Norm Champ, Director of the Division of Investment Management at the Securities and Exchange Commission, on Thursday gave a speech on the current work of the SEC staff on initiatives relating to investment advisers. This kind of broad update was a frequent feature in the past, but more recently has been less frequently seen.
Derivatives: The most notable update was an announcement that the staff will again consider exemptive requests under the Investment Company Act of 1940 relating to actively managed exchange-traded funds that make use of derivatives. ETFs seeking exemptive orders to allow the use of derivatives must represent (i) that the ETF's board periodically will review and approve the ETF's use of derivatives and how the ETF's investment adviser assesses and manages risk with respect to the ETF's use of derivatives; and (ii) that the ETF's disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance. The staff announced in March 2010 that it would defer consideration of exemptive requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives, and the issuance of such exemptive orders has been on hold since then. Because of concerns regarding leveraged ETFs, the staff continues not to support new exemptive relief for them. Subsequent to Champ's speech, the staff issued an announcement that it would not recommend enforcement action if actively-managed ETFs operating in reliance on certain existing orders invest in options contracts, futures contracts or swap agreements, provided that they comply with the representations stated above. My colleagues at Stradley Ronon Stevens & Young, LLP have produced a Fund Alert on the SEC's change of position on derivatives, and it is linked below.
JOBS Act: The Jumpstart Our Business Startups Act required the SEC to revise its rules to provide that the prohibition against general solicitation or general advertising shall not apply to offers and sales of securities made pursuant to Rule 506 of Regulation D, provided that all purchasers of the securities are accredited investors. The SEC proposed implementing rule changes on August 29, but the proposal has proved highly controversial, both because of its lack of investor protections and because it was initially intended to be an interim final rule, but was changed to a conventional proposal shortly before the open meeting to propose it. Champ noted that commenters have different views about the extent to which private funds should be permitted to advertise publicly, and the staff is carefully reviewing those comments and considering what recommendations to make to the Commission. The addition of advertising rules for private fund advisers is a change to the rule proposal particularly sought by the Investment Company Institute.
(As an aside: Patrick McHenry (R - NC), the Chairman of the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, on November 30 wrote to SEC Chairman Mary Schapiro, criticizing the SEC's failure to adopt an interim final rule and quoting internal emails to and from Meredith Cross, Director of the SEC's Division of Corporation Finance, who supported adopting an interim final rule. The letter urged Schapiro to complete the adoption of a final rule before she steps down from the SEC on December 14. It is now less than the statutorily required seven days for an open meeting notice, and no open meeting notice has been posted, so there presumably will not be another open meeting before Schapiro's departure. The SEC announced on December 4 that Cross will leave the SEC at the end of the year.)
Uniform fiduciary standard: The staff last year released a study recommending that the SEC engage in rulemaking to implement a uniform fiduciary standard of conduct for broker-dealers and investment advisers when they provide personalized investment advice about securities to retail investors. Champ said that the staff has been working on a request for information and economic data on this issue.
Private fund advisers: Champ said that the staff has received inquiries regarding the application of the investment adviser advertising rules and staff positions to private fund advisers, especially in light of the JOBS Act, and how certain provisions of the books and records rule apply to advisers of private equity funds. The staff is considering these and other issues raised by private fund advisers and considering what action, if any, should be taken or recommended to the Commission to address these questions.
Valuation: Champ said that the staff believes there is a need to provide additional guidance on valuation of securities held by registered investment companies. He noted that much has changed since the SEC last issued guidance regarding valuation.
Conspicuously absent from Champ's speech: Any reference to money market funds.
Champ's speech, which includes a link to the March 2010 press release on derivatives, is available online at
The related no-action announcement is at
The Stradley Ronon Fund Alert on the SEC change of position on derivatives is at
Rep. McHenry's letter to Chairman Schapiro has been posted to the SEC website at
A FundLaw post on the SEC's JOBS Act rule proposal is at
John M. Baker <JMB@...
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
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