June 2006 Archives
SEC Hedge Fund Registration Rule Vacated by D.C. Circuit
On June 23, the U.S. Court of Appeals for the D.C. Circuit vacated the SEC’s rule requiring registration of certain hedge fund advisers, Rule 203(b)(3)-2 (Hedge Fund Rule) under the Investment Advisers Act of 1940 (Advisers Act). The SEC adopted the Hedge Fund Rule on December 2, 2004 under then-Chairman William Donaldson, and over the dissent of Commissioners Paul Atkins and Cynthia Glassman. The Hedge Fund Rule officially took effect on February 6, 2006.
SEC Adopts Rules Regarding Fund-of-Funds Arrangements
Yesterday, the SEC adopted three new rules under the Investment Company Act of 1940 (1940 Act) that provide exemptive relief for certain fund-of-funds arrangements. The rules codify and expand on a number of exemptive orders the SEC has issued that permit funds to invest in other funds. The SEC also mandated enhanced disclosure concerning the expenses associated with a fund-of-funds arrangement by requiring the expenses of acquired funds to be aggregated and shown as a separate line item in the acquiring fund’s prospectus fee table. The disclosure requirements have a compliance date of January 2, 2007.
Article - In Securities Deals, Plan for the Regulators: Know the Rules and Avoid Delay
Published in Legal Times, week of June 19, 2006 (Vol. 29, No. 25), by John Ayanian, Monica Parry, Beth Kiesewetter, Stephen Cohen.
Read the article (reprinted with permission).
SEC Files Status Report on Fund Governance Rule with US Court of Appeals and Issues Release Soliciting Comment
The SEC filed a status report with the U.S. Court of Appeals for the District of Columbia yesterday in connection with its rules requiring a mutual fund’s board of directors to have an independent chair and 75 percent of the board be composed of disinterested directors. In April, the court held that the SEC violated the Administrative Procedure Act by failing to seek comment on the data used to estimate the costs of implementing the two rules. Instead of vacating the rules, the court ordered the SEC to file a status report with the court within 90 days and reopen the rulemaking record for comments on the costs of implementing the two rules.
SEC Staff Issues No-Action Letter Regarding Cross Traders Where the Adviser and/or Its Controlling Persons Own 25% or Less of an Account
In a recent no-action letter provided to Gardner Russo & Gardner (GRG), the SEC staff provided no-action relief from Section 206(3) of the Advisers Act for cross transactions between a client account and an account of which the investment adviser and/or a controlling person, in the aggregate, owns 25% or less. Importantly, the SEC staff confirmed that Section 206(3) would apply to cross transactions between a client account and an account over which an investment adviser and/or a controlling person, in the aggregate, owns more than 25%. The SEC staff also reaffirmed the SEC’s view that ownership interests of an adviser’s controlling person(s) are deemed to be ownership interests of the adviser for purposes of Section 206(3). The no-action letter expresses no view on whether Section 206(3) applies to cross trades between client accounts when non-controlling personnel of an adviser have ownership interests in the accounts.
NYSE Issues Information Memo Regarding Directed Brokerage
On June 1, 2006, NYSE issued Information Memo 06-38, which provides guidance relating to the obligation of NYSE member firms to abstain from participation in directed brokerage arrangements prohibited by Rule 12b-1(h) under the Investment Company Act of 1940. Rule 12b-1(h) prohibits mutual funds from considering the promotion and sale of fund shares as factors in the selection of broker-dealers to execute fund portfolio transactions (Executing Brokers). In addition, Rule 12b-1(h) prohibits mutual funds from using their brokerage commissions to provide additional compensation to broker-dealers that promote the sale of fund shares (Selling Brokers). These practices are commonly referred to as "directed brokerage arrangements." NYSE stated in Information Memo 06-38 that member firms are obligated not to accept directed brokerage pursuant to NYSE Rules 401 and 476(a)(6).
Nasdaq Exchange Registration, Member and Issuer Transition Issues
On January 13, 2006, the Securities and Exchange Commission (“SEC”) approved the application of the Nasdaq Stock Market (“Nasdaq”) to become registered as a national securities exchange. Under the SEC’s approval order, Nasdaq will be able to begin operating as a national securities exchange after a number of legal and operational conditions have been satisfied. Nasdaq has indicated that it hopes to begin operating as an exchange in August 2006.
Article - What to Do If Your Fund Becomes Subject to ERISA
Published in The Investment Lawyer (Vol. 13, No. 6, pp. 3-17) by I. Lee Falk and Daniel Kleinman.