Since the last issue of our IM Update, we have also published the following separate Alerts of interest to the investment management industry:
On May 20, 2015, the SEC proposed new and amended rules and forms (the “Proposals”) that, if adopted, will significantly broaden the type and scope of information reported by registered investment companies. This alert summarizes the new disclosure forms and reporting requirements contained in the SEC’s proposed rulemaking, including the new Form N-PORT, which would require registered investment companies to report detailed information about their monthly portfolio holdings and risk metrics to the SEC using a prescribed XML data format.
In late May, the SEC proposed rules that would amend portions of Form ADV and rules promulgated under the Investment Adviser Act of 1940. The proposed amendments are intended to improve the quality of information that investors and the SEC receive, fill data gaps that the SEC has identified and facilitate the SEC’s risk monitoring initiatives. The proposed amendments relate to Part 1A of Form ADV and address: 1) additional reporting requirements with respect to Separately Managed Accounts; 2) additional disclosures about investment advisers and their businesses; 3) registration on a single Form ADV of multiple fund advisers operating as a single advisory business; and 4) certain clarifying and technical changes. The SEC has also proposed amendments to the Advisers Act Books and Records Rule (Rule 204-2) to require advisers to maintain additional written materials related to the calculation and distribution of performance information.
On May 12, 2015, the FINRA staff published an interpretive letter (the “Letter”) permitting FINRA members to include related performance information (e.g., of separately managed accounts and private funds) in mutual fund marketing materials directed at institutional investors. Previously, FINRA’s position was that, except in limited circumstances, related performance information in marketing materials would violate the content standards of FINRA Rule 2210(d). Therefore, the Letter is important because mutual fund marketers now may use related performance information when marketing mutual funds to institutional investors, including financial intermediaries, who may recommend these mutual funds to their customers. This is particularly important in cases where an investment adviser has been employing an investment strategy that will be used for a new mutual fund that lacks its own performance history.
As a follow-up to last year’s “Spreading Sunshine in Private Equity” speech, in which then-OCIE Director Andrew Bowden stated that the SEC had found that more than half of the funds examined by OCIE had allocated expenses and collected fees inappropriately and identified “lack of transparency” as a pervasive issue in the private equity industry, Marc Wyatt delivered a speech on May 13, 2015, reflecting on progress in the past year as well as identifying likely areas of scrutiny the private equity industry will face in the future.
On May 18, 2015, the Supreme Court confirmed the existence of an independent duty on the part of ERISA plan fiduciaries to continuously “monitor” retirement plan investments and remove those that are imprudent. In Tibble v. Edison International, the Court held that ERISA’s six-year statute of limitations for breaches of fiduciary duty does not extinguish claims alleging imprudent selection of investments if a continuing “duty to monitor” those investments is violated within the limitations period. The Court thus breathed life into stale claims about investment selection by recognizing a fiduciary’s continuing obligation to “monitor” investments and investment options. The opinion stopped short of defining the precise contours of the duty to monitor, leaving the development of the obligation to case-by-case evolution.
The SEC recently released additional guidance on the definition of “voting equity securities” as applied to the bad actor disqualification rules under Rule 506(d) of the Securities Act of 1933, as amended (the “Securities Act”). Private fund and hedge fund offerings to U.S. investors typically rely on Rule 506 under Regulation D as the basis for their exemption from registration under the Securities Act. Rule 506(d) disqualifies a securities offering from relying on a Rule 506 exemption if a covered person with respect to the issuer, which includes “any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities,” has had a “disqualifying event.” In the Rule 506(d) adopting release, the SEC defined the term “voting equity securities” as securities that confer to security holders the ability to “control or significantly influence the management and policies of the issuer through the exercise of a voting right.” In its new guidance, the SEC states that it has reconsidered its initial views on the definition of “voting equity securities,” and has now adopted a bright-line standard under which “voting equity securities” are defined as securities that, by their terms, provide the security holders with a presently exercisable right to vote for the election of directors.
The U.S. Department of Commerce, through the Bureau of Economic Analysis (the “BEA”), requires reporting on Form BE-10 (a “BE-10 Filing”) from any U.S. person (including entities or individuals) that had a “Foreign Affiliate” at any point during the U.S. person’s 2014 fiscal year. Form BE-10 is a five-year benchmark survey, with the prior survey conducted in 2009. At the time of the 2009 survey, a BE-10 Filing was required only from a U.S. person contacted by the BEA. In a rule published in the Federal Register on November 20, 2014, the BEA announced that any U.S. person that satisfies the applicable reporting threshold will be required to make a BE-10 Filing, regardless of whether the BEA has contacted such entity. A BE-10 Filing may be required as early as May 29, 2015. However, the BEA extended the submission deadline for first-time filers to June 30, 2015.
On April 28, 2015, the SEC’s Division of Investment Management released a Guidance Update titled Cybersecurity Guidance (the “Guidance”). The Guidance represents the latest evidence of the SEC’s continued focus on cybersecurity issues as they relate to financial services firms, particularly investment funds and advisers. Due to this heightened focus, it is becoming increasingly important for such firms to adopt more advanced and up-to-date cybersecurity protections. Funds and advisers would be well-advised to review their cybersecurity programs and to consider how they might implement some of the recommendations offered by the Guidance.
In June of last year, Paradigm Capital Management agreed to pay the SEC nearly $2 million to settle allegations that it violated the Dodd-Frank Act’s conflict-of-interest rules and unlawfully retaliated against the whistleblower that brought the conflict-of-interest issue to the SEC’s attention. On April 28, 2015, the SEC announced that the Paradigm Capital whistleblower would receive, on a percentage basis, the maximum allowable whistleblower reward – 30 percent of the amount that Paradigm Capital paid to the SEC to settle the allegations. In announcing the maximum reward, the SEC’s press release cited the fact that the whistleblower “suffered unique hardships, including retaliation, as a result of reporting [the conflict-of-interest issue] to the Commission.”
On April 22, 2015, the SEC staff released guidance, titled “2014 Money Market Fund Reform Frequently Asked Questions,” that discusses various interpretive issues arising from the SEC’s 2014 Money Market Fund Reform release (the “2014 Reform Release”). On April 23, 2015, the SEC staff released additional guidance, titled “Valuation Guidance Frequently Asked Questions,” that discusses the valuation guidance applicable to all mutual funds that was included within the 2014 Reform Release. Both the April 22 release and the April 23 release were in a question-and-answer format and represent the views of the SEC’s Division of Investment Management’s staff.
On April 22, 2015 the SEC announced that it had awarded approximately $1.5 million to a whistleblower who had served as a compliance officer of a company. According to the SEC’s press release, the whistleblower “had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors.” The SEC’s press release also stated that the whistleblower reported the company’s misconduct to the SEC only “after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.”
Ropes & Gray authored a memorandum summarizing the 2015 ICI Mutual Funds and Investment Management Conference held in March in Palm Desert, California.
On April 1, 2015, the SEC announced the resolution of its first enforcement action against a company for violations of the whistleblower protection provisions of the Dodd-Frank Act regulations. Under a “no admissions” resolution, KBR, Inc. agreed to pay a $130,000 penalty to resolve charges that the language it used in its confidentiality agreements during internal investigations violated SEC Rule 21F-17. As a voluntary “remedial action,” KBR also amended its internal investigation confidentiality agreements to state expressly that employees are not prohibited from reporting, without prior company consent, violations of federal law to the Department of Justice, SEC, or other relevant federal agencies.