Compliance Matters Q2 2020

Jul 23, 2020

Curated for compliance officers of mutual funds and investment advisers, please find summaries and links to headlining compliance and regulatory topics from the second quarter of 2020.

Regulators have continued to calibrate temporary relief to the unfolding COVID-19 pandemic. Even then, they have managed to issue modest rule proposals and guidance this past quarter, while continuing their torrid pace of rulemakings expected to be released over the coming months. Below are highlights from the evolving regulatory landscape.

SEC Temporary Relief

Update on the Commission’s Targeted Regulatory Relief to Assist Market Participants Affected by COVID-19 and Ensure the Orderly Function of our Markets

Over the past several months, the SEC issued temporary relief for both registered funds and advisers to address operational difficulties and challenging market conditions associated with the COVID-19 pandemic. The regulator has reassessed those actions in light of market developments and observations of registrants’ experience, and it has made adjustments and set forth flexible expectations for future relief as the need arises.

The SEC has summarized its position on various relief on its website. Selected matters include:

Relief that remains in force or has been extended:

  • In-person board votes – the SEC has extended, until at least December 31, 2020, relief from in-person board voting requirements in connection with Sections 15(c) and 32(a) if votes are cast at a telephonic or videoconference meeting and the board, including a majority of non-interested trustees, ratifies its vote at the next in-person meeting.
  • Proxy Material Delivery – This relief remains in effect, though the staff expects that few registrants will need to avail themselves of this relief with respect to materials sent to domestic mailing addresses; the relief remains available for proxy materials sent to international addresses if the common carrier has suspended delivery service as a result of COVID-19.
  • Short-Term Funding Flexibility – The Commission has extended relief via an exemptive order that permits mutual funds and insurance company separate accounts to obtain short-term funding, including borrowing from certain affiliates, entering into lending arrangements or borrowings that deviate from fundamental policies, and more flexible interfund lending. The Commission extended the relief until a date to be specified in a public notice from Commission staff, which date will be at least two weeks from the date of the notice.
  • Transfer Agent Relief – The Commission provided registered transfer agents with exemptive relief for certain recordkeeping, reporting, and processing time obligations that could be difficult to meet due to operational challenges associated with the COVID-19 pandemic (except that transfer agents will remain fully subject to the safeguarding requirements of Exchange Act Rule 17Ad-12). The Commission extended the relief until a date to be specified in a public notice from Commission staff, which date will be at least two weeks from the date of the notice.
  • Fingerprinting, Manual Signatures, Paper Submissions, and Notarization Requirements – The Commission has relieved transfer agents, broker-dealers, national securities exchanges and their members, and clearing agencies from the statutory requirement that certain persons be fingerprinted, and Division staff have stated that they would not recommend enforcement action if registrants make alternate arrangements, as detailed in the statement, for delivery, execution, and notarization of certain paper filings. The Commission extended the relief until a date to be specified in a public notice from Commission staff, which date will be at least two weeks from the date of the notice.
  • International Mail – The Divisions of Investment Management and Trading and Markets issued a joint staff statement providing that they would not recommend enforcement action if certain alternate arrangements are satisfied for mailing certain regulatory communications to persons in jurisdictions where mail service has been suspended. This statement expires on the date, as applicable to each specific affected international jurisdiction, that common carriers resume mail delivery.
  • Form N-23C-2 (closed-end funds and BDCs) – relief until August 15 for notices to call or redeem securities need not be made 30 days in advance if the fund notified the Commission, ensures that the shortened notice period is permitted under state law and governing documents, and the fund files a notice containing all information required by Rule 23c-2 before any call or redemption of existing securities, offering replacement securities, or notifying existing shareholders.

Relief that has expired.

  • Prospectus Delivery to Existing Shareholder – The Commission permitted delayed delivery (but not for new shareholders) under certain circumstances. That relief expired on June 30, 2020, and has not been extended.
  • Forms N-CEN and N-PORT – By exemptive order, the Commission extended the filing deadlines for Form N-CEN and Form N-PORT due between March 13, 2020 and June 30, 2020. That relief has not been extended.
  • Annual and semi-annual shareholder reports – As with Forms N-CEN and N-PORT, the Commission by exemptive order extended the deadlines for transmittal of shareholder reports due between March 13, 2020 and June 30, 2020. That relief likewise has not been extended.
  • Form ADV and Form PF filing and delivery deadlines – By exemptive orders, the Commission extended the filing deadlines for Form ADV, Form ADV Part 1A reports, and Form PF, and delivery deadlines for Form ADV Part 2, due between March 13, 2020 and June 30, 2020. That relief has expired without extension.

The SEC has encouraged market participants to engage with the Commission and its staff to seek further guidance or request additional relief. For more information, including specific detailed requirements, registrants should review the SEC’s summary, which contains links to each relevant Order or other regulatory statement available at the following links on the SEC’s website:

Other SEC Rules and Orders

ETF Generic Listing Standards

The SEC has granted requests, effective immediately, for Exchange Rule changes that would allow an ETF that meets the requirements of Rule 6c-11 to be listed on the Exchanges without the need to meet (most) other generic listing standards and without any further Commission approval. These changes effectively do away with the quantitative standards for initial and continued listing, eliminate the need to disseminate an intraday indicative value, and discontinue certain quarterly reporting obligations. For more information, please follow the links to the SEC’s website:

