On May 20th, the U.S. Senate approved Restoring American Financial Stability Act of 2010, a complex and sweeping overhaul of financial services regulation. The U.S. House of Representatives had approved Wall Street Reform and Consumer Protection Act of 2009 in December. The House and Senate bills will need to be reconciled before the President’s signature. We will issue a report on the Senate bill when the actual legislative text is available.

For more information, please see:

http://thomas.loc.gov/cgi-bin/bdquery/z?d111:s.03217:
http://banking.senate.gov/public/index.cfm? FuseAction=Newsroom.PressReleases&ContentRecord_id=bb65047b-d31c-aeac-f52d-a4caf8e71f37

On April 26th, DOL announced its spring regulatory agenda which emphasized, among other things, the importance of understanding the unique characteristics that distinguish target date funds from other types of investments, the differences among the various target date funds available, and how these differences can affect the retirement savings of employees. The agenda contemplates that the DOL will provide guidance to assist plan fiduciaries in evaluating and selecting from the different target date funds that are available. DOL’s agenda also set August as the timeframe for amended rules to enhance disclosure of fund risks, and clarifying fund options.

On May 6th, DOL and SEC issued an Investor Bulletin on target date funds. The bulletin explains the basic characteristics of target date funds and provides guidance on how to evaluate a target date fund. The bulletin urges investors to consider several factors before investing in a target date fund, such as investment style, fund strategy and risks, investment mix over time, access to money in the fund, and fees.

For more information, please see:

http://www.dol.gov/asp/regs/unifiedagenda/spring-2010-regulatory-plan.pdf

http://www.dol.gov/ebsa/pdf/TDFInvestorBulletin.pdf

On May 11th, the SEC issued an order instituting administrative and cease-and-desist proceedings against a municipal bond fund portfolio manager alleging that, during the market crisis of Fall 2008, he tipped his family members to redeem their shares in a fund he managed while the portfolio manager knew adverse material non-public information concerning the fund.

The order states that a hearing will be scheduled before an administrative law judge to determine whether the allegations are true, and to afford the portfolio manager with an opportunity to establish a defense to the allegations.

For more information, please see:
http://www.sec.gov/litigation/admin/2010/33-9124.pdf

On May 5th, the SEC announced that SEC staff will hold a public seminar on June 4th to help mutual funds comply with new rules that require funds to file data in the risk/return summary section of the prospectus using Extensible Business Reporting Language (“XBRL”). At the seminar, the SEC staff will discuss both the rule requirements and the XBRL taxonomy, which is the list of tags associated with the risk/return summary. The compliance date for the new XBRL rules for open-end investment companies is January 1st, 2011.

For more information, please see:
http://www.sec.gov/news/press/2010/2010-71.htm  

On May 11th, Mr. Donohue addressed the Massachusetts Society of CPAs. In his speech Mr. Donohue discussed, among other things, investment companies’ use of derivatives. Specifically, Mr. Donohue mentioned the challenge of how to appropriately inform fund shareholders of market, liquidity, leverage, counterparty, legal, and structural risks as part of the SEC’s disclosure and financial reporting regime. Mr. Donohue stated that recent changes implemented by the Financial Accounting Standards Board have increased the transparency related to the use of derivatives within the financial statements. According to Mr. Donohue, unlike prospectus disclosure, which generally describes the types of derivatives contracts into which a fund can enter, the financial statement disclosure relates to the derivatives contracts into which the fund actually entered; and thus can be a more useful tool to inform shareholders as to how derivatives were actually used during the period to meet the objectives of the fund.

For more information, please see: http://www.sec.gov/news/speech/2010/spch051110ajd.htm

On May 6th, SEC Chairman Mary Shapiro addressed the Securities Industry and Financial Markets Association. The Chairman discussed, among other things, the adoption of amendments to Part 2 of Form ADV. Chairman Shapiro explained that the SEC is “looking to move past the 1960s check-the-box, paper-based approach by requiring a plain English narrative discussion of an adviser’s conflicts, compensation, business activities and disciplinary history.” According to Chairman Shapiro, the amended Part 2 will also require disclosure of information through the SEC’s website.

SEC Commissioner Luis Aguilar had also recently discussed the adoption of amendments to Part 2 in an April 29 speech to the Investment Adviser Association. Calling the current form “sadly antiquated,” Commissioner Aguilar noted that the SEC will soon revisit Part 2 amendments. Commissioner Aguilar’s remarks focused on the amendments to the brochure supplement the SEC proposed in 2000 and 2008, which would contain information as to the qualifications of the advisory personnel who provide the investor with personalized investment advice. Commissioner Aguilar believes clients would benefit greatly from the information to be conveyed through the proposed supplement, particularly where advisory personnel have disciplinary histories.

