Investment Management
SEC Staff Confirms that Hedge Fund Solicitors Are Not Subject to the Cash Solicitation Rule
What This Means
As had long been expected, Securities and Exchange Commission (SEC) staff confirmed a few days ago that the SEC’s cash solicitation rule, Rule 206(4)-3 (the Rule) under the Investment Advisers Act of 1940 (the Advisers Act), does not apply to a registered adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, hedge funds and other pooled investment vehicles.1 The Rule prohibits a registered investment adviser from directly or indirectly paying a cash fee to a person who solicits on the adviser’s behalf, unless the solicitor is not subject to a court order or administrative sanction, and the fee is paid pursuant to a written agreement to which the adviser is a party. >>> continued
SEC Proposes Rule That Would Require Equity Index Annuities to Be Registered Securities
What This Means
The Securities and Exchange Commission (SEC) has proposed a rule which, if adopted, is expected to require all insurance companies issuing equity index annuities (EIAs) to register them as securities under the Securities Act of 1933 and sell them pursuant to a prospectus. An EIA is an annuity that provides annual interest equal to some or all of the return of a specified securities index, such as the S&P 500, or a minimum percentage rate specified in the annuity contract, whichever is greater. Insurance agents who currently can sell EIAs with a state insurance license would have to pass FINRA tests and become registered representatives associated with a broker-dealer. EIA sales practices would become subject to the antifraud provisions of the securities laws, including Rule 10b-5. Given the current uncertainty as to how the law applies to EIAs, the proposed rule would not apply retroactively, but only to EIA sales after a rule is adopted. The proposed rule does not address the status of general account life insurance products whose return is index-based. >>> continued
Interactive Data for Mutual Fund Risk/Return Summary
What This Means
The U.S. Securities and Exchange Commission (SEC) recently proposed to require mutual funds to provide their risk/return summary information in interactive data format as an exhibit to their post-effective amendment filings on Form N-1A. The proposed interactive data requirements would not affect the format of or the information required to be disclosed in a mutual fund’s risk/return summary in its prospectus. The proposed amendments also would require mutual funds to post the interactive data to their respective websites. >>> continued
CFTC Authority Extended over Retail Forex and Energy Trading
What This Means
Recently, Congress enacted amendments to the Commodity Exchange Act (CEA) that grant the Commodity Futures Trading Commission (CFTC) extended authority to regulate over-the-counter foreign exchange (forex) trading with retail customers and trading in energy derivatives conducted over the counter and through electronic platforms. As a result of the new CEA provisions, certain futures market participants will have to register their retail forex business with the CFTC. Additionally, futures commission merchants (FCMs) and futures-introducing brokers involved in retail forex and energy trading will want to consider making changes to their compliance procedures and processes. The new provisions of the CEA are scheduled to become effective September 19, 2008. >>> continued
Seventh Circuit “Disapproves” of Gartenberg Factors
PDF version The Seventh Circuit Court of Appeals recently cast some uncertainty over the long-standing factors that fund directors use to determine the proper level of an adviser’s fees as set forth in Gartenberg v. Merrill Lynch. The court affirmed the lower court’s dismissal of a complaint against Harris Associates, the adviser to the Oakmark family of mutual funds. In support of a claim under Section 36(b) of the Investment Company Act of 1940, the plaintiffs argued that, because the funds paid a higher fee than the adviser’s institutional accounts for allegedly similar services, the funds’ fees could not have been the result of arm’s-length bargaining. While the Seventh Circuit agreed with the lower court’s dismissal of this claim, it is unclear how this decision will affect the treatment of Gartenberg by other courts. >>> continued