The ICI recently issued a comment letter urging The New York Stock Exchange, Inc. (“NYSE”) to amend its proposed changes to its continued listing standards for closed-end investment companies registered under the 1940 Act. The ICI noted that, although the changes may be appropriate for stand-alone closed-end funds, they are not appropriate for funds in a fund family. The ICI urged that the proposal be modified to provide a more equitable continued listing standard for closed-end funds in a fund family, in order to facilitate a fund family's ability to list all of its funds on the NYSE.
Under the proposed standards, the NYSE would initiate suspension and delisting procedures with respect to any fund with an average market capitalization of below $25 million (instead of $15 million) over 30 consecutive trading days. The proposal, however, does not take into account that the NYSE has distinct listing standards for closed-end funds in the same fund family.

The ICI noted that the NYSE previously recognized that many fund families would not be able to list all of their funds on the same market when one or more funds do not meet the exchange's size requirement. To address this, the NYSE provided an alternative initial listing standard for closed-end funds, permitting the listing of all the funds in a family if, among other things, no one fund has a market value of publicly held shares of less than $30 million (rather than the $60 million required for the listing of individual closed-end funds). Fund families seeking to list all of their funds on one market have relied on this alternative listing standard.

The NYSE's continued listing standards provide a way for the NYSE to evaluate the continued adequacy of the size of a company after its initial listing. In developing the continued listing standards, the NYSE recognized that lower threshold levels are appropriate for companies that are qualified for initial listing at a lower amount. Under existing continued listing standards, each closed-end fund that is part of a fund family must have a public market value of $30 million to initially list while stand-alone closed-end funds must have a public market value of $60 million.

The ICI explained that despite this difference in initial listing standards, under the proposal any closed-end fund would be subject to delisting if its public market value fell below $25 million. Therefore, according to the ICI, stand-alone funds would be subject to delisting if they experience more than a 58 percent decline in market capitalization while individual funds in a family would be subject to delisting with only a decline of more than 16 percent.

The ICI argued that the proposed standard is particularly inappropriate given that transitory market conditions could cause a sudden and perhaps short-lived decline in capitalization that would not be truly indicative of the appropriateness of the fund's continued listing. Accordingly, the ICI recommended that the NYSE modify the proposal to apply the current continued listing standard of $15 million to a closed-end fund that lists as part of a family of funds.

The ICI urged that this approach would make the NYSE' size requirement for the continued listing of closed-end funds more proportional to its size requirements for their initial listing and make the standards more consistent with the NYSE's continued listing standards for other issuers. The ICI also stated that this approach would further the NYSE's goal of making it easier for fund families to list all of their funds on one exchange.

ICI Comment Letter, Proposed Amendments to NYSE Rules Relating to Continued Listing Standards (File No. SR-NYSE-2004-20) (April 6, 2005)  

On April 16, 2009, Reuters reported that several mutual fund companies have asked the SEC to review rules for participating in the Term Asset-Backed Securities Loan Facility (“TALF”). Because the leverage ratios in TALF can range up to 20-to-1, this effectively shuts out mutual funds, which face restrictions on the amount of leverage they can carry. The mutual funds argue that leverage provided through TALF carries no risk because it is in the form of non-recourse loans.

For more information, please see:
http://www.reuters.com/article/ousiv/idUSTRE53F1RL20090416 
http://www.nypost.com/seven/04162009/business/mutual_mission_164634.htm?dbk

The Oregon Attorney General has sued an investment adviser and two affiliates to recover at least $36.2 million allegedly lost in the state’s college savings program. The suit alleges violations of Oregon securities law, breach of contract, breach of fiduciary duty, and negligence in the investment adviser’s management of two plans under the Oregon 529 College Savings Plan (the “529 Plan”).