On April 24th, Andrew Donohue, the Director of the Division of Investment Management, addressed a meeting of the Business Law Section of the American Bar Association Committee on Federal Regulation of Securities. Mr. Donohue’s remarks included a discussion of the adoption of Part 2 amendments. Mr. Donohue noted that the SEC is moving away from the check-the-box format to use a more useful format, most likely a narrative format. Mr. Donohue also announced that the SEC staff is working on a recommendation to the Commission for adoption of amendments to Part 2 soon.

For more information, please see:
http://www.sec.gov/news/speech/2010/spch050610mls.htm  
http://www.sec.gov/news/speech/2010/spch042910laa.htm  
http://www.sec.gov/news/speech/2010/spch042410ajd.htm  

The SEC staff published an investor alert on the amended Rule 206(4)-2 under the Investment Advisers Act of 1940 (“Advisers Act”). The alert summarizes the requirements of the amended rule, and urges investors to consider several points when performing adviser diligence. The alert encourages investors to ask about custody arrangements when establishing an account with an adviser, to contact the adviser and/or the custodian if the investor is not receiving account statements from a qualified custodian at least quarterly, and to inform both the adviser and the custodian if the investor notices a discrepancy between the account statement from the adviser and the account statement from the custodian.

For more information, please see:
http://www.sec.gov/investor/alerts/custodyinvestor-alert.htm

On May 17th, the SEC’s Investor Advisory Committee (“Committee”) held a public meeting to discuss, among other things, whether money market funds should have floating “net asset value” (“NAV”) calculations, the factors that influence investor decision-making, and mandatory arbitration provisions in customer agreements with broker-dealers.

Although the Committee did not vote on a proposed resolution from the Committee’s Purchaser Subcommittee that money market funds should not be required to use a floating NAVs, the SEC staff and the Committee discussed the proposed resolution and other aspects of money market fund regulation. Mr. Robert Plaze, Associate Director of the Division of Investment Management, acknowledged that floating NAVs for money market funds present a number of problems. Mr. Plaze was also doubtful that establishing an insurance provider for money market funds would be a meaningful solution to issues faced by money market funds.

For more information, please see:
http://www.sec.gov/news/press/2010/2010-77.htm  
http://www.sec.gov/spotlight/investoradvisorycommittee.shtml  

On April 22nd and 23rd, the Group of Twenty (“G20”) Finance Ministers met in Washington, D.C. to discuss, among other things, global hedge fund regulation, including The European Union’s Alternative Investment Fund Management Directive (“AIFMD”). The ministers discussed consistent and coordinated oversight of hedge funds. According to the Alternative Investment Management Association (“AIMA”), U.S. Treasury Secretary Timothy Geithner has expressed concerns to European lawmakers that under AIFMD, European investors will be effectively barred from investing with non-EU hedge fund managers. The AIMA has also expressed concern that AIFMD will fragment global regulation, cause protectionism, and affect asset managers in financial centers throughout the world. G20 leaders will meet in June 2010 to consider, among other things, global financial regulation.

For more information, please see: http://www.g20.org/Documents/201004_communique_WashingtonDC.pdf
http://www.aima.org/en/media_centre/press-releases.cfm/id/BF9411D2-154B-40D8-8BEC1BA0F3496BDF

On April 20th, the U.S. House of Representatives passed the Deposit Restricted Qualified Tuition Programs Act of 2010, which would create a new category of 529 plans. The bill would allow banks and states to offer 529 plans insured by the Federal Deposit Insurance Corporation (“FDIC”). In the bill, deposits of cash, certificates of deposit or other instruments at the bank would not be deemed a “security” by the Securities Exchange Act of 1934 or the Investment Company Act and any bank, state, or administrator appointed to run the program would not be deemed an “issuer” of a security or an investment company.

For more information, please see:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4178eh.txt.pdf  

On April 23rd, SEC Commissioner Elisse Walter, at the University of California San Diego Economics Roundtable, urged Congress to create a self-regulatory organization for investment advisers to enhance investment adviser oversight and as an effective method to increase regulatory resources. Walter did not specify whether an existing entity, such as the Financial Industry Regulatory Authority (“FINRA”), or a new entity should assume the role of an adviser SRO.

