Last week the SEC adopted rule amendments to the definition of “accredited investor” under Regulation D (“Reg D”) of the Securities Act of 1933. The rule amendments, the SEC says, are intended to modernize a term that has not changed in nearly 40 years and to “more effectively identify institutional and individual investors that have the knowledge and expertise to participate in” today’s “multifaceted and vast private markets.” Continue Reading Updated SEC Definition Opens Private Markets to (a Handful of) New Investors

On August 26, 2020, the SEC adopted amendments to update the definition of “accredited investor” in Rule 501(a) of the Securities Act, adding new categories of individuals who may qualify as accredited investors based on measures of knowledge, experience, or certifications, and expanding the list of entities that can qualify as accredited investors. The SEC also adopted similar amendments to the definition of “qualified institutional buyer” in Rule 144A of the Securities Act, expanding the types of entities that may qualify as qualified institutional buyer (QIBs) to include those accredited investors that satisfy the existing requirements for QIB status.

You can find details in this update provided by Joe Bailey and Numaan Deen of our firm.

The Financial Industry Regulatory Authority (“FINRA”) issued two regulatory notices in August 2020 with warnings of imposter websites (Regulatory Notice 20-30 and Regulatory Notice 20-27). In Regulatory Notice 20-30, FINRA warned that it has received notifications from several member firms that malicious actors are using registered representatives’ names and other information to create imposter websites that appear to be the representatives’ personal sites. FINRA also reported that the malicious actors were calling and directing potential customers to use the imposter websites and, in turn, may be responding through imposter-based email addresses that could contain malware or imbedded phishing links. Regulatory Notice 20-30, raises concerns that imposters may be using these sites to collect personal information from the potential customers to commit financial fraud. Continue Reading FINRA Repeats Warnings of Imposter Websites

In an October 2019 update, we highlighted that the SEC’s attention to Rule 12b-1 fees for over 40 years, along with more recent initiatives, enforcement activities, and FAQs suggested that the Commission would likely continue to closely scrutinize investment advisers’ share class selection and related compensation practices at least for the foreseeable future.

In January of this year, the SEC’s Office of Compliance Inspections and Examinations highlighted this area in its 2020 National Examination Program Priorities. True to its word, the SEC has continued to pursue enforcement actions relating to the fiduciary duties and conflicts of interest of investment advisers in connection with mutual fund share class selection and Rule 12b-1 fees, revenue sharing, and other financial arrangements.

As operational and market volatility issues arising from the COVID‑19 pandemic are rightly occupying much of the asset management industry’s bandwidth, our current update reminds fund boards and advisers of the SEC’s continued enforcement in this area that raises questions about the future of Rule 12b-1 fees and advisers’ revenue sharing and other compensation practices.

With the influx of virtual business meetings resulting from the pandemic, FINRA recently issued an FAQ on how non-in-person events should be treated pursuant to entertainment, gifts, and noncash compensation rules. Specifically, FINRA addressed whether it is allowable for an associated person to host virtual business entertainment events or video conferencing with the employees of an institutional customer or third-party broker-dealer and provide food and beverage to be consumed during the event. The guidance is limited to interactions with representatives of institutional customers. Continue Reading FINRA Issues Guidance on Virtual Business Entertainment

This post ends our series critiquing the proposed definition of “unfunded commitment agreement” in re-proposed Rule 18f-4. This definition is important because it would create an exception from the Value at Risk (“VaR”) limitations the proposed rule would impose on “derivatives transactions” by investment companies. This post will recap the problems with the proposed definition and the approach we would recommend for addressing these shortcomings. Continue Reading Re-Proposed Rule 18f-4: Commitment Agreements—Putting it all Together

In a previous post, we compared loan commitments, which re-proposed Rule 18f-4 would treat as “unfunded commitment agreements,” and “to be announced” (“TBA”) mortgage-backed securities (“MBS”) trades and put options, which Rule 18f-4 would treat as “derivative transactions,” to identify features that may be unique to loan commitments. Our last post showed how one feature, greater uncertainty as to the term of eventual loans as compared to the average life of the mortgages that underlie TBAs (in each case resulting from prepayments of the loans and mortgages, respectively), could prevent loan commitments from fluctuating in value. If the value of the commitment does not fluctuate substantially, the commitment cannot “present an opportunity for the fund to realize gains or losses between the date of the fund’s commitment and its subsequent investment” and thus will not have a leveraging effect on the fund.

Gauging the probability of drawings and prepayments is not a practical approach to regulating commitments by investment companies, so we will continue analyzing the potential leveraging effects of the unique features of loan commitments we previously identified. Two features, the right to terminate the commitment and the expectation that the commitment would be drawn, were uniquely present in loan commitments. Two other features, the availability of offsetting transactions and posting margin to secure the commitment, were uniquely absent. Continue Reading Re-Proposed Rule 18f-4: Features of Loan Commitments that May Prevent “Leveraging Effects”

Our last post used a comparison of loan commitments, which re-proposed Rule 18f-4 would treat as “unfunded commitment agreement,” and “to be announced” (“TBA”) mortgage-backed securities trades and put options for bonds, which Rule 18f-4 would treat as “derivative transactions,” to isolate features that could be used to delineate these commitments based on their leveraging effects. Our next post will continue this analysis by considering whether each unique feature of a loan commitment mitigates its potential “leveraging effects.” Before proceeding, however, we will consider one feature shared by loan commitments and TBAs to illustrate why even seemingly common features may have different leveraging effects. Continue Reading Re-Proposed Rule 18f-4: What Features of Loan Commitments May Preclude “Leveraging Effects”—Prepayments

Our last post began to consider why some firm and standby commitments entered into by investment companies (including business development companies) may have “leveraging effects” while others do not. The Securities and Exchange Commission (“SEC”) needs to identify the essential differences between these commitments to delineate when re-proposed Rule 18f-4 should treat a commitment as an “unfunded commitment agreement” rather than a “derivatives transaction.” Our last post showed that loan commitments share, at a minimum, the same interest rate risks as other types of commitments, so any absence of leveraging effects must depend on other factors. Continue Reading Re-Proposed Rule 18f-4: Using Morphology to Delineate Commitment Agreements

This post continues our consideration of a carveout from the proposed Value at Risk (“VaR”) limitations of Rule 18f-4 for unfunded commitment agreements “because they do not present an opportunity for the fund to realize gains or losses between the date of the fund’s commitment and its subsequent investment ….” Our last post dealt with commitments to invest in a company’s equity. But the definition of “unfunded commitment agreement” would also include a contract “to make a loan to a company.” Commenters on the original Rule 18f-4 proposal contrasted these loan commitments with:

firm and standby commitment agreements, under which a fund commits itself to purchase a security with a stated price and fixed yield without condition or upon the counterparty’s demand.”

We do not believe the contrast is as stark as these commenters suggest. If our view is correct, we will need to search for additional factors to distinguish these loan commitments from commitment agreements that should be treated as derivatives transactions. Continue Reading Re-Proposed Rule 18f-4: Unfunded Loan Commitments