On May 6, 2013, the Division of Investment Management of the SEC issued an IM Guidance Update for funds registered under the Investment Company Act and investment advisers that rely on exemptive orders issued by the SEC. According to the Division of Investment Management, the IM Guidance Update was issued in response to a June 2011 report issued by the SEC’s Office of Inspector General, which, among other things, detailed deficiencies in the SEC’s oversight of firms’ compliance with the representations and conditions of SEC exemptive orders and made recommendations to improve the SEC’s oversight in that regard. In warning investment advisers and registered funds of the risk of violating federal securities laws as a result of not complying with the representations and conditions of exemptive orders, the IM Guidance Update specifically identified (1) Rule 206(4)-7 under the Investment Advisers Act of 1940 (the “Advisers Act”), which requires investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and its rules and to conduct an annual review of the adequacy and the effectiveness of implementation of such policies and procedures and (2) Rule 38a-1 under the Investment Company Act, which requires registered funds to adopt and implement written policies and procedures (that must be approved by the fund’s board) reasonably designed to prevent the fund from violating the federal securities laws and to conduct an annual review of the adequacy of the fund’s policies and procedures. According to the IM Guidance Update, among the ways investment advisers and registered funds can seek to mitigate the risk of violating such laws is to adopt and implement written policies and procedures (as required under

Rule 206(4)-7 of the Advisers Act or Rule 38a-1 of the Investment Company Act, as applicable) “that are reasonably designed to ensure ongoing compliance with each representation and condition of the order.” As an example, for a fund relying on an exemptive order that has conditions relating to a board review, the IM Guidance Update indicates that a fund could either (1) adopt a specific policy or procedure regarding the conditions of the board review or (2) consider whether an existing policy or procedure relating to board review of other matters sufficiently covers the conditions set forth in the exemptive order on which the fund is relying. In either case, according to the IM Guidance Update, annual review of the policy or procedure by the fund would be required to ensure adequacy and effectiveness of implementation.

The IM Guidance Update is the second such release by the Division of Investment Management. On March 15, the Division of Investment Management released an IM Guidance Update responding to inquiries about filing requirements for certain electronic communications, as discussed in the April 29, 2013 Investment Management Regulatory Update. According to a March 15, 2013 SEC press release, the Division of Investment Management intends to issue additional IM Guidance Updates in the future addressing legal issues relevant to the investment fund industry.