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

SEC Requests Comment on NYSE Proposed Rule Changes that Would Allow Most Actively Managed ETFs to Forego the 19b-4 Application Process

March 12, 2015 On March 10, 2015, the SEC published a notice in the Federal Register requesting public comment on a proposed rule change from NYSE Arca, Inc. (“NYSE Arca”) that, if approved, would make it easier for actively managed ETFs to list and trade their shares. Under current rules, actively managed ETFs are required to have a sponsoring exchange file a Rule 19b-4 application with the SEC and obtain SEC approval prior to listing and trading their shares. This process often takes several months and may take longer in some cases. In contrast, most index-tracking ETFs are not subject to the Rule 19b-4 application process due to an exception contained in NYSE Arca Equities Rule 5.2(j)(3). The proposed rules would apply a similar exception to actively managed ETFs through amendments to NYSE Arca Equities Rule 8.600. If the proposed rules are approved, the time required for, and costs associated with, launching an actively managed ETF would be reduced.

Federal Agencies Release New Volcker Rule Guidance for Non-U.S. Banking Entities and Fund Sponsors Seeking to Rely on the “SOTUS” Covered Fund Exemption, Clarifying that the U.S. Marketing Restriction Does Not Apply to Third Parties

March 3, 2015  On February 27, 2015, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the SEC and the Commodity Futures Trading Commission (the “Agencies”) issued an addition to their list of Frequently Asked Questions (“FAQs”) pertaining to section 13 of the Bank Holding Company Act of 1956 (the “Volcker Rule”).

Subject to certain exceptions, the Volcker Rule generally prohibits a “banking entity” from, as principal, “sponsoring,” acquiring or retaining an “ownership interest” in, or making certain transactions with, “covered funds,” which include most hedge funds and private equity funds. The Volcker Rule provides an exemption for certain covered fund activities conducted solely outside of the United States by non-U.S. banking entities holding an ownership interest in, or acting as sponsor to, a covered fund, provided that certain requirements are met (the “SOTUS Exemption”). One such condition for the SOTUS Exemption is that no ownership interest in the covered fund is offered for sale or sold to a resident of the United States (the “U.S. Marketing Restriction”).

In the new FAQs, the staffs of the Agencies clarify that the U.S. Marketing Restriction only constrains the activities of non-U.S. banking entities seeking to rely on the SOTUS Exemption and does not apply more generally to the activities of unaffiliated third parties. The FAQs reaffirm, however, that a non-U.S. banking entity (including its affiliates) that seeks to rely on the SOTUS Exemption still must comply with all of the conditions of the SOTUS Exemption, including the U.S. Marketing Restriction.

Mutual Fund Adviser Sanctioned for Deficiencies in Custody of Funds’ Derivatives Collateral and Directed Brokerage Compliance

February 19, 2015 On February 12, 2015, the SEC announced that Water Island Capital LLC (“Water Island”) agreed to settle enforcement proceedings arising from alleged violations of the 1940 Act found during an SEC exam of Water Island and the mutual funds it advises (the “Funds”). The alleged violations related to custody of cash collateral posted as security for derivatives transactions and the requirements of Rule 12b-1(h) under the 1940 Act (which governs the direction of fund portfolio transactions to brokers that sell fund shares), as well as weaknesses in the design of the Funds’ compliance program. The settlement imposed only a modest monetary penalty, and the underlying facts are not recited in great detail in the SEC’s order, but the enforcement action nevertheless illustrates an SEC focus on technical compliance with the 1940 Act rules, especially in the context of mutual funds implementing “alternative” investment strategies.