June – July Alerts on Regulatory Actions

Since our prior Investment Management Update, we have monitored a number of significant SEC actions affecting the mutual fund/investment management industry, each of which we covered in a separate Alert. These Alerts are summarized below with a hyperlink to the full text of each Alert.

SEC Reverses Its 2020 Amendments to the Proxy Rules Governing Proxy Voting Advice; Rescinds Supplemental Guidance on the Proxy Voting Responsibilities of Advisers July 26, 2022 On July 22, 2020, the SEC adopted amendments to its rules governing proxy solicitations and the filing exemptions for proxy voting advice (the “2020 Amendments”). With Democratic Commissioner Lee dissenting, then Chairman Clayton and the two Republican commissioners closed the initial chapter in a more than decade-long attempt to rein in the influence of “proxy voting advice businesses.” The 2020 Amendments conditioned the exemptions for reports issued by Proxy Advisers from the filing and information requirements of the federal proxy rules on compliance with disclosure and procedural requirements. In addition, the 2020 Amendments codified in Rule 14a-1(l)’s definition of “solicitation” the SEC’s long-standing view that Proxy reports are solicitations subject to the anti-fraud provisions of the federal proxy rules.

On November 17, 2021, Chair Gensler, joined by the two Democratic SEC commissioners, voted to propose changes to the 2020 Amendments, and the SEC issued a release containing rule amendments (the “2021 Proposals”) that, if adopted, would eliminate some of the 2020 Amendments’ requirements, while leaving others unchanged. On July 13, 2022, Chair Gensler, joined by the Democratic SEC commissioners, voted to adopt the 2021 Proposals. The changes are effective September 19, 2022.

SEC Proposes to Amend Rule 14a-8 Shareholder Proposal Provisions Regarding Substantial Implementation, Duplication and Resubmission July 25, 2022 Rule 14a-8 under the Exchange Act requires issuers that are subject to the federal proxy rules to include shareholder proposals in their proxy statements to shareholders, subject to certain procedural and substantive requirements. On July 13, 2022, the SEC issued a release containing proposed amendments to, and seeking public comment on, three of Rule 14a-8’s substantive bases for an issuer to exclude a shareholder proposal.

SEC Solicits Comments on Whether Certain Service Providers Are Investment Advisers June 28, 2022 On June 15, 2022, the SEC issued a release (the “Release”) focused on index providers, model portfolio providers, and pricing services (“Information Providers”) whose activities may cause them to meet the definition of “investment adviser” under the Advisers Act.

The Release states that Information Providers’ “operations also raise potential concerns about investor protection and market risk, including, for example, the potential for front-running of trades where the providers and their personnel have advance knowledge of changes to the information they generate and potential conflicts of interest where the providers or their personnel hold investments they value or that are constituents of their indexes or models.” The Release goes on to discuss other legal concerns that may be raised by each type of Information Provider’s activities as they relate to investment adviser status issues.

This Alert summarizes the Release’s contents with respect to the three types of Information Providers.

The following summarizes other recent legal developments of note affecting the mutual fund/investment management industry.

William Birdthistle Addresses PLI Conference

On July 26, 2022, William Birdthistle, Director of the SEC Division of Investment Management (the “Division”), delivered an address to attendees of the Practising Law Institute’s conference, Investment Management 2022: Current Issues & Trends, held in New York City.

Complex Fee Structures. Director Birdthistle stated that investor protection concerns require the Division to “consider how we can help investors better understand fees, which directly reduce the life savings entrusted to funds.” In particular, he said, the “expectation that investors must closely monitor (and independently understand) complex fee arrangements and costs that may include anything from revenue sharing to soft dollars, is perhaps less than realistic.” Therefore, the Division’s focus on fees will include not “merely the form and content of disclosure” but, in addition, “helping to ensure that advisers comply with their fiduciary obligations.”

SEC’s Proposed Private Fund Reforms. Director Birdthistle noted that the SEC has “made great progress recently in the area of capital formation through its proposed rules concerning private fund advisers.”1 He stated that, if adopted, these rules “would shine a lot of healthy light upon a darkened corner of our markets, which indirectly manages the money of many ordinary pensionholders.” Director Birdthistle said that the proposed rules “would prohibit private fund advisers from engaging in certain practices that are contrary to the public interest and protection of investors.” Specifically, he noted, the proposed rules would (i) require private fund advisers to provide investors with quarterly statements, (ii) require private fund advisers to obtain annual audits, (iii) address the possibility for conflicts resulting from adviser-led secondary transactions without, among other things, obtaining a fairness opinion from an independent opinion provider, and (iv) prohibit an investment adviser to a private fund from engaging in certain enumerated practices listed in proposed Rule 211(h)(2)-1 under the Advisers Act.

