Fund of Funds Arrangements

The SEC has approved new Rule 12d1-4 under the Investment Company Act to allow funds to acquire other funds in excess of the limits imposed by Section 12(d)(1) without having to seek exemptive relief in various common scenarios. The Rule should simplify a patchwork of statutory exemptions, rules, exemptive orders, and no-action letters (and results in rescinding Rule 12d1-2 and most related exemptive orders and no-action letters). Under the new rule, funds no longer will need exemptive relief to exceed 3% of another fund or 10% of other funds overall. Acquiring funds will have some voting restrictions to limit control, but those limits do not apply for affiliated funds in the same fund group. The rule will require mirror voting when the acquiring fund has more than 25% of an underlying open-end fund, or 10% of a closed-end fund. Reliance on the Rule requires that advisers make findings that the acquiring fund will not exert undue influence over the acquired fund and fees are not duplicative, and the acquiring and acquired funds must enter into a contract (a “fund of funds investment agreement”) that specifies the terms of their relationship.

In a welcome change from the proposal, the final Rule does not include a restriction that otherwise would have prohibited an acquiring fund from redeeming more than three percent of an acquired fund’s shares in a 30-day period. The final rule mostly eliminates three-tiered structures, except for master-feeder arrangements and money market fund investments. Rule 12d1-4 will permit an acquiring fund, however, to invest in an acquired fund as long as the acquired does not exceed 10 percent of its total assets invested in securities of other investment companies or private funds. Funds that invest in other funds in the same group of investment companies may continue to rely on section 12(d)(1)(G) as long as they limit other investments to U.S. government securities, short-term paper, and money market funds as permitted by Rule 12d1-1 (which has been amended as well).

The new rule will be effective 60 days after publication in the Federal Register, and compliance will be required 425 days after publication. For more information, including specific detailed requirements, registrants should review the SEC’s adopting release at the following link on the SEC’s website:

Rule 12d1-4: Fund of Funds Arrangements

Expedited Exemptive Application Review

The SEC has amended Rule 0-5 under the Investment Company Act to implement an expedited review procedure for routine exemptive applications under the Investment Company Act if they are substantially identical to recent precedent. To qualify, the application must be “substantially identical” to two other applications for which an order was granted within three years of the new application’s initial filing. (That expands the two-year lookback as originally proposed.) To be deemed “substantially identical,” the application would need to seek relief from the same sections of the Company Act and rules thereunder, containing identical terms and conditions, and differing only with respect to factual differences that are not material to the relief requested. Expedited relief is not available for “mix and match” applications that seek to combine portions from multiple prior precedents. If eligible, the staff shall respond within 45 days from the date of filing. The SEC also approved a new internal review procedure to speed up approval of applications that do not qualify for the expedited process. For those, the staff will take action within 90 days of the initial filing and each of the first three amendments thereto, and within 60 days of any subsequent amendments.

While hardly revolutionary, these changes are a welcome improvement over current practice under which the staff, even under delegated authority (i.e., no need for full Commission vote), often takes many months to respond to exemptive applications. The new rule will be effective June 14, 2021. For more information, please review the SEC’s adopting release at the following link on the SEC’s website:

Rule 0-5: Amendments to Procedures With Respect to Applications Under the Investment Company Act of 1940

Amendments to Proxy Voting Advice Rules

The SEC adopted amendments to the rules governing proxy solicitations, which will impact investment advisers’ reliance on proxy advisory firms (e.g., ISS and Glass Lewis), particularly as to how those service providers disclose conflicts of interest and provide information about company responses concerning particular proxies. In a companion release (discussed separately below), the SEC also supplemented guidance it issued in September 2019 concerning the voting responsibilities of advisers. The Rule amendments are designed to ensure that proxy advisory firms provide transparent, accurate, and complete information to investors who rely on the firms for making their voting decisions. The amendments make clear that proxy voting advice generally constitutes a “solicitation” under Section 14(a) and Rule 14a-1 of the Exchange Act, but proxy advisory firms would be exempt from information and filing requirements of the proxy rules if they satisfy the conditions of the amended rules, including disclosing information about the firm’s methodology, sources of information, and conflicts of interest. Proxy voting advice of course will remain subject to Rule 14a‑9’s anti-fraud provision. The final rules discarded a feature of the proposal that would have required proxy advisory firms to provide companies time to review and provide feedback on proxy voting advice before their recommendations are disseminated to clients.