Offering Reform for Closed-End Investment Companies

The SEC has adopted rule amendments that impact BDCs and closed-end funds. The amendments primarily are designed to allow BDC and other closed-end funds to use the offering rules that are already available to operating companies and to streamline disclosures. There are three provisions, however, that also may have a modest impact on other closed-end or interval offerings. First, interval funds will pay registration fees in a manner that resembles mutual funds under Rule 24f-2. Hence, they will register an indefinite number of shares and pay fees based on net issuance. Second, closed-end funds will be required to provide a management discussion of fund performance in their annual reports just like mutual funds and ETFs. Third, funds that file Form 24F-2 to pay registration fees (mutual funds, ETFs, and now interval funds) will be required to file the form in XML structured data format. The amendments will be effective on August 1, 2020, except the amendments related to registration fee payments will become effective August 1, 2021. The amendments include further transition periods, which allow later compliance with various provisions after the effective dates. For more information, please follow the links to the SEC’s website:

SEC Proposed Rules

Rule 2a-5: Good Faith Determinations of Fair Value

The SEC is seeking comment on proposed Rule 2a-5, which would address valuation practices and the role of the board of directors with respect to the fair value of the investments of a registered investment company or business development company. The proposal largely reflects a consolidation of past guidance, coupled with explicit approval for the board to assign fair valuation to the investment adviser. Boards would be responsible for oversight, with specific risk management requirements (including testing and avoiding conflicts of interest), and advisers responsible for periodic reporting to the board. If adopted as proposed, the Rule would not amount to a tectonic shift in how valuation is determined, but there are aspects of the Rule (e.g., oversight of evaluated pricing vendors or board reporting) that in all likelihood will elicit some objections during the comment period. The comment period closed on July 21, 2020.

For more information, please follow this link to the SEC’s website:

OCIE Guidance and Alerts

OCIE Examination Initiative: LIBOR Transition Preparedness

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued an alert outlining a new examination initiative concerning firms’ preparedness for transitioning from the London Interbank Offered Rate (LIBOR) to a new reference rate. LIBOR is commonly used as a benchmark for financial contracts, including for setting interest rates for corporate and municipal bonds, asset-backed securities, interest rate swaps, lines of credit, and derivatives. The discontinuation of LIBOR, currently expected to occur after 2021, could have significant impact on financial instruments and may present a material risk for some registrants. Accordingly, the SEC has repeatedly urged registrants to prepare for the transition to a new reference rate. Having identified this topic among the exam priorities for 2020, OCIE is using this alert to flesh out exam expectations, including a list of sample requests it expects to ask in upcoming examinations. Registrants should review the sample questions to ensure they are prepared to demonstrate their preparedness in case of an examination. For more information, please follow this link to the SEC’s website:

OCIE Risk Alerts: Reg BI and Form CRS

In anticipation of the June 30, 2020, compliance date for Reg BI and Form CRS, OCIE issued two risk alerts that address the anticipated scope of exams that will address Reg BI and Form CRS. While not applying to advisers that serve only mutual funds, Reg BI and the associated Form CRS will be of interest to advisers that also serve retail clients. Exams regarding Reg BI generally will focus on whether broker-dealers have made a good faith effort to implement policies and procedures to comply with the rule. Exams focused on Form CRS generally will focus on whether firms have made a good faith effort to implement the form, including filing and posting the relationship summary and delivering it to retail customers. For more information, please follow this link to the SEC’s website:

Other Guidance

Division of Investment Management Coronavirus (COVID-19) Response FAQs

The Commission’s Division of Investment Management has issued responses to FAQs concerning measures taken to provide relief to advisers and funds impacted by COVID-19, including guidance for disclosures. Much of the guidance is reflected in temporary relief measures discussed above. The staff emphasized that reliance on temporary regulatory relief would not be a risk factor used to determine whether OCIE should commence an examination. The FAQs also discuss disclosure obligations, particularly with regard to the receipt of loans under the Paycheck Protection Program (PPP), and the staff provides information about contacting the SEC for additional questions or relief. For more information, please follow this link to the SEC’s website:

FINRA Items

FINRA Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic

FINRA continues to update its FAQs concerning a range of temporary relief to member firms from rules and requirements in the wake of the Coronavirus pandemic. Recent additions or updates to the FAQs include recording customer meetings, payment of FINRA membership assessment fees, net capital calculations, documenting reliance on FAQs, fingerprinting requirements, disclosure requirements, individual registration and continuing education questions, and questions concerning supervision. For more information, please follow this link to the FINRA website:

In the wake of the SEC’s adoption of the Regulation Best Interest and in anticipation of the June 30, 2020, compliance date, FINRA has published highlights of best practices it observed during the course of its reviews designed to assess firms’ preparedness for the new regulation. The highlights discuss effective approaches for successful compliance with Reg BI, including governance, supervisory procedures, managing conflicts of interest, and implementing Form CRS. For more information, please follow this link to the FINRA website:

CFTC Items

Amendments to Compliance Requirements for Commodity Pool Operators on Form CPO–PQR

The CFTC has proposed changes to the reporting requirements on Form CPO-PQR. The changes would streamline the reporting requirements by consolidating onto a single schedule and have all CPOs, regardless of size, using the same form, filing with the same quarterly frequency. This would align it with NFA filings, and in fact CPOs could file NFA Form PQR in lieu of filing the revised CPO-PQR (but simultaneously Rule 4.27 would be revised to prohibit filing SEC Form PF in lieu of CPO-PQR). The comment period closed on June 15, 2020. For more information, please follow this link to the CFTC website:

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