The following brief updates exemplify trends and areas of current focus of relevant regulatory authorities:
SEC Publishes Regulatory Agenda for 2015
As required by Executive Order, the SEC has recently published an updated Agency Rule List, which identifies the most important significant regulatory actions that agencies expect to take in the coming year. Among other things, the SEC has included new proposed regulatory actions regarding (i) a proposed rule that would require a mutual fund to implement a “liquidity management program” and enhanced guidance relating to liquid assets in open-end funds; (ii) new requirements for stress testing by large asset managers and large investment companies; (iii) amendments to the forms used by open-end and closed-end registered investment companies to report fund operations and portfolio holdings information; and (iv) proposed rules relating to derivative use and disclosure by funds. The list also indicates that the staff of the Division of Trading and Markets is considering seeking public comment on Exchange-Traded Products (“ETPs”), including evaluating the listing and trading of ETPs, the risks posed by ETPs, and exchange proposals to list and trade ETPs.
SEC Announces Results of 2014 Enforcement Program
The SEC announced that new investigative approaches and the innovative use of data and analytical tools resulted in a record number of enforcement actions and penalties spanning the entire securities industry in the fiscal year ended September 30, 2014. According to the announcement, the SEC filed 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures. The numbers represent significant increases over the SEC’s results for fiscal year 2013, which in turn represented an increase over fiscal year 2012 in terms of total disgorgement and penalties. The SEC’s announcement noted that these results reflect the SEC’s current enforcement priorities, including a number of “first-ever” cases, such as actions involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering and whistleblower retaliation.
Norm Champ Continues to Voice Concerns Regarding Alternative Mutual Funds
In a recent speech before the SIFMA Complex Products Forum, Norm Champ, the director of the SEC’s Division of Investment Management, again highlighted the SEC’s concerns regarding alternative mutual funds, and specifically what he termed “the challenges of appropriately disclosing the heightened risks of alternative mutual funds to retail investors.” In this regard Mr. Champ noted that a fund should evaluate its disclosures to ensure that they are (i) presented in plain English; (ii) tailored specifically to how a fund expects to be managed; (iii) providing investors with a complete risk profile; and (iv) reviewed on an ongoing basis to ensure accuracy in light of a fund’s actual operations.
Investment Company Institute Comments on IRS and U.S. Treasury Department’s Money Market Fund Tax Guidance
On October 23, 2014, the Investment Company Institute (“ICI”) submitted a comment letter to the Internal Revenue Service (“IRS”) and U.S. Department of the Treasury (“Treasury”) in response to tax guidance released in connection with the SEC’s adoption of amendments to its money market fund rule (the “MMF Rule”). The tax guidance attempts to set forth a new, simplified method of tax accounting for shareholders in a floating net asset value (“NAV”) money market fund. Pursuant to this “NAV Method,” shareholders in a floating NAV money market fund may report their gain or loss from the fund based on the change in the aggregate value of the shares of the fund during a specified computation period. The ICI’s letter recommends three changes to the NAV Method: (i) shareholders should be allowed to use the NAV Method on an account-by-account basis; (ii) the NAV Method should be available for shareholders in stable NAV money market funds that charge a liquidity fee; and (iii) the IRS and Treasury should confirm that a regulated investment company is permitted to use the one-year period from November 1 to October 31 as its “computation period” for purposes of the excise tax. Additionally, the ICI asked the IRS and Treasury to provide guidance regarding, among other things, the tax implications if a stable NAV fund imposes a liquidity fee and guidance allowing a money market fund that separates existing institutional and retail share classes into standalone funds, pursuant to the MMF Rule, to treat such transaction as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. The ICI’s letter can be found here.
SEC Continues to Provide No-Action Relief for Closed-End Funds Seeking Automatic Effectiveness of Shelf Registration Statement Amendments
Consistent with relief granted in previous years, the Staff recently provided no-action relief (the “Rule 486(b) No-Action Letter”) to Guggenheim Strategic Opportunities Fund (the “Fund”) with respect to the Fund’s shelf registration statement on Form N-2, allowing the Fund to file a post-effective amendment to such registration statement pursuant to Rule 486(b) under the Securities Act, pursuant to which such amendment would go automatically effective rather than have to be declared effective by the SEC. Such relief is meant to help ensure that the Fund has the ability to raise capital as the opportunity arises, and could reduce expenses incurred by the Fund in the post-effective amendment process. The SEC has periodically granted similar no-action relief to other closed-end funds, but, unlike many no-action letters, such relief specifically provides that it may not be relied upon by third parties and must be requested on a fund-by-fund basis. The Rule 486(b) No Action Letter is available here.