United States: Investment Services Regulatory Update - April 2017

Last Updated: May 18 2017
Article by John S. Marten and Nathaniel Segal

NEW RULES, PROPOSED RULES AND GUIDANCE

SEC Adopts T+2 Settlement Cycle for Securities Transactions, Shortening Timing Mismatch for Mutual Funds

On March 22, 2017, the SEC adopted an amendment to the settlement cycle rule under the Securities Exchange Act to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (i.e., T+3) to two business days after the trade date (i.e., T+2). The SEC's adopting release for the rule amendment cites comments on the T+2 proposing release (published on September 28, 2016), including from the Investment Company Institute (ICI), that noted, in the context of mutual funds, a shortened settlement cycle would reduce the timing mismatch and funding gap between settlement of a mutual fund's portfolio securities (which settle on T+3) and the settlement of shares issued to investors through the mutual fund itself (which generally settle on T+1), improving cash management for funds to meet redemptions. The adopting release notes that such comments support the SEC's belief that "by better aligning the settlement cycle between the underlying portfolio securities and the securities issued to investors through the mutual fund, the risk to the fund, and ultimately investors is reduced." The amendment to the settlement cycle rule will go into effect on September 5, 2017.

The adopting release directs the SEC staff to submit a report to the SEC no later than September 5, 2020, examining the impact of the establishment of the T+2 standard settlement cycle on market participants and the potential impacts associated with moving to an even shorter settlement cycle.

The SEC's adopting release is available at: https://www.sec.gov/rules/final/2017/34-80295.pdf.

SEC Staff Issues No-Action Letter Permitting U.S. Master Fund— Foreign Feeder Fund Arrangements

On March 8, 2017, the staff of the SEC's Division of Investment Management (the Staff) issued a no-action letter (the No-Action Letter) stating that it would not recommend enforcement action to the SEC under Section 12(d)(1)(A) or (B) of the 1940 Act against: (i) a foreign investment company that is not registered under the 1940 Act (a Foreign Feeder Fund), if the Foreign Feeder Fund acquires (1) securities of a single 1940 Act-registered open-end fund (a U.S. Master Fund) in excess of the limits of Section 12(d)(1)(A) of the 1940 Act and, for certain Foreign Feeder Funds, (2) Foreign Currency Instruments (as defined in the No-Action Letter); and ( ii) the U.S. Master Fund and its principal underwriter (the Master Fund Principal Underwriter) and any broker or dealer for selling the U.S. Master Fund's securities in excess of the limits of Section 12(d)(1)(B) of the 1940 Act to a Foreign Feeder Fund (the Proposed Structure). As explained in the letter to the Staff seeking no-action assurance (the Incoming Letter), the Proposed Structure would enable global investment managers to efficiently offer investment products across several foreign jurisdictions. The law firm that submitted the request (the Applicant) asserts in the Incoming Letter that the "Proposed Structure would be beneficial to the U.S. mutual fund industry and could potentially attract significant assets to the U.S. and create significant scale to the benefit of investors in U.S. Master Funds."

Section 12(d)(1)(A) of the 1940 Act, in relevant part, prohibit s a registered or unregistered investment company (an acquiring fund) from investing in the securities of a registered fund (the acquired fund) if immediately after the acquisition the acquiring fund: (i) owns more than 3% of the outstanding voting securities of the acquired fund; (ii) has more than 5% of its total assets invested in the acquired fund; or (iii) has more than 10% of its total assets invested in the acquired fund and all other acquired funds. Section 12( d)(1)(B) of the 1940 Act prohibits an acquired fund, its principal underwriter and any broker or dealer registered under the Exchange Act, from knowingly selling the acquired fund's securities to any acquiring fund and any companies controlled by such acquiring funds if, immediately after the sale: (i) more than 3% of the acquired fund's outstanding voting securities would be owned by the acquiring fund or companies controlled by it; or (ii) more than 10% of the acquired fund's outstanding voting securities would be owned by the acquiring fund and other funds and companies controlled by them.