Walter questioned the proposed legislation before the U.S. Congress that would grant state regulators authority over investment advisers with less than $100 million in assets under management, and exempt venture capital and private equity funds from SEC registration. Walter suggested that investment advisers to hedge funds, venture capital, and private equity funds should register with the SEC.

Walter said that mandating the SEC to conduct a study regarding the effectiveness of existing legal and regulatory standards of care for brokers, dealers, and investment advisers would be a mistake, as such a study has already been conducted. Walter also suggested that all securities-related derivatives should be regulated by the SEC and all commodities-related swaps by the Commodities Futures Trading Commission. Lastly, Walter advocated for the SEC to be self-funded to enable the SEC to maintain appropriate number of staff as a result of new legislation and to fund critical technology initiatives.

For more information, please see:
http://www.sec.gov/news/speech/2010/spch042310ebw.htm  

On April 14th, the SEC proposed to create a new large trader reporting system intended to assist the SEC in identifying and obtaining certain trading information about traders engaged in substantial trading activity. Proposed Rule 13h-1 under the Exchange Act would require “large traders” to identify themselves to the SEC on Form 13H, and obtain from the SEC a Large Trader Identification Number. Broker-dealers for large traders would maintain records of, and upon request report to the SEC, large traders' trading activity.

A "large trader" generally would be defined as a person who exercises investment discretion over one or more accounts, and whose transactions in exchange-listed stocks and options ("NMS securities") for such accounts equal or exceed (i) two million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month, subject to certain exclusions for limited activities. For purposes of the proposed rule, "investment discretion" has the meaning provided for in Section 3(a)(35) of the Exchange Act. A person’s employees would be deemed to exercise investment discretion on behalf of that person when they act within the scope of their employment.

Under the proposed rule, a registered investment adviser that acts as an adviser to several investment companies would self-identify as a large trader even if each fund is managed by a natural person that would meet the applicable large trader threshold - the proposed rule requires the investment adviser and not the natural person, to self-identify as a large trader. For purposes of the proposed rule, investment companies would not directly or indirectly exercise investment discretion over one or more accounts and therefore would not need to self-identify as large traders.

For more information, please see:
http://www.sec.gov/rules/proposed/2010/34-61908.pdf  

The parent of the Trusts’ investment adviser entered into a merger agreement causing the adviser to become a wholly-owned subsidiary of another party. This transaction caused the automatic termination of the advisory agreements between the adviser and the Trusts to which it provides investment management services. The Trusts’ boards of directors approved an interim advisory agreement pursuant to Rule 15a-4(b)(2) under the Investment Company Act. A few days before the expiration of the interim advisory agreement, the adviser and several exchange-traded funds in the Trusts had not received the number of votes necessary to constitute a quorum because of frequent trading of their shares and frequent turnover in the identity of their shareholders. The staff agreed that the adviser could continue to serve as the investment adviser of the exchanged-traded funds for an additional 45 calendar days from March 13, 2010 (or until each of the exchange-traded funds receive a quorum) without any compensation or reimbursement of its costs.

For more information, please see: http://www.sec.gov/divisions/investment/noaction/2010/claymoreadvisors042710.htm  

On April 23rd, the staff of the Division of Investment Management agreed not to recommend enforcement action under Section 5 or Section 6(a) of the Securities Act of 1933 (the “Securities Act”) if a registered closed-end management investment company, which filed and had declared effective by the SEC a universal shelf registration statement on Form N-2 and issued securities pursuant to Rule 415(a)(1)(x) of the Securities Act, files a post-effective amendment to its registration statement pursuant to Rule 486(b) under the Securities Act.

Under Rule 486(b), a post-effective amendment to a registration statement filed by registered closed-end management investment company that makes periodic repurchase offers under Rule 23c-3 under the Investment Company Act of 1940 (the “Investment Company Act”) becomes effective on the date on which it is filed with the SEC, provided it is filed solely for certain purposes.

Rule 415(a)(1)(x) lets closed-end investment companies conduct a delayed “at the market public offering” of their shares so that the funds can issue new shares when the funds’ shares are trading at a premium to net asset value. Previously not permitted to use Rule 486(b), closed-end investment companies that issued shares pursuant to Rule 415(a)(1)(x) were subject to the SEC staff’s review and comment, thereby resulting in the funds inability to sell their securities during the review process. With this no-action letter, closed-end investment companies that issue securities pursuant to Rule 415(a)(1)(x) may file post-effective amendments pursuant to Rule 486(b), allowing such amendments to become effective when filed rather than after the amendment is subject to review and comment by the SEC staff.

