Since the last issue of our IM Update, we have also published the following separate Alerts of interest to the investment management industry:

SEC Seeks Comments on Changes to Rules Governing Mutual Fund Transfer Agents

February 2, 2016

On December 22, 2015, the SEC published an Advance Notice of Proposed Rulemaking, Concept Release, and Request for Comment on Transfer Agent Regulations (the “Release”) seeking public comment regarding the SEC’s transfer agent rules. The SEC notes that the “first transfer agent rules were adopted in 1977 and remain essentially unchanged [while] transfer agents now operate in a market structure that bears little resemblance to the structure in 1977.” 

Ropes & Gray Private Investment Fund Update: January 2016

January 14, 2016

This Update summarizes recent legal developments of note affecting the private investment fund industry, including the following topics:

  • SEC Lays Out Road Map for CCO Skill Set
  • SEC Keynote Address: “Five Years On: Regulation of Private Fund Advisers After Dodd-Frank”
  • OCIE Reports Observations from Outsourced COO Initiative
  • SEC Considering Mandatory Third-Party Compliance Reviews
  • Investment Adviser Sanctioned for Failing to Adopt Proper Cybersecurity Policies and Procedures.

SEC Publishes Guidance on Mutual Fund Distribution and Sub-Accounting Fees

January 13, 2016

On January 6, 2016, the SEC’s Division of Investment Management issued a Guidance Update titled, “Mutual Fund Distribution and Sub-Accounting Fees” (the “Guidance”). The Guidance arises from a multi-year SEC staff review of mutual fund payments for shareholder, sub-transfer agency and recordkeeping services paid to intermediaries that distribute fund shares (“sub-accounting fees”). The staff’s goal has been to determine whether a portion of sub-accounting fees were, in fact, “payments for distribution in guise” and, therefore, required to be paid pursuant to a Rule 12b-1 plan or by the adviser out of its “legitimate profits.”

SEC Proposes New Rule Concerning Registered Funds’ Use of Derivatives

January 7, 2016

On December 11, 2015, the SEC issued its long-anticipated release (the “Release”) proposing Rule 18f-4 (“the “Proposed Rule”) under the 1940 Act regarding the use of derivatives and certain related instruments by registered investment companies (collectively, “funds”). The stated objective of the Release is to “address the investor protection purposes and concerns underlying section 18 [of the 1940 Act] and to provide an updated and more comprehensive approach to the regulation of funds’ use of derivatives” in light of the increased participation by funds in today’s large and complex derivatives markets.

Proposed Rule 18f-4 would supplant a significant volume of SEC no-action and other guidance on derivatives use by funds, and would introduce a range of specific, technical restrictions, including:

  • The Proposed Rule defines and distinguishes between derivatives transactions and a newly defined category of “financial commitment transactions.”
  • Each fund that utilizes any derivatives transactions would have to comply with one of two alternative portfolio limitations.
  • Each fund would have to maintain a specified value of “qualifying coverage assets,” and qualifying coverage assets is defined more narrowly for derivatives transactions than for financial commitment transactions.
  • Depending on the extent and complexity of its derivatives usage, a fund may be required to adopt and implement a board-approved written derivatives risk management program.

CFTC Provides Relief from Certain Recordkeeping Requirements Applicable to CPOs and CTAs

January 5, 2016

Effective December 24, 2015, the CFTC revised its Rule 1.35(a) to provide relief from certain recordkeeping requirements for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”), whether registered with the CFTC or not, that are members of a designated contract market or have trading privileges on a swap execution facility. Under the revised Rule, CPOs and CTAs still are required to keep records of all transactions in commodity interests and related cash or forward transactions. However, CPOs and CTAs not registered with the CFTC need not keep transaction records that are in the form of text messages (defined as short message service (“SMS”) or multimedia messaging service (“MMS”) telephone transmissions). In addition, CPOs and CTAs not registered with the CFTC need not keep records of written pre-trade communications. Moreover, CPOs or CTAs, whether registered or not, are not required to keep records of oral communications. Finally, there is no prescribed form or manner in which the required records must be kept, and no prescribed methodology by which records must be searched or retrieved. Instead, CPOs and CTAs must keep records so as to permit prompt, accurate and reliable location, access and retrieval of any particular information and to allow for identification of a particular transaction.

Common Reporting Standards Come Into Effect for Many Offshore Funds on January 1, 2016

December 28, 2015

On January 1, 2016, the new standard for automatic exchange of information between tax authorities developed by the OECD (the “Common Reporting Standard”) becomes effective in the Cayman Islands, Bermuda, the British Virgin Islands, Guernsey, Jersey and a number of other jurisdictions that are part of the “Early Adopters Group.”

Starting on this date, all persons opening new accounts with financial institutions located in one of such jurisdictions are required to provide certain “self-certifications” that allow such financial institutions to perform due diligence and determine the investors’ tax residency. Due diligence procedures for identifying existing individual accounts with balances of at least $1 million will have to be completed by December 31, 2016, while due diligence with respect to all other investors must be completed by December 31, 2017. The first exchange of information with respect to certain accounts is expected to take place in 2017.

Omnibus Bill Includes Significant Changes to Tax Law Regarding FIRPTA, REITs, and RICs

December 24, 2015

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the “Act”). The Act includes significant changes to tax laws relevant to private equity, real estate, and mutual fund investors and managers, including important modifications to the Foreign Investment in Real Property Tax Act of 1980. In addition, the changes make permanent certain “extenders,” and thus provide valuable clarity in several important areas. Overall, the changes are taxpayer-friendly. In particular, they reduce impediments for non-U.S. investors investing in U.S. real estate.

Gramm-Leach-Bliley Act Amendment Eliminates Annual Privacy Notice Requirement for Many Advisers

December 14, 2015

On December 4, 2015, President Obama signed into law the nearly 500-page Fixing America’s Surface Transportation Act, which included an amendment of the consumer privacy provisions within the Gramm-Leach-Bliley Act (the “Amendment”). The Amendment, which went into effect immediately, significantly reduces the need for financial institutions to provide an annual privacy disclosure to consumers that describes the financial institution’s privacy policies and practices. If a financial institution satisfies certain conditions, it need not provide an annual privacy disclosure.