Section 12(d)(1)(E) of the 1940 Act provides a conditional exemption from the restrictions in Sections 12(d)(1)(A) and (B) of the 1940 Act that is relied upon by, among others, private funds and foreign investment companies to invest in U.S.-registered funds. Absent no-action relief from the Staff, as applied to the Proposed Structure, Section 12(d)(1) (E) would require that: (1) the principal underwriter for the Foreign Feeder Fund must be a broker or dealer registered under the Exchange Act or a person controlled by such broker or dealer; (2) the U.S. Master Fund's securities are the only investment security held by the Foreign Feeder Fund; and (3) the Foreign Feeder Fund purchases or otherwise acquires securities issued by the U.S. Master Fund pursuant to an arrangement with the U.S. Master Fund or its principal underwriter whereby the Foreign Feeder Fund is obligated: (i) either to seek instructions from its shareholders with regard to the voting of all proxies with respect to the U.S. Master Fund's securities and to vote such proxies only in accordance with such instructions, or to vote the shares held by it in the same proportion as the vote of all other shareholders of the U.S. Master Fund's securities; and (ii) to refrain from substituting the U.S. Master Fund's securities unless the SEC shall have approved such substitution in the manner provided in Section 26 of the 1940 Act. However, as the Applicant explains in the Incoming Letter, a Foreign Feeder Fund may not be able to comply with certain provisions of Section 12(d)(1)(E) because of its structure and the laws and/or market practices of the foreign jurisdiction in which it operates. As examples, the Applicant notes that the laws and/or market practices of the foreign jurisdiction in which a Foreign Feeder Fund operates: (i) may prohibit the Foreign Feeder Fund from directly voting the shares of the applicable U.S. Master Fund, which could be viewed as precluding compliance with the "pass through" or "echo" voting requirements under Section 12(d)(1)(E); or (ii) not require the Foreign Feeder Fund to distribute its securities through a principal underwriter or a principal underwriter that is, or that is controlled by, a broker-dealer registered under the Exchange Act.

In granting the no-action relief, the Staff allowed the following deviations from the conditions of Section 12(d)(1)(E):

  • a Foreign Feeder Fund: (a) may have a principal underwriter that either controls or is under common control with an Exchange Act-registered broker-dealer (Foreign Principal Underwriter); and (b) will have as its investment adviser an adviser (Feeder Fund Adviser) that (i) controls, is controlled by, or is under common control with (Control Affiliate), the investment adviser to the U.S. Master Fund (Master Fund Adviser) and the Master Fund Principal Underwriter and (ii) may be registered under the Advisers Act;
  • a Foreign Feeder Fund may hold certain investment securities other than the securities of the U.S. Master Fund, but will do so solely for purposes of hedging either: (a) the performance of the U.S. Master Fund, measured in the U.S. dollar, against the currency of the foreign jurisdiction in which the Foreign Feeder Fund's securities are primarily offered and sold (Designated Currency); or (b) if the U.S. Master Fund seeks to approximate the return of an index, the U.S. dollar and/or foreign currency exposure of the U.S. Master Fund to the Foreign Feeder Fund's Designated Currency; and
  • a Foreign Feeder Fund may either abstain from voting or withhold voting the U.S. Master Fund's shares, rather than pass through such vote to the Foreign Feeder Fund's shareholders or vote proportionately to the vote of the U.S. Master Fund's other shareholders.

