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
As Fintech Platforms Grow Up, Investment Management Firms Face the ‘Problems of Tomorrow’
Read our new article in The Investment Lawyer to learn more about the legal and regulatory implications of emerging technologies, including blockchain and digital ledger technology, investing in fintech companies, robo-advisers and algorithms, and cybersecurity.
Segregating Custody of Family Office Assets
Our previous post discussed how a family office registered as an investment adviser (RIA) under the Investment Advisers Act of 1940 (Advisers Act) might underestimate the scope of its custody of family assets for purposes of Rule 206(4)‑2. The problem is that the rule’s definition of custody extends to all funds and securities an RIA has the power to withdraw, even those not held for investment. This post considers how a family office with sufficient personnel to independently staff its RIA can limit the scope of funds and securities subject to Rule 206(4)‑2. Continue Reading
Custody Pitfalls for Family Offices
The staff of the Division of Investment Management (IM) recently issued a flurry of interpretive guidance regarding when advisers are deemed to have custody of their clients’ funds and securities. The guidance covers transfers among a client’s custodial accounts, standing letters of instruction to a custodian, and inadvertent custody under the client’s custodial agreement. The guidance does not affect family offices exempted from the Investment Advisers Act of 1940 (Advisers Act) by Rule 202(a)(11)(G)‑1. The guidance also does not address issues commonly faced by family offices that must register under the Advisers Act.
SEC Enforces Campaign Contributions Rule
Yesterday, the SEC announced a number of political contribution-related settlements with investment advisers, both registered and exempt. As background, Rule 206(4)-5 under the Investment Advisers Act of 1940 limits the size of political contributions that certain personnel of an investment adviser may make to state and local officials, among other things. Specifically, limits apply to contributions to officials or candidates (such as a Governor or State Treasurer) who can influence the investment decisions of public institutional investors (such as state employee pension plans) that are clients of the adviser or invest in the adviser’s funds. If the relevant contribution threshold is breached, an adviser is prohibited from accepting compensation from the specific public investor for a two-year period. A quick summary of the settlements appears in the table below. Continue Reading
“Odd Lots” and Valuation Déjà Vu–Part 2
In the first part of this post, I explained how trading odd lot MBS can create the same valuation issue as trading PIPEs. I also touched on some important differences between MBS and PIPEs. In this part, I’ll examine why these differences may make the valuation of odd lot MBS more problematic than the valuation of PIPEs. The Order is significant for investment advisers as well as investment companies, insofar as the SEC asserted that PIMCO’s valuation procedures violated Rule 206(4)-7. Continue Reading
“Odd Lots” and Valuation Déjà Vu–Part 1
The SEC’s recent settlement (the “Order”) with Pacific Investment Management Company (“PIMCO”) reflects a new twist on an old issue: buying securities at bargain prices and then marking them up when calculating NAVs. The SEC first addressed this issue in 1969 in the context of what we now refer to as “PIPEs.” The first part of this post examines the similarities and differences between PIPEs and the mortgage-backed securities (“MBS”) addressed in the Order. The second part explains why “odd lot” MBS may be more problematic than PIPES. Continue Reading
SEC Chair’s Suggested Expansion of Executive Liability Unlikely to Occur
Apparently lost in the news of the impending departure of SEC Chair Mary Jo White is her recent suggestion to expand liability of corporate executives. In a speech on November 18, 2016, Chair White suggested a potential change in federal securities law that would hold executives accountable even if they are not involved in the misconduct and did not know about it. Given recent signals from the new administration in Washington, we believe this potential expansion of liability is unlikely to occur.