For more information, please see: http://www.sec.gov/divisions/investment/noaction/2010/tortoiseenergy042310.htm  

On April 12, 2010, FinCEN issued a final rule which modifies – and may streamline – various Bank Secrecy Act (“BSA”) requirements for mutual funds. First, the final rule includes mutual funds in the definition of “financial institution” for purposes of regulations implementing the BSA. As a result, mutual funds must now file FinCEN Form 104 “Currency Transaction Report (CTR),” which is standard for financial institutions, rather than Internal Revenue Service (“IRS”)/FinCEN Form 8300 “Report of Cash Payments Over $10,000 Received in a Trade or Business” for transactions involving a transfer of more than $10,000 in currency by, through, or to the mutual fund. Mutual funds should note that the definition of “currency” for the CTR is narrower than the definition of “currency” for Form 8300, which may reduce the filing burden on mutual funds.

Second, the final rule also subjects mutual funds to the BSA “Recordkeeping and Travel Rule” regarding the creation, retention, and transmittal of records or information for transmittals of funds in amounts that equal or exceed $3,000. Third, the rule amends the definition of mutual fund in the existing rule requiring mutual funds to establish anti-money laundering (“AML”) programs; the definition of a mutual fund in the AML program rule is now consistent with the definitions found in the other BSA rules to which mutual funds are subject. Finally, the final rule makes it clear that FinCEN has delegated to the SEC – rather than the IRS – the authority to examine mutual funds for compliance with the BSA.

Mutual funds must comply with the final rule by May 14, 2010, except that compliance with the Recordkeeping and Travel Rule is not required until January 10, 2011.

For more information, please see:
http://www.fincen.gov/news_room/nr/html/20100409.html  

On April 22, 2010, Deputy Secretary of the Treasury, Neal S. Wolin, spoke at ISDA’s 25th Annual Meeting about financial regulatory reform, he specifically addressed the need for reform of the over-the-counter (“OTC”) derivatives market. While Mr. Wolin indicated that OTC derivatives play an important role, he also noted that the growth in their use and misuse subjects the market to significant risk. Mr. Wolin noted that the Senate Banking Committee and the Senate Agricultural Committee have proposed separate bills that would reform the OTC derivatives market.

Under the provisions of both bills, the OTC derivatives market would be much more highly regulated. As Mr. Wolin indicated, the following are common to both bills:
 all standardized derivatives trades must be executed on regulated exchanges or regulated electronic trading platforms;
 there would be no barrier to using customized derivatives when customization is necessary and appropriate;
 all OTC derivative dealers and major swap participants would be strictly supervised,
 all OTC derivatives dealers would be required to maintain substantial capital buffers to back up their obligations;
 detailed information about all derivatives trades would be readily available to regulators; and
 the CFTC and SEC would be given full authority to police these markets.

Mr. Wolin stated that he believes “a comprehensive, seamless, and tough framework” for regulating over-the-counter derivatives will help prevent “market manipulation, fraud, and other abuses” and that these reforms will help prevent the OTC derivative markets from threatening the stability of the financial system. He also indicated that the Treasury is working to ensure that international OTC derivative regulation is improved.

For more information, please see:
http://www.treasury.gov/press/releases/tg656.htm  

In early April, 2010, FINRA began warning broker-dealers about mutual funds’ disclosures regarding average credit ratings. A FINRA spokesman indicated that there is not enough consistency around the formulas used to calculate such averages and that differences in formulas could lead to confusion on the part of investors. FINRA noted that because calculations of these averages are being performed internally and are not being assessed and provided by nationally recognized statistical rating organizations, they are not independent and therefore should not be marketed to investors as such.

For more information, please see:
http://online.wsj.com/article/SB10001424052702303531304575176780970031318.html  
http://www.investmentnews.com/article/20100409/FREE/100409852  

On April 20, 2010, a major financial services provider signed a memorandum of understanding with investor plaintiffs to settle federal securities law claims alleged in a civil class action suit involving disclosures and marketing related to a mutual fund’s investments in mortgage-backed securities. According to the press release issued by the company, the preliminary settlement is subject to a more definitive agreement and final court approval. Under the terms of the settlement, the company would pay $200 million to resolve plaintiffs’ claims without admitting liability. The company’s decision to settle the claims follows a recent U.S. District Court order granting summary judgment of a portion of the claims in favor of the plaintiffs. Related regulatory actions and state law claims remain open.