The complaint alleges that the defendant agreed to recommend for the 529 Plan only investments that were consistent with an approved investment policy; and also that the defendant would update the 529 Plan’s board if there were any material changes to the investment strategy. The complaint further alleges that the defendants violated their fiduciary duties by continuing to recommend investments whose strategies had changed. Specifically, the complaint alleges that a fund, originally described as a conservative bond fund, underwent a radical transformation as it began to sell credit default swaps and other derivative instruments, resulting in large losses. The complaint alleges that neither investors nor the state were alerted to the fact that the fund had become significantly more aggressive.
 

For more information, see the press release:
http://www.doj.state.or.us/releases/2009/rel041309.shtml
 
Also see the complaint:
http://www.doj.state.or.us/releases/pdf/oppenheimerfunds_complaint.pdf 
 

On March 30, 2009, a class action lawsuit was filed in the U.S. District Court for the Northern District of Illinois on behalf of all 401(k) and pension plans that invested in or maintained investments with a bank that engaged in securities lending between January 1, 2007 and present and suffered losses caused by breaches of fiduciary duties and violations of ERISA’s prohibited transaction rules.

The lawsuit alleges that the bank and its affiliate defendants breached their fiduciary duty when they engaged in securities lending for their own benefit, and recklessly invested collateral received from securities lending activity. Instead of investing collateral in safe, short-term, liquid instruments, the complaint alleges that the defendants instead chose investments that were illiquid, highly leveraged, and unduly risky. The complaint further alleges that the 401(k ) and pension plans suffered large financial losses as a result.

In addition, a separate class action lawsuit was filed in the U.S. District Court for the District of Massachusetts on April 7, 2009, against an investment manager and certain affiliates on behalf of all 401(k) and pension plans invested between January 1, 2007 and present. The complaint alleges that investors suffered losses from the imprudent investment of cash collateral pools that support the investment adviser’s securities lending program.
The complaint also alleges that the investment adviser and its subsidiaries engaged in prohibited transactions involving ERISA plan assets by collecting fees and other compensation from securities lending.


For more information, see the complaints, available on PACER, at:
https://ecf.ilnd.uscourts.gov/cgi-bin/ShowIndex.pl 
Docket No. 1:09-cv-01934; and
https://ecf.mad.uscourts.gov/cgi-bin/ShowIndex.pl 
Docket No. 1:09-cv-10533.

On April 8, 2009, the Eighth Circuit reversed a district court’s summary judgment ruling, holding that the lower court too narrowly construed the extent of an adviser’s duty under § 36(b) of the 1940 Act and gave insufficient weight to issues of material fact. Plaintiffs claimed the defendant breached its fiduciary duty to shareholders during fee negotiations with the fund’s board of directors. The plaintiffs claimed that (1) external factors, namely fees charged the adviser’s other clients, were central to the negotiations; (2) the adviser provided comparable services to institutional, non-fiduciary clients at much lower fees; and (3) the adviser delivered a misleading report regarding the discrepancy to the board.

The district court had applied the Gartenberg factors to the fees charged by the defendant and determined that it had not breached its fiduciary duty.

The adviser argued that a negotiation, even if inadequate, that produces a reasonable fee cannot in itself form the basis of a claim under § 36(b). The appellate court rejected this argument. While recognizing that the Gartenberg factors create a useful framework, the Eighth Circuit also looked to the Seventh Circuit’s recent decision in Jones v Harris Associates, 527 F.3d 627 (7th Cir. 2008), and concluded that the Jones decision highlighted a flaw in the application of Gartenberg. According to the Eighth Circuit, charging an excessive fee is one way for an adviser to breach its §36(b) fiduciary duty as demonstrated by Gartenberg, but not the only way. As expressed by the Eighth Circuit, the proper approach is to look “to both the adviser’s conduct during negotiation and the end result.”

The appellate court concluded that the district court erred in rejecting a comparison between the fees charged to the defendant’s institutional clients and its mutual fund clients, stating that the district court should have explored disputed issues of material fact regarding the comparability of mutual funds and institutional accounts negotiation (i.e. the validity of the report delivered to the board). These issues should have been evaluated independently from the end result of the negotiation.

In the course of its decision, the Eighth Circuit did explicitly note that a court’s business judgment does not supplant that of a mutual fund’s board of directors under §36(b) and that industry fee comparison is a common business strategy and not inherently suspect.

