Division of Investment Management Guidance on the Acceptance of Gifts by Fund Advisory Personnel

The SEC’s Division of Investment Management issued updated guidance on the conflict of interest that arises when the personnel of a fund’s investment adviser are presented with gifts, favors or other forms of consideration from persons doing business, or hoping to do business, with the fund. The staff reminds mutual fund industry participants that the receipt of gifts or entertainment by fund advisory personnel, among others, also may implicate the prohibition in Section 17(e)(1) of the Investment Advisers Act. In the staff’s view, the acceptance of gifts should be addressed by funds’ compliance policies and procedures as required by Rule 38a­1 under the Act. Guidance.

Regulatory Relief

Listing of “Paired Class Shares” ETFs Approved over Commissioner’s Dissent

On February 20th, the SEC issued an exemptive order allowing the listing and trading of seven new Accushares exchange­traded funds (“ETFs”). Each Fund will engage in issuing, offering, and redeeming “paired” “Up” and “Down” Shares, two types of Shares that reflect different views on the future direction of the Underlying Index. Entitlements of a Fund’s Up Shares to distributions are related to any increases of such Fund’s Underlying Index, and entitlements of a Fund’s Down Shares to distributions from such Fund are related to any decreases of the same Underlying Index, during each Measuring Period. SEC Release No. 34­74348. SEC Commissioner Kara M. Stein vigorously dissented from the order permitting the listing of these new ETFs, noting that in 2006 a similarly structured product of paired up and down shares was launched for listing and trading and which promptly failed. She called for a “more thoughtful, transparent, and fulsome review process for these types of ETFs” which considers broader market and systemic impacts of novel exchange­traded products and includes more public comment and academic analysis. Stein Dissent.

Closed­End Fund Receives Conditional No­Action Relief to Omit Shareholder Proposal

On February 20th, the SEC posted to its website the Division of Investment Management’s February 18, 2015 conditional no­action relief regarding the exclusion of a shareholder proposal. The shareholder proposal would authorize the Board of Directors of the AllianceBernstein Income Fund to consider a self­tender offer for all outstanding common shares of the Fund at or close to net asset value. If more than 50 percent of the Fund’s outstanding common shares are tendered, the tender offer should be cancelled and the Fund should be liquidated, converted into an exchange­traded fund, or converted/merged into an open­end mutual fund. Division of Investment Management staff found that a basis exists for the view that the proposal may be excluded under Rules 14a­8(i)(2) and 14a­8(i)(6). Fund counsel believes that the Board lacks the authority to liquidate, merge, or convert the Fund into an open­end or exchange­traded fund and that implementation of these aspects of the proposal would violate state law. However, it appears that defect could be cured if the proposal were revised to state that the Board should take the steps necessary to liquidate, merge, or convert the Fund. Therefore, unless the proposal’s proponent provides the Fund with a proposal revised in that manner, no enforcement action will be recommended if the Fund omits the proposal from its proxy materials in reliance on Rules 14a­8(i)(2) and 14a­8(i)(6).

Other Developments

Small and Emerging Companies Advisory Committee Meeting

The SEC’s Advisory Committee on Small and Emerging Companies will hold a public meeting on, March 4, 2015. The meeting will be webcast and a majority of the Commission may attend. Notice. The Committee is expected to consider liquidity in the secondary market for shares in small and emerging companies and the definition of “accredited investor.” Agenda.

Co-­Chief of Asset Management Unit Discusses Conflicts of Interest

On February 26th, Julie M. Riewe, Co­Chief of the Enforcement Division’s Asset Management Unit (“AMU”), discussed the AMU’s evolution, its work with the Office of Compliance Inspections and Examinations and the Division of Investment Management, and AMU’s 2015 priorities, especially its concern over conflicts of interest. Riewe Remarks.

Whistleblower Blowback

On February 26th, the Wall Street Journal reported the SEC is investigating whether companies are using non­ disclosure agreements and similar employment contracts in an attempt to silence potential whistleblowers. Whistleblowers.

Chief Economist Discusses Risk Assessment

On February 25th, Mark J. Flannery, Chief Economist and Director, Division of Economic and Risk Analysis, discussed how the Division detects market misconduct and assesses its effect on the wider market. Flannery Remarks.

SEC Speaks

On February 20th and 21st, the Practicing Law Instituted held its annual SEC Speaks conference.

  • SEC Commissioner Michael S. Piwowar discussed how the SEC can be made more fair, orderly, and efficient. In doing so, he discussed the SEC’s rulemaking, litigation, and enforcement priorities. He questioned the fairness of new rules which frequently run hundreds of pages long and include “guidance” which resembles rules or affects matters outside the scope of the core issue addressed by the rule. To avoid the perception that the Commission is taking its tougher cases to its in­house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts. Fairness also requires the agency to address the imposition of corporate penalties and the issuance of waivers from automatic disqualifications. Piwowar Remarks.
  • SEC Commissioner Kara M. Stein focused on how the Electronic Data Gathering, Analysis, and Retrieval system can be modernized for the benefit of both issuers and investors and the need to bring greater clarity and transparency to transaction data. Turning to the controversy surrounding the issuance of waivers from automatic disqualifications, Stein asserted that the “argument that automatic disqualifications should not be considered a sanction or an enforcement tool is a red herring ­ a verbal sleight of hand that distracts from the real question. The real question is whether automatic disqualifications are being applied appropriately and effectively.” Stein Remarks.
  • SEC Commissioner Daniel M. Gallagher voiced vigorous criticism of the Department of Labor’s anticipated proposal for a fiduciary standard for retirement advisers, noting that the SEC has not been consulted and that the proposal appears to ignore the existing regulatory structure for investment advisers. Gallagher Remarks.

Staff Announcements

The SEC announced that Karen L. Martinez, Regional Director of the Salt Lake office, will retire this summer.