The Financial Choice Act Aims to Help Angel Investors

The proper treatment of angel investing groups under the Federal securities laws can be a vexing question. If it were appropriate to describe the angel investing group as a “company” as defined in Section 2(a)(8) of the Investment Company Act of 1940, and if the “company” were appropriately viewed as issuing interests or shares, then the angel investing group would have to seek to rely on Sections 3(c)(1) or 3(c)(7) of the Investment Company Act and comply with the requirements of Regulation D under the Securities Act of 1933. Yet these views seem to beg the questions of who is giving investment advice to the “company” and who is acting as a broker in offering and selling interests in the “company.” Continue Reading

Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Conclusion)

This series of posts has examined the misguided efforts of the House Financial Services Committee to reform the existing process for issuing exemptive orders pursuant to Section 6(c) of the Investment Company Act of 1940 (the “1940 Act”). The previous posts discussed the problems with the current process and why Section 848 of the pending Financial Choice Act of 2017 would make matters much worse. This concluding post considers the possibility that Section 848 may not accomplish anything and then discusses other possible reforms to the exemptive process that may prove more fruitful. Continue Reading

Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Part 4)

This series of posts examines the misguided efforts of the House Financial Services Committee to reform the existing process for issuing exemptive orders pursuant to Section 6(c) of the Investment Company Act of 1940 (the “1940 Act”). My first three posts discussed the current exemptive process and some of its significant shortcomings. This post discusses the changes to the process proposed in Section 848 of the pending Financial Choice Act of 2017 and why these proposed changes would undermine investor protections provided by the 1940 Act. It is difficult to overstate what bad public policy Section 848 represents.

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Distribution in Guise Settlement Orders Reinforce Need for Better Compliance, Contracting, and Disclosure Practices (Part 2)

This post continues our discussion of the settlement orders that the SEC recently entered into with investment advisory firms based in Chicago (the “First Order”) and Maryland (the “Second Order”).  These cases illustrate that the SEC remains focused on mutual fund distribution issues and teach some hard lessons about the importance of compliance oversight, contracting, and disclosure around distribution and sub-transfer agency (“sub-TA”) payments.

The improper payments detailed in the First Order were discovered by the firm during an internal review conducted after it knew that the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) would be examining its intermediary payments.  According to the First Order, “After identifying the payment errors, [the adviser] promptly notified the Board, reimbursed the Funds with interest, and supplemented its practices of providing oversight of payments to financial intermediaries.”

But these two recent distribution in guise enforcement cases, together with the first one brought in connection with OCIE’s sweep exam that was settled in 2015,  show that liability may be present even where mitigating factors exist, such as a firm and fund board undertaking due diligence and reviewing and/or remediating misclassified payments.  Moreover, while press reports suggest that the First Order and the Second Order may represent the end of enforcement follow-up from the distribution in guise sweep exam, distribution and intermediary payments continue to be an OCIE priority.  An ounce of prevention is worth a pound of cure when it comes to mutual fund distribution payments, and the following are some observations that can be drawn from the Orders for best practices going forward. Continue Reading

Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Part 3)

This series of posts examines the misguided efforts of the House Financial Services Committee to reform the existing process for issuing exemptive orders pursuant to Section 6(c) of the Investment Company Act of 1940. Section 848 of the pending Financial Choice Act 2017 would attempt to accelerate the process of obtaining exemptive orders by forcing the SEC to grant or deny an exemptive application within a fixed time frame. My first post discussed the current process of obtaining an exemptive order. This post examines a problem overlooked by proposed Section 848, perhaps due to the Committee’s limited understanding of the exemptive process. Continue Reading

Distribution in Guise Settlement Orders Reinforce Need for Better Compliance, Contracting, and Disclosure Practices (Part 1)

In two back-to-back enforcement cases arising from the SEC’s now four-year old distribution sweep exam, a Chicago-based mutual fund adviser has agreed to a $4.5 million civil money penalty and a Maryland-based firm has agreed to pay disgorgement of $17.8 million plus $3.8 million in interest and a $1 million penalty.  Both cases reinforce the importance of compliance oversight, contracting, and disclosure around distribution and sub-transfer agency (“sub-TA”) payments.  This post will review the findings in each case (which the firms neither admitted nor denied). A subsequent post will recommend steps to mitigate the risk of improper distribution payments. Continue Reading

Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Part 2)

This series of posts examines the misguided efforts of the House Financial Services Committee to reform the existing process for issuing exemptive orders pursuant to Section 6(c) of the Investment Company Act of 1940. Section 848 of the pending Financial Choice Act 2017 would attempt to accelerate the process of obtaining exemptive orders by forcing the SEC to grant or deny an exemptive application within a fixed time frame. My prior post discussed the current process of obtaining an exemptive order. This post examines the problem at which Section 848 appears to be aimed. A later post will explain why it misses its mark. Continue Reading

Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Part 1)

Most observers of the Investment Company Act of 1940 (“1940 Act”) would agree that, (i) without the exemptive authority in Section 6(c), Section 17(b), and in other provisions in the 1940 Act and (ii) without the manner in which the SEC and its staff have used that authority, the 1940 Act would have become obsolete insofar as it would not have been possible to adapt it to some of the most popular financial products developed during the last 40 years.  It is also true that the process for obtaining exemptive orders is far from perfect and has proven to be frustrating on more than one occasion. Presumably, these frustrations motivated a proposed “reform” to the exemptive application process as part of the pending Financial Choice Act 2017.  Specifically, Section 848 would attempt to accelerate the process of obtaining exemptions by forcing the SEC to grant or deny an exemptive application within a fixed time frame.  This proposal: (a) does not reflect a sophisticated understanding of the process it seeks to change and, therefore, (b) fails to identify the actual problems with the process, so that Section 848 would almost certainly (c) result in superficial changes at best and at worst seriously undermine the protections the 1940 Act provides to shareholders of investment companies.  This series of posts will consider each of these points, before recommending more appropriate changes to the processes of obtaining exemptions. Continue Reading

SEC Chairman Nominee Jay Clayton Provides Insight on the Future of the SEC (Part 2)

This post continues our summary of the testimony of Jay Clayton, President Trump’s pick to head the SEC, at his recent nomination hearing before the Senate.  Clayton commented on several important issues confronting the SEC. Continue Reading

SEC Chairman Nominee Jay Clayton Provides Insight on the Future of the SEC (Part 1)

For those eager to learn what direction the SEC will take during the Trump administration, some clues surfaced during the recent nomination hearing of Jay Clayton, President Trump’s pick to head the SEC.  Clayton commented on several important issues confronting the SEC. Continue Reading

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