On April 28, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against a company and its chief executive officer (“CEO”) for alleged fraud in connection with the company’s stated response to the COVID-19 pandemic. In its complaint, the SEC alleged that the company issued two press releases containing false or misleading statements in which the company purported to be negotiating the sale of N95 masks and then made claims that it was in possession of N95 masks. After regulators inquired about these claims, the SEC alleged that the company issued a third press release a month later that it did not have any N95 masks on hand. The complaint asserts that the company’s stock trading volume and stock price increased significantly as a result of the initial press releases. Continue Reading SEC Alleges COVID-19 Related Fraud by a Company after Suspending Trading

This post continues my consideration of why certain “unfunded commitment agreements” should be carved out of the valuation at risk limitations of re-proposed Rule 18f-4. My previous post explained why two of the justifications offered for this carve out do not bear scrutiny. My current view is that the scope of the carve out depends on the third proposed justification: that some commitments may not have “leveraging effects.” This requires an understanding of the leveraging effects regulated by Section 18 of the Investment Company Act.

I will use the example of money market funds to explore “leveraging effects” because (a) it allows me to answer a question raised in the proposing release and (b) it illustrates another means of limiting leverage. Continue Reading Money Market Funds and Re-Proposed Rule 18f-4

The SEC has the authority under the Securities Exchange Act of 1934 to suspend trading in a given security if it deems it necessary for the public’s interest. It has been exercising its authority to suspend trading with increased frequency for potentially false and misleading statements made in connection with the COVID-19 pandemic. The following update addresses these developments and their implications.

Click here to read the full update.

In a previous post we covered the April 14, 2020 statement from the SEC’s Division of Investment Management encouraging registered funds to assess and, as appropriate, update their prospectus risk disclosures in light of the COVID-19 pandemic. Now, Dalia Blass, Director of the Division, has joined with the Chairman of the SEC, the PCAOB Chairman and others at the SEC to release a joint public statement discussing how Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (the “Statement”).

The Statement highlights challenges that the SEC and the PCAOB continue to observe in emerging markets. Corporate data flow in emerging markets can be significantly limited for political and other reasons, which can impact the valuation and risk assessment of emerging market companies. The Statement reminds investment advisers and registered and private funds of their disclosure obligations generally, and posits key disclosure and other considerations around emerging market investments. Continue Reading Emerging Markets Risks: Disclosure Considerations for Funds and Advisers

This post continues my assessment of the proposed treatment of unfunded commitments under re-proposed Rule 18f-4. My previous post questioned whether the proposed definition of an “unfunded commitment agreement” successfully carved these transactions out of the definition of “derivatives transactions.” This post begins my evaluation of why such a carve out may be warranted.

The SEC’s release cites three factors offered by commenters that the SEC agreed “distinguish unfunded commitment agreements from … derivatives transactions.” Unfortunately, the first two of these factors do not provide a sound basis for drawing such a distinction. Continue Reading Re-Proposed Rule 18f-4: How Not to Distinguish Commitments from Derivatives

My initial posts on re-proposed Rule 18f-4 reflect my generally favorable reactions to the SEC’s attempt to develop a practical, hence imperfect, means of implementing the limitations on senior securities required by Section 18 of the Investment Company Act of 1940. My initial series of post written at the time Rule 18f-4 was first proposed attempted to explain some of the inherent difficulties of this task.

I will now turn to a more problematic matter: the proposed treatment of so-called “unfunded commitment agreements.” While I basically agree with the proposed approach of limiting commitments by requiring a reasonable means of meeting the fund’s obligations, I have reservations about how and why the rule proposes to implement this approach. Continue Reading Does Re-Proposed Rule 18f-4 Have Commitment Issues?

On April 14, 2020, the staff of the SEC’s Division of Investment Management (the “Division”) published a Statement on the Importance of Delivering Timely and Material Information to Investment Company Investors (the “Statement”). The Statement gives notice that the Division has a keen eye on prospectus risk disclosure as it continues to monitor the ongoing impacts of the COVID‑19 pandemic on investment companies. “In light of the current uncertainties and market disruptions,” the Division explains, “investors need high-quality financial information more than ever.”

The Statement comes amid other guidance and temporary regulatory relief from the SEC, including public statements by Chairman Jay Clayton and Chief Accountant Sagar Teotia emphasizing the need to assist “Main Street investors” in navigating turbulent markets. Uniquely, the Statement focuses explicitly on how fund complexes might modify existing disclosures. Continue Reading SEC Staff Speaks to COVID-19 and Fund Prospectus Disclosure

The SEC’s Division of Investment Management has posted Coronavirus (COVID-19) Response FAQs (the “FAQs”), which have been updated through April 14, 2020. The FAQs summarize and provide links to various forms of relief granted by the SEC and the Division to registered investment companies and investment advisers. A list of the questions addressed is provided below. Continue Reading SEC Provides a Consolidated Reference for COVID-19 Relief for Investment Companies and Advisers

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert to explain the focus of its upcoming examinations of broker-dealers when gauging their compliance with Regulation Best Interest (Reg BI). In particular, OCIE will focus on reviewing broker-dealers’ policies and procedures relating to Reg BI. 

OCIE’s Reg BI examinations are scheduled to begin soon after June 30, 2020, and last for about a year. The examinations will not be delayed because of COVID-19. Read the full article. 

In recognition of the disruptions caused by COVID-19, the Division of Investment Management (the “Division”) of the Securities and Exchange Commission (the “SEC”) will require interested persons to submit written hearing requests for filed exemptive applications by sending an e-mail to the SEC’s Secretary at Secretarys-Office@sec.gov rather than sending a request to the SEC by physical mail. The Division will reflect this e-mail requirement in forthcoming notices. In addition, the Division is offering applicants the option to provide an e-mail address to be included in the SEC’s notice of their application so that interested persons may serve applicants by e-mail (instead of by mail or personally). Continue Reading The Division of Investment Management Responds to COVID-19’s Impact on Requests for Hearings on Exemptive Applications