The Wall Street Journal reported on November 21, 2019, that the Federal Reserve is considering whether to begin examining data storage technology service providers (“TSPs”) of the banks that it regulates. While financial regulators have long scrutinized TSPs generally, this report indicates a new interest by a federal regulator in direct oversight of TSPs, particularly those that provide data storage on media such as the cloud.
We previously explored the treatment of “leveraged/inverse investment vehicles” under SEC’s reproposal for regulating how funds use derivatives in compliance with Section 18 of the Investment Company Act of 1940 (proposed Rule 18f-4), and related proposed Rule 15l-2 under the Securities and Exchange Act of 1934 and Rule 211h-1 under the Investment Advisers Act of 1940. In this post we consider the options available to retail investors for leveraged trading and whether a more consistent approach may make sense.
We are still digesting the SEC’s reproposal for regulating how mutual funds, ETFs, closed-end funds and BDCs (“funds”) may use derivatives in compliance with Section 18 of the Investment Company Act of 1940 (proposed Rule 18f-4), but one surprising aspect is proposed Rule 15l-2 under the Securities Exchange Act of 1934. As explained more fully below, Rule 15l-2 would increase the due diligence required before a broker/dealer permits a customer to trade in “leveraged/inverse investment vehicles.” Including this rule in the proposal required the cooperation of both the Trading and Markets and Investment Management Divisions of the SEC. There is even a parallel rule proposed for investment advisers (proposed Rule 211h‑1). This shows that the SEC is taking a more comprehensive view of the SEC’s authority over the use of leverage in securities trading.
Although we find this non-compartmentalized approach heartening, we think that more could be done to fully deploy the SEC’s powers in this area. We even dare to suggest that, having avoided silos within itself, the SEC might try to work with the Fed to better rationalize regulation of leverage in the financial system.
In our previous posts, we reviewed the new Rule 6c-11 (the “ETF Rule”) from the U.S. Securities and Exchange Commission (“SEC”), which provides relief to exchange traded funds (“ETFs”). The SEC also issued a complementary exemptive order (the “ETF Exemptive Order”) primarily providing relief to broker-dealers that distribute ETFs. ETFs distribute their shares by issuing a block of shares (known as a “creation unit”) to certain broker-dealers (referred to as “Authorized Participants”) in exchange for a basket of the ETF’s underlying securities. Authorized Participants then sell these ETF shares on exchanges. Only Authorized Participants may redeem the ETF’s shares for the basket of underlying securities (or the cash equivalent) and only in amounts corresponding to a creation unit. This process could cause Authorized Participants and ETFs to run afoul of the provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) discussed below. Continue Reading
In a previous post, we outlined the scope of new Rule 6c-11 (the “ETF Rule”) which the U.S. Securities and Exchange Commission (“SEC”) approved on September 26, 2019. In this post, we identify some conditions currently required in ETF exemptive orders that were not included in the ETF Rule. Continue Reading
On September 26, 2019, the U.S. Securities and Exchange Commission (“SEC”) unanimously approved a long-awaited rule regulating exchange-traded funds (“ETFs”). Previously, ETFs were required to obtain exemptive orders from the SEC, a time consuming and expensive process. New Rule 6c-11 under the Investment Company Act of 1940 (the “ETF Rule”) streamlines the process for launching some ETFs and standardizes the compliance requirements for existing ETFs.
The ETF Rule goes into effect sixty days after it appears in the Federal Register, which has yet to occur as of this post. One year following its effective date, the SEC will rescind the exemptive orders for any existing ETF that falls within the scope of the ETF Rule. Continue Reading
On June 5, 2019, the U.S. Securities and Exchange Commission (“SEC”) adopted a package of rules and interpretations relating to the standards of conduct for broker-dealers and investment advisers, including a new “best interest” rule for broker-dealers. The package was adopted by a 3-1 vote, with Commissioner Robert J. Jackson Jr. as the lone dissenter. Chairman Jay Clayton, who supported the package, stated that the SEC was not adopting a uniform fiduciary rule for broker-dealers and investment advisers. Instead, Chairman Clayton explained that “Regulation Best Interest incorporates fiduciary principles, but is appropriately tailored to the broker-dealer relationship model and will preserve retail investor access and choice.” Chairman Clayton, as well as the SEC’s press release, emphasized that Regulation Best Interest cannot be satisfied by disclosure alone, but rather through compliance with each of the rule’s four substantive obligations.
The actions taken on June 5 include the following:
As we touched upon briefly in our previous post on the SEC’s recent Fund-of-Fund (“FOF”) rule proposal, proposed Rule 12d1-4 includes a provision that would limit an acquiring fund’s ability to redeem shares of an acquired fund. Specifically, proposed Rule 12d1-4(b)(2) would prohibit a fund that acquires more than 3% of an acquired fund’s outstanding shares from attempting to redeem more than 3% of the acquired fund’s shares in any 30-day period. Unlike most current exemptions from Section 12(d)(1), this limitation would apply to acquiring and acquired funds that are part of the same group of investment companies. However, the release asked for comments on whether to exempt funds within a group of investment companies from the limitation on redemptions.
On December 21, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced enforcement actions against two robo-advisers, Wealthfront Advisors LLC (“Wealthfront”) and Hedgeable Inc. (“Hedgeable”), for making false statements about investment products and publishing misleading advertising. “Robo-advisers” are investment advisers that provide automated, software-based portfolio management services. In a press release related to these actions, the Chief of the SEC Enforcement Division’s Asset Management Unit stated that “[t]echnology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients … [but] [r]egardless of their format … all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.” These enforcement actions, the first by the SEC against robo-advisers, highlight the nuanced risks and requirements for robo-advisers under U.S. securities laws.
On December 19, 2018, the SEC released a set of rule proposals (the “Proposals”) intended to streamline the regulatory framework for fund-of-funds (“FOF”) arrangements under the Investment Company Act of 1940 (the “1940 Act”). Investment advisers managing FOFs should consider looking closely with counsel at the impact these Proposals could have on their businesses and compliance programs. They might also consider responding to the substantive comment requests included in the Proposals.