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.” More recently the Director of the Division of Investment Management, Dalia Blass, said that her division is reviewing and assessing prior staff statements. Both Mr. Clayton and Ms. Blass invited engagement and input from the public. With that invitation, we offer ten topics that the Division of Investment Management should reconsider as it assesses its staff positions:
10 Topics the Division of Investment Management Should Reconsider
Custody: The custody rule and the reams of staff FAQs have only confused the industry and ensured massive inadvertent noncompliance. If the staff only tackles one problem, this is it.
Valuation: Please offer clear guidance on the fair valuation of securities that are not publicly traded. The current regime is too subjective, relying on accounting interpretations and shifting market information.
Proxy Voting: Firms spend significant resources complying with the proxy voting recordkeeping and supervision requirements. Do these rules really protect clients and shareholders?
Private Funds: Restricting private funds to 100 holders or qualified purchasers is overly restrictive. The staff should also reconsider the definition of “accredited investor.”
Leverage: With the advent of derivatives and other forms of innovative investment products, the staff should modernize its positions on permitted leverage.
Advertising: The staff has not materially changed the adviser advertising rules in 30 years. The new media world requires some new rules.
Code of Ethics: A significant percentage of compliance time and resources is spent on personal securities transaction compliance. The staff should consider other less onerous schemes to prevent and punish unlawful personal trading.
Affiliate Transactions: Scholars have written entire treatises on the definition of “affiliate transaction” under the Investment Company Act. It may be the most confusing definition in the securities laws.
Disclosure: Few retail investors read prospectuses or Form ADV. One way to make clearer and more readable documents is too exempt issuers from securities law liability.
Wrap Programs: The SEC has brought dozens of actions against wrap programs. We would recommend that the staff adopt some definitive rules that the industry could follow.
OUR TAKE: Mr. Hinman offers practical guidance and some clarity on how to apply decades-old precedent to modern cryptocurrency networks and offerings. We expect more guidance in the coming months from the other SEC divisions.