Proxy Voting. Director Birdthistle stated that fund shareholders “are not always aware how portfolio shares are voted by the funds in which they are invested.” He stated that a scenario therefore results in which “investors’ voices are being entirely delegated and used indirectly to influence portfolio companies’ behavior without investors’ awareness, attention, or, perhaps even interest.” He deemed this a “noteworthy phenomenon” in light of the size of the “$30-trillion fund industry.”

Director Birdthistle said that he sees “proxy voting as one of the main areas where markets could aim for increased democratization, which would, in turn, promote markets that more fairly reflect the views and priorities of American investors, not just large asset managers.” He did not specify any particular regulatory remedy.

LIBOR Cessation. The administrator of LIBOR ceased publication of most LIBOR settings on a representative basis at the end of 2021 and is expected to cease publication of a majority of U.S. dollar LIBOR settings on a representative basis after June 30, 2023. Director Birdthistle noted that “[m]any advisers and funds have made substantial progress in preparing for the transition, but for others, more work is needed.” He said that a remaining concern, “even among the well-prepared, is operational readiness,” and that operational readiness is the focus of the Alternative Reference Rate Committee’s Operations and Infrastructure Working Group. He added that “[a]sset managers – and their lawyers – should be mindful of their disclosure obligations with respect to LIBOR as well as any valuation risks arising from the transition.”

MiFID II No-Action Letter. Director Birdthistle noted that, with MiFID II’s advent in January 2018, the Division staff provided three no-action letters (described in this Ropes & Gray November 2017 Alert), including a temporary no-action letter stating that the SEC staff would not recommend enforcement action if a broker-dealer provides research services that constitute investment advice under Section 202(a)(11) of the Advisers Act to an investment adviser subject to EU MiFID II regulation (directly or by contract) (each, a “MiFID II Adviser”). This no-action letter (the “SIFMA Letter”) permits a broker-dealer to be compensated for providing research to a MiFID II Adviser without the payments being deemed to be “special compensation” under Section 202(a)(11) merely because the payments are made in a manner required by MiFID II. The assurances in the SIFMA Letter were set to expire in July 2020, but were extended to July 3, 2023 in a 2019 no-action letter.

Director Birdthistle announced that the Division does not intend to extend the temporary position in the SIFMA Letter beyond its current expiration date on July 3, 2023. He noted that, to the extent that the three no-action letters include statements or positions that are “independent of the temporary adviser status position, such as those regarding client commission arrangements, they are not being rescinded.”

Money Market Funds. Director Birdthistle discussed the market stress of March 2020 as investors, “particularly institutional investors,” sought liquidity and safety. He noted that government money market funds enjoyed record inflows of $838 billion in March 2020 and an additional $347 billion in April 2020. In contrast, during the “fortnight of March 11 to 24, publicly offered institutional prime funds experienced a 30% redemption rate (representing about $100 billion), which included outflows of approximately 20% of assets during the week of March 20 alone.” He acknowledged that redemption fees and gates failed to stop money market fund redemptions but, he maintained, institutional money is “unlikely to return to bank accounts and more likely to find its way to ultrashort bond funds.” Funds, he stated, now play a role in the markets that “bank accounts would have a hard time replacing” because banks do not offer “diversified exposure or a market rate in non-zero rate environments.”

As a potential solution, Director Birdthistle highlighted the use of swing pricing by European funds, noting that swing pricing “allows investors in a fund to leave whenever they wish but, in moments of tight liquidity, the departing shareholders must bear the higher costs of their exit.”2 He noted that the Division looks forward to reviewing comments on this aspect of the January 2022 money market fund proposal, which includes swing pricing (described in this January 2022 Alert).