For more information, please see:
Charles Schwab Corporation Securities Litigation, No. C08-01510 WHA (N.D. Calif. 2010)
http://www.businesswire.com/portal/site/schwab/index.jsp?ndmViewId=news_view&ndmConfigId=1020773&newsId=20100420005911&newsLang=en
http://www.wilmerhale.com/publications/periodicals/investment_management/blog.aspx?entry=3109

On April 15, 2010, the SEC and seven other federal regulators released an Online Form Builder based on the adoption of the model privacy form under the Gramm-Leach-Bliley Act. The model privacy form was jointly developed by the SEC and the Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Federal Trade Commission, National Credit Union Administration, Office of the Comptroller of the Currency, and the Office of Thrift Supervision. The form simplifies implementation of the model privacy notice adopted by the regulators in November 2009. Use of the form is voluntary, and will satisfy disclosure requirements under the Gramm-Leach-Bliley Act and Regulation S-P for SEC registrants. Links to the form are available below and on the websites of the federal agencies listed above.

For more information, please see:
http://www.sec.gov/news/press/2010/2010-57.htm  
http://www.sec.gov/divisions/marketreg/tmcompliance/modelprivacyform-secg.htm

On April 9, 2010, at a Practising Law Institute Investment Management conference, Gene Gohlke, Associate Director of the SEC Office of Compliance Inspections and Examinations (“OCIE”) announced that the SEC had expanded its examination system to include a tips, complaints and referral exam system, where the SEC would conduct surprise exams of advisers that are the subject of tips and complaints. Gohlke stated that the goal was to decrease the lead time a target firm would have to clean up when notified of an impending exam. According to press reports, this examination system replaces examination of advisers on a regular schedule. Gohlke also confirmed a pilot program that seeks data from advisers who have never been examined and warns them that they could receive visits from examination staff within 12 months.

For more information, please see:

http://www.investmentnews.com/article/20100409/FREE/100409833

On April 29, 2010, SEC Commissioner Luis A. Aguilar addressed the Investment Adviser Association Annual Conference. In his remarks, he expressed his view that Congress should require all providers of investment advice to be fiduciaries and enunciated the “only one true fiduciary standard…an affirmative obligation to act in the best interests of the client and to put the client’s interests above one’s own.” He also touched on a wide range of other investor protection issues.

After reviewing conflicts of interest cited in the SEC study that gave rise to the Investment Advisers Act of 1940 (“Advisers Act”), Commissioner Aguilar pointed to sales of auction rate securities and AAA-ratings by credit rating agencies as recent examples of the role conflicts play in harming investors and harming market integrity.

He then discussed the extension of the investment adviser fiduciary standard to broker-dealers providing investment advice and characterized it as “the ultimate investor protection issue – because the harm to investors is real if broker-dealers giving advice are not held to the fiduciary standard and fail to put their client’s interests before their own.” He went on to say that broker dealers are permitted to “end-run the Advisers Act” and that permitting “broker-dealers to provide investment advice without requiring them to act as fiduciaries is to permit a practice that undercuts the core principles of the Advisers Act…” He also commented on the provisions in the version of the financial regulatory reform bill voted out of the Senate Banking Committee on March 22^nd that would require a one-year study by the SEC concerning standards for “providing personalized investment advice and recommendations about securities to retail customers.” In his view, there is no need for a study of the existing obligations of investment advisers. Further he questioned why a fiduciary standard should be limited to “retail” customers or to “personalized services.” Finally, he indicated that an additional study was not necessary in order to conclude that investor protection requires that broker-dealers providing investment advice be subject to a fiduciary standard.

Commissioner Aguilar then turned to provisions in the March 22^nd version of the Senate bill providing for self-funding of the SEC and redeployment of the examination staff from the SEC’s Office of Compliance Inspections and Examinations to the Divisions of Trading and Markets and Investment Management. While he viewed self-funding as a positive step for the SEC, he was concerned that redeployment of the examination staff would result in fragmented oversight and would deprive the SEC of necessary flexibility in determining how to best oversee the industry.

He also addressed the importance of a review of custody rules as they apply to broker-dealers, pay-to-play rules and amendments to Form ADV Part II, particularly the brochure supplement that would provide investors with more information regarding the advisory personnel who will be providing them with personalized investment advice.

For more information, please see:

http://www.sec.gov/news/speech/2010/spch042910laa.htm

See also Commissioner Aguilar’s March 26, 2010 speech, A Shared Responsibility: Preserving the Fiduciary Standard:

http://www.sec.gov/news/speech/2010/spch032610laa.htm