In allowing the foregoing deviations from Section 12(d)(1)(E), and in view of, in particular, the potential absence of a principal underwriter or depositor for a Foreign Feeder Fund or participation in the Proposed Structure by a Foreign Principal Underwriter, the Staff required that:

  • the Foreign Feeder Fund will have an investment adviser that is a Control Affiliate of the Master Fund Adviser and Master Fund Principal Underwriter;
  • to the extent the Feeder Fund Adviser is not registered under the Advisers Act, such Feeder Fund Adviser must make its books and records with respect to the activities of the Foreign Feeder Fund available to the SEC and its Staff, designate the Master Fund Adviser as its agent for service of process in the U.S. with respect to the Foreign Feeder Fund, and consent to the jurisdiction of the U.S. courts and the SEC with respect to its activities in connection with the Foreign Feeder Fund;
  • the Foreign Feeder Fund will be organized in, and regulated under the laws of, jurisdictions whose securities regulators have entered into a cooperation agreement with the SEC; and
  • no Foreign Feeder Fund will offer or sell its securities in the U.S., either publicly or privately, or sell its securities to any "U.S. person," as defined in Rule 902(k) of Regulation S; each Foreign Feeder Fund's transactions with its shareholders will be consistent with the definition of "offshore transactions" in Rule 902(h) of Regulation S; and no Foreign Feeder Fund, Feeder Fund Adviser, Foreign Principal Underwriter, any of their respective affiliates, or any person acting on be half of any of the foregoing, will engage in any "directed selling efforts, " as defined in Rule 902(c) of Regulation S, with respect to securities of the Foreign Feeder Fund in the U.S.

The No-Action Letter is available at: https://www.sec.gov/divisions/investment/noaction/2017/dechert-030817-12d1.htm.

SEC Issues Proposal Requiring Use of Inline XBRL Format for Mutual Fund Risk/Return Summaries

On March 1, 2017, the SEC issued a proposed rule that would require the use of the "Inline XBRL" format for the submission of mutual fund risk/return summaries. Inline XBRL allows filers to embed XBRL data directly into an HTML document, eliminating the need to tag a copy of the information in a separate XBRL exhibit. In 2009, the SEC required mutual funds to provide risk/return summary information from their prospectuses in eXtensible Business Reporting Language (i.e., XBRL) format by submitting it to the SEC in an "Interactive Data File" exhibit. The Interactive Data File is required to be posted on a mutual fund 's website for as long as the registration statement or post-effective amendment to which the Interactive Data File relates remains current. If a mutual fund does not submit or post interactive data as required, its ability to file post-effective amendments to its registration statement under Rule 485(b) under the Securities Act is automatically suspended until it submits and posts the interactive data required. The 2009 requirements were intended to make mutual fund risk/return summaries easier for investors to analyze and to assist in automating regulatory filings.

To "help facilitate efficiencies in the mutual fund post-effective amendment filing process," the SEC is proposing changes to the General Instructions to Form N-1A that would change the timing requirements for the submission of Interactive Data Files. As noted in the proposing release, the SEC proposes permitting mutual funds to submit Interactive Data Files concurrently with certain post -effective amendments filed pursuant to Rule 485(b) under the Securities Act. The SEC also is proposing to eliminate the current 15 business day filing period accorded to all mutual fund filings containing risk/return summaries, including initial registration statements, post-effective amendments, and forms of prospectuses filed pursuant to Rule 497 . In the case of initial registration statements and post-effective amendments, the Interactive Data File would be required to be submitted no later than the effective date of those filings. In the case of forms of prospectuses file d pursuant to Rule 497, the Interactive Data File would be required to be submitted concurrently with the filing.

The SEC proposes a phase-in for mutual funds based on net asset size. For "larger entities," identified in the proposing release as mutual funds that together with other investment companies in the same "group of related investment companies" have net assets of $1 billion or more as of the end of the most recent fiscal year, the proposed compliance date is one year after the effective date t o comply with the new reporting requirements. For "smaller entities," i.e., mutual funds that together with other investment companies in the same "group of related investment companies" have net assets of less than $1 billion a s of the end of the most recent fiscal year , the SEC proposes to provide for an additional year to comply with the new reporting requirements.

Comments on the proposed rule are due by May 16, 2017. The SEC's proposing release is available at: https://www.sec.gov/rules/proposed/2017/33-10323.pdf.

To read this Update in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.