These amendments are part of a broader effort to modernize the proxy voting process, and we expect more changes will be afoot to address aspects of the proxy “plumbing” or processes. Proxy advisory firms will be required to comply with the new requirements by December 1, 2021, and thus modernized practices should be in place for the 2022 proxy season. For more information, please review the SEC’s adopting release at the following link on the SEC’s website:

Exemptions from the Proxy Rules for Proxy Voting Advice

Amendments to Shareholder Proxy Proposal Rules

In another move to modernize the proxy solicitation process, the SEC amended Exchange Act Rule 14a-8 to update the requirements for including shareholder proposals in company proxies. Balancing the rights of smaller shareholders with the costs that proxy proposals impose on all shareholders, the SEC has modified the thresholds – generally to make it more difficult – for a shareholder to include proposals on a company’s proxy statement. Most significantly, the amendments update the ownership requirements by eliminating the one percent threshold, but providing three alternative continuous ownership thresholds to establish eligibility to submit a proposal:

The amended rule will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022, though there is a transition period that allows current shareholders to remain eligible to submit proposal if they continuously satisfy the $2,000 threshold through the date of submission and relevant meeting held before January 1, 2023. For more information, please review the SEC’s adopting release at the following link on the SEC’s website:

Exchange Act Rule 14a-8: Procedural Requirements and Resubmission Thresholds

Summary Shareholder Reporting

The SEC is seeking comment on a proposal that would create a new shareholder report that the SEC believes would be more concise, user friendly, and engaging for shareholders than current prospectus updates and shareholder reports. Instead of receiving both prospectus updates and shareholder reports, existing investors would be mailed only a streamlined report, though other information will continue to be made available online. Disclosures would focus on fund expenses, performance, illustrations of holdings, and material fund changes. Funds will be encouraged to use graphics and text features (e.g., Q&A format) as well as interactive data in electronic versions. Form N-CSR would still contain detailed information like the schedule of investments and financial statements, but those forms would be available only online or free of charge upon request. As to the prospectus, new shareholders would get a full prospectus, but updates would not have to be delivered thereafter. Instead, a fund would disseminate new information in the new proposed shareholder report (via a summary of material changes for the prior year) and notifications of material changes. Interestingly, the Commission is proposing to amend the newly minted Rule 30e-3 to exclude open end funds from electronic delivery. The proposal also would amend advertising rules for investment companies to require more transparent and balanced information about investment costs.

Comments are due 60 days from publication in the Federal Register. For more information, please follow this link to the SEC’s website:

Amendments to Shareholder Reporting and Improved Fee and Risk Disclosures

Amendments to Rule 13f-1 of the Exchange Act

The proposed amendment would update the reporting threshold for filing Form 13F by investment advisers, raising the reporting threshold from $100 million to $3.5 billion. Under current Rule 13f-1 of the Exchange Act, institutional investment managers that exercise investment discretion with respect to accounts holding at least $100mm of 13(f) securities (essentially, exchange-traded equities, equity options and warrants, shares of closed-end investment companies, and convertible debt securities) on the last trading day of any month must file a report on Form 13F. Comments were due September 29, 2020. In what may have come as a surprise to the SEC, many large investment managers vigorously opposed the proposal, arguing that they make substantial use of the data collected in Form 13F, including to identify shareholders of exchange-traded funds and to help identify activist investors who are accumulating large positions. The SEC has not officially stated how it intends to proceed, but the proposal seems very much on the ropes. For more information, please follow this link to the SEC’s website:

Reporting Threshold for Institutional Investment Managers

Proposed Rule 15 under Reg S-T : Administration of EDGAR

The SEC has proposed to make amendment to the administration of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) to promote the reliability and integrity of EDGAR submissions. Among other provisions, this proposal would allow the SEC to make redactions, prevent filing submissions that pose a cybersecurity threat, or correct errors. For more information, please follow the links to the SEC’s website:

