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.
My first post discussed the SEC’s Office of Compliance Inspections and Examination’s (“OCIE’s”) recent Risk Alert (the “Alert”) and specific fund categories in its crosshairs. This post will cover the three remaining fund categories and general examination issues identified by OCIE in the Alert.
Recently, the Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert (the “Alert”) identifying six categories of mutual funds and mutual fund advisers it plans to examine: (i) index funds tracking custom-built indexes; (ii) smaller and thinly-traded exchange traded funds (“ETFs”); (iii) funds with aberrational underperformance relative to their peers; (iv) funds with higher allocations to securitized assets; (v) advisers “new” to managing mutual funds; and (vi) advisers who also manage private funds with similar strategies or that share managers with the mutual funds. The Alert provides a list of practices, risk and conflicts for each specific type of fund, but also notes OCIE will also look at standard fund examination topics.
This post reviews the first three specific categories of funds identified in the Alert. A subsequent post will discuss the final three categories, general examination issues mentioned in the Alert and additional considerations for any exam.
This post continues my recap of where things stand regarding the treatment of tokens, coins, cryptocurrencies, and other digital assets under the federal securities laws. My prior post discussed actions and statements made by the SEC in 2017. This post reviews significant enforcement actions and statements this year prior to the recent Coburn enforcement action. Continue Reading