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 The SEC Issues its Long-Awaited ETF Rule (Part 3) – The ETF Exemptive Order

Periodically, SEC staff issue alerts describing deficiencies observed during exams, as a tool to help advisers improve their compliance programs. the Office of Compliance Inspections and Examinations issued a Risk Alert identifying common deficiencies in adviser compliance with Rule 206(4)-3 under the Investment Advisers Act of 1940 (the “Cash Solicitation Rule”), and suggesting that deficiencies in this area could indicate that an adviser is struggling with its fiduciary duties to clients under Sections 206(1) and 206(2) of the Advisers Act.

Continue Reading SEC Staff Warns About Cash Solicitation Rule Compliance

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

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

My first post discussed the requirements for the Section 4(c) exemption from broker-dealer registration added by the JOBS Act. This second part will apply Section 4(c) of the Securities Act of 1933 to a number of situations where questions can be raised whether the activities require registration as a broker-dealer.
Continue Reading Section 4(c) of the 1933 Act: The Orphan Exception from Broker-Dealer Registration – Part Two

We have previously discussed the long-running saga regarding whether transaction-based compensation related to non-public sales of securities require registration as a broker-dealer under the Securities and Exchange Act of 1934 (“Exchange Act”). Our discussions have included (i) the tricks and treats of the SEC’s Crowdfunding release last Halloween, (ii) California’s exemption for “finders,” and (iii) a Christmas present for resellers of privately placed securities in last year’s Fixing America’s Surface Transportation (FAST) Act. As a precursor to any of this, Congress added Section 4(b)(1) [now treated as if it had been properly renumbered as Section 4(c) by the FAST Act] to the Securities Act of 1933 (“1933 Act”) describing circumstances in which a person involved in a Rule 506 offering under Regulation D would not have to register as a broker-dealer under Section 15(a)(1) of the Exchange Act.
Continue Reading Section 4(c) of the 1933 Act: The Orphan Exception from Broker-Dealer Registration – Part One

This post continues my discussion of the IM Guidance Update released on January 6, 2016, in which the SEC staff urges boards to consider the following factors in meeting the staff’s expectations of boards, vis-à-vis Rule 12b-1 and Rule 38a-1, in overseeing the use of fund assets to cover what the staff has dubbed “Sub-Accounting Fees” for recordkeeping, sub-transfer agent, and other purely administrative services (“Sub-Accounting Services”) that intermediaries provide to shareholders:
Continue Reading Fund Boards and Advisers Called to Action by SEC “Distribution in Guise” Update – Part Two

Since the SEC’s mutual fund distribution sweep examination began in 2013, the industry has become increasingly focused on the various types of payments made to intermediaries selling fund shares and providing services to shareholders.  Fund assets may, of course, be used to compensate intermediaries for marketing and other distribution-related costs, including “shelf space” on sales platforms, only under a board-approved Rule 12b-1 plan.  Outside of a 12b-1 plan, Fund assets may be used to cover what the SEC has dubbed “Sub-Accounting Fees” for recordkeeping, sub-transfer agent, and other purely administrative services (“Sub-Accounting Services”) that intermediaries provide to shareholders.
Continue Reading Fund Boards and Advisers Called to Action by SEC “Distribution in Guise” Update – Part One