Administration of the Electronic Data Gathering, Analysis, and Retrieval System

Proposed NYSE Rule Change: Non-Transparent ETF Generic Listing Standards

NYSE Arca filed a rule change proposal to implement generic listing standards for non-transparent ETFs using the Active Proxy Portfolio Shares. According to the application, if approved NYSE would amend NYSE Arca Rule 8.601-E to adopt generic listing to permit listing new ETFs without having to go through the 19b-4 rule change process. If approved, this would allow certain non-transparent ETFs to get to market in much the same way as passive or full transparent ETFs. That could in theory shave months off the time to market and correspondingly reduce costs (the exchange currently charges $7,500 for listing ETFs that do not meet generic listing standards). Currently, there are a handful of funds using this model. If approved (after 45-day comment period from publication in the Federal Register, which occurred on September 21, 2020), we anticipate other non-transparent models will follow suit. For more information, please follow the links to the SEC’s website:

Proposed Rule Change to Amend NYSE Arca Rule 8.601-E to Adopt Generic Listing Standards for Active Proxy Portfolio Shares

OCIE Risk Alert: COVID-19 and market volatility

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued an alert that identifies risks related to the COVID-19 pandemic, market volatility, and remote working. The alert addresses several predictable themes, including investor protection, supervision, protection from fraud, business continuity, and accuracy of fees and expenses. For more information, please follow this link to the SEC’s website:

COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers

OCIE Risk Alert: Cybersecurity (credential stuffing)

Returning to the familiar cybersecurity theme, OCIE issued a risk alert concerning a cybersecurity vulnerability known as “credential stuffing,” which involves automated attacks using log-in credentials that have either been guessed or stolen from the dark web. OCIE suggests policies and procedures may need updating (particularly password policies) and use of multi-factor authentication and CAPTCHA (the screen that asks you to click on pictures to confirm you are human). It also suggests certain controls to detect and prevent attacks, like monitoring for high volume of login attempts or using more sophisticated algorithms to “fingerprint” the login. OCIE also recommended keeping staff and clients informed (tell them to update passwords) and to consider firewalls and monitoring the dark web. For more information, please follow this link to the SEC’s website:

Cybersecurity: Safeguarding Client Accounts against Credential Compromise

SEC Guidance Regarding Proxy Voting Responsibilities of Investment Advisers

In conjunction with amendments to the rules governing proxy advisory firms, the Commission supplemented its prior guidance (issued in September 2019) concerning the voting responsibilities of advisers. The SEC expects that the amended rules will result in improvements to the information available to advisers making voting decisions, hence advisers should heed the rule amendments and consider updating their proxy voting policies and procedures. The new guidance discusses the handling of electronic vote management systems that “pre-populate” the adviser’s proxies with suggested voting recommendations, suggesting that policies and procedures should accommodate circumstances when an issuer intends to file additional information or responses to a voting recommendation after the adviser receives the voting recommendation but before the vote deadline. The SEC also recommends updating disclosures to describe the adviser’s reliance on automated voting recommendations. For more information, please follow this link to the SEC’s website:

Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers

Guidance on Factors Used in Evaluating Corporate Compliance Programs in Connection with Enforcement Matters

The CFTC released its first-ever guidance on how the agency evaluates compliance programs in the context of enforcement actions. The guidance is part of the CFTC’s enforcement manual and should be read in conjunction with the agency’s recent update its civil monetary penalty guidance. The CFTC groups its compliance guidance into factors that compose a constellation of prevention, detection, and remediation. Prevention factors focus on written policies and procedures and training. Detection concerns surveillance and monitoring, evaluating suspicious activity, and internal reporting. Remediation focuses on addressing misconduct, disciplining culpable individuals, and addressing compliance deficiencies. For more information, please follow this link to the CFTC website:

Guidance on Factors Used in Evaluating Corporate Compliance Programs