Director Birdthistle noted that swing pricing may not be practical in the United States because the “financial plumbing system” may not readily permit swing pricing. In contrast, “Europe has the benefit of comparatively younger financial infrastructure.” In his closing statements regarding money market funds, Director Birdthistle said:

I do not think everything should be a bank, nor am I sanguine about problems with money market funds and other instruments vulnerable to liquidity mismatches. On the contrary, I share Chair Gensler’s position that the Securities and Exchange Commission has a responsibility to protect for financial stability and to increase the resilience of our financial system. I have seen what happens when firms disregard regulation in an unchecked pursuit of “innovation.” When some insist on moving fast and breaking things, sometimes that just leaves things broken.

Delaware Enacts a Control Share Statute Tailored to Listed Closed-End Funds and Business Development Companies

On July 27, 2022, with an effective date of August 1, 2022, the State of Delaware amended the Delaware Statutory Trust Act3 to add a control share acquisition statute (the “Delaware Statute”).4 The Delaware Statute applies automatically to any closed-end fund or business development company that is organized as a Delaware statutory trust and that has a class of equity securities listed on an exchange (each a “Fund”), and does not apply to any other Delaware statutory trust. Thus, there is no requirement for a Fund to opt in to the Delaware Statute.

In general, control share statutes serve as a corporate defense against self-interested conduct by concentrated minority shareholders, by imposing additional requirements on any person who, directly or indirectly, acquires ownership of, or the power to direct the vote of, “control shares” of the company. The Delaware Statute sets forth a series of voting power “thresholds” above which an acquiring person’s shares are considered control share acquisitions:5

10% or more, but less than 15% of all voting power;

15% or more, but less than 20% of all voting power;

20% or more, but less than 25% of all voting power;

25% or more, but less than 30% all voting power;

30% or more, but less than a majority of all voting power; or

a majority or more of all voting power.

The Delaware Statute’s voting restrictions are triggered at each of the voting power thresholds above. Once a threshold is triggered, the acquiring person’s ability to vote its shares that are in excess of that threshold is conditioned upon receiving either the approval of two-thirds of all the votes cast by the other beneficial owners or an exemption from this requirement by the board of trustees.

The Delaware Statute provides that a Fund’s board of trustees, either through a provision in the Fund’s governing instrument or by action of the board, may exempt application of the Delaware Statute to a control share acquisition “specifically, generally, or generally by types, as to specifically identified or unidentified existing or future beneficial owners or their affiliates or associates, or as to any series or classes of beneficial interests.”6 However, there is no general “opt out” provision in the Delaware Statute.

  • As described in this June 2020 Ropes & Gray Alert, in May 2020, the SEC’s Division of Investment Management published a statement that withdrew the 2010 Boulder Total Return Fund no-action letter (the “Boulder Letter”), which concerned the interaction between Section 18(i) of the 1940 Act and a state control share acquisition statute, and replaced the Boulder Letter with a new no-action position. Section 18(i) requires that, “[e]xcept . . . as otherwise required by law, every share of stock hereafter issued by a [Fund] . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock”
  • Under the new no-action position, the SEC staff would not recommend enforcement action to the SEC against a closed-end fund under Section 18(i) for opting into and triggering a control share acquisition statute, provided the fund’s board decision to opt in was “taken with reasonable care on a basis consistent with other applicable duties and laws and the duty to the fund and its shareholders generally.”
  • In February 2022, in a lawsuit brought by a closed-end fund activist investor, the U.S. District Court for the Southern District of New York issued an opinion granting the investor’s motion to rescind control share acquisition bylaw amendments by a group of closed-end funds organized as Massachusetts business trusts. The court held that the bylaw amendments violated Section 18(i) of the 1940 Act. The court’s decision has been appealed to the U.S. Court of Appeals for the Second Circuit.


The following brief update exemplifies certain trends and areas of current focus of relevant regulatory authorities.

Odd-Lots and Sub-Adviser’s Pricing at Center of SEC Settlement

On June 3, 2022, the SEC issued an order settling an administrative proceeding arising from the alleged failures of AlphaCentric Advisors LLC (“AlphaCentric”), the investment adviser to a registered fund (i) to implement its policies and procedures relating to the valuation of securities held by the fund and (ii) to adopt and implement policies and procedures reasonably designed to oversee the role of the sub-adviser to the fund in valuing the fund’s securities. At all times, the fund’s investments focused primarily on sub-prime non-agency residential mortgage-backed bonds (“RMBS”).

Odd-Lot Pricing Problems. The SEC alleged that, in accordance with the fund valuation procedures, the fund administrator obtained pricing vendor evaluated prices to value the fund’s RMBS portfolio holdings prior to calculating and publishing the daily NAV. The pricing vendor disclosed to the fund, and the fund disclosed to its shareholders, that its marks were reference prices based on prices for institutional round lots, which the pricing vendor generally defined as those bonds with at least $1 million current face value. As the sub-adviser purchased odd-lot bonds for the fund, the fund routinely valued those securities at the higher marks provided by the pricing vendor.

Sub-Adviser Games the Pricing Vendor. The SEC further alleged that:

  • From the inception of the fund in 2015 through January 2017, when the sub-adviser believed that the pricing vendor evaluated price on bonds held by the fund were too low, it provided the pricing vendor with its analysis of the bond’s fundamental characteristics and sought an upward price adjustment based on this “market color.” The pricing vendor generally did not adjust its marks upward in response to these submissions, which carried less weight with the pricing vendor than submissions supported by new market information, such as bids and trades.
  • From January 2017 into February 2019, the sub-adviser submitted bids to broker-dealers, offering to purchase certain RMBS held by the fund at prices higher than the pricing vendor evaluated prices when it believed the pricing vendor evaluated prices undervalued those bonds. The sub-adviser then submitted these bids to the pricing vendor, noting that it was submitting bids on RMBS it owned, in support of higher prices for those RMBS. In response, the pricing vendor consistently raised its marks to the levels reflected in the sub-adviser’s bids.
  • Between January 2017 and February 2019, in several instances, the sub-adviser submitted bids on RMBS for which the fund already owned the entire tranche and thus could not purchase additional bonds in the market. In these situations, the sub-adviser noted in its bids that it owned the whole tranche but would be interested in other bonds with similar profiles. From at least February 2018, the sub-adviser forwarded its bid submissions to AlphaCentric in addition to the fund administrator.
  • AlphaCentric generally did not respond to or analyze these submissions.

SEC Assertions. The SEC asserted that:

  • AlphaCentric was responsible for reviewing daily the pricing of the fund’s holdings for reasonableness. AlphaCentric did not reasonably implement these procedures to determine whether the pricing vendor evaluated prices represented the fair value or “exit price” for odd-lot securities that traded at a discount to institutional round-lot securities when the pricing vendor evaluated prices were based upon the prices for institutional round-lots of similar bonds.
  • Under its compliance policies and procedures, AlphaCentric was responsible for monitoring the sub-adviser’s compliance with the fund’s investment guidelines and determining that the sub-adviser maintained sufficient controls in light of the fund’s investment activities. AlphaCentric failed to adopt and implement policies and procedures reasonably designed to oversee the sub-adviser’s role in valuing securities held by the fund and failed to implement its policies and procedures relating to the valuation of securities held by the fund.

The SEC concluded that AlphaCentric willfully violated provisions of the Advisers Act and rules thereunder that require registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and rules thereunder. Without admitting or denying the SEC’s findings and allegations AlphaCentric agreed to be censured and to pay a civil money penalty of $300,000.

Upcoming Compliance Dates

The following is a reminder of the upcoming compliance dates of significant SEC rulemakings.

August 19, 2022 – Funds’ Use of Derivatives. Rule 18f-4’s effective date was February 19, 2021. The adopting release provides for an 18-month transition period following the rule’s effective date (i.e., until August 19, 2022) for funds to prepare to come into compliance with Rule 18f-4. In addition, on that date, Release 10666 will be rescinded, and related no-action letters and other staff guidance (or portions thereof) will be withdrawn. On August 19, 2022, the SEC also will rescind the exemptive orders provided to leveraged/inverse ETFs, which will be permitted to rely on Rule 6c-11, as amended by the Rule 18f-4 adopting release. See Ropes & Gray’s November 2020 Alert.

September 8, 2022 – Good Faith Determinations of Fair Value. The effective date for Rules 2a-5 and 31a-4 was March 8, 2021. The compliance date is September 8, 2022. Funds have the option of complying with the Rules before the compliance date and after March 8, 2021. However, the adopting release states that any fund that elects to rely on Rules 2a-5 and 31a-4 before the compliance date may rely only on those rules, and may not also rely on other SEC guidance and staff letters and other guidance that will be withdrawn or rescinded on the compliance date. See Ropes & Gray’s December 2020 Alert.