For more information, please see:
Gallus v. Ameriprise Fin., Inc., No. 07-2945, 2009 U.S. App. LEXIS 7382 (8th Cir. Apr. 8, 2009).  

On April 15, 2009, the SEC reopened the public comment period on a model form that financial institutions could use to comply with disclosures required under section 504 of the Gramm-Leach-Bliley Act.

Regulation S-P, also known as the Privacy of Consumer Financial Information regulation, promulgated under the Gramm-Leach-Bliley Act, requires the SEC and other federal agencies to adopt rules implementing notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about consumers.
 

The comment period is being reopened to solicit more feedback in the wake of recent quantitative consumer testing of the form. Comments on the results of the consumer testing are due May 20, 2009.


For more information and the results of consumer testing, see:
http://www.sec.gov/news/press/2009/2009-84.htm 
http://www.sec.gov/comments/s7-09-07/s70907-21.htm

For more general information on Regulation S-P, see:
http://www.sec.gov/rules/final/34-42974.htm
 

On April 8 and again on April 16, 2009, the SEC updated its EDGAR Filing Manual to improve the Form D filing process and also to support the potential rule that certain filers using U.S. Generally Accepted Accounting Principles provide a new exhibit to their filings as required in the final eXtensible Business Reporting Language (“XBRL”) rule. Further, Chapter 6 has been updated to make clarifications to the instructions on XBRL/Interactive Data tagging.


For more information, please see:
http://www.sec.gov/rules/final/2009/33-9027.pdf 
http://www.sec.gov/rules/final/2009/33-9022.pdf  

A WilmerHale partner and former SEC official is returning to the SEC as the Director of the Division of Corporation Finance.
 
Meredith Cross originally joined WilmerHale in 1998. In her previous tenure at the SEC, she served as Chief Counsel and Deputy Director of the Division of Corporation Finance, and played a key role in disclosure-related rulemakings.

 
For more information, please see:
http://www.sec.gov/news/press/2009/2009-78.htm 
 

On April 15, 2009, the SEC staff issued a no-action letter confirming that it will not recommend action against an open-end investment company that does not deduct redemption fees when calculating the “price of securities redeemed or repurchased” in item 5(ii) of Form 24F-2.

This no-action letter enables investment companies that charge redemption fees to avoid higher registration fees under the Securities Act of 1933 as a result of their redemption fees.
 

For more information, please see:
http://www.sec.gov/divisions/investment/noaction/2009/sewardandkissel041509.htm  

On April 13, 2009 the SEC staff issued a no-action letter to a registered open-end management investment company and variable annuity issuer that operates somewhat differently than other funds (the “Fund”). The Fund’s money market portfolio issues accumulation units or shares that do not maintain a stable net asset value because the money market portfolio accumulates its income rather than distributing it. While this money market portfolio had complied with the risk-limiting and other applicable requirements of Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”), it had not used the amortized cost method to value its portfolio securities with a remaining maturity of more than 60 days as set forth in Rule 2a-7.

The Fund then determined it would be in the best interests of the money market portfolio and its participants to begin using the amortized cost method; however, certain requirements under Rule 2a-7 relating to use of the amortized cost method by a money market fund could be read as limiting reliance on the rule to funds that maintain a stable net asset value. Accordingly, the Fund sought relief so that its money market portfolio could use the amortized cost method even though the net asset value of its shares is not stable. The SEC staff granted the relief, noting among other things, the Fund’s argument that by its compliance with all of the requirements of Rule 2a-7, money market fund investors would have the protections against dilution that the rule provides for money market funds with a stable net asset value.

Although this letter related to very particular facts, it is noteworthy because proposals for reform of money market funds have included permitting variable net asset values. This letter provides insight into a money market fund that currently operates with a non-stable net asset value -- albeit one where the changes in net asset value are essentially due to distribution policies rather than fluctuating valuation.

For more information, please see:
http://www.sec.gov/divisions/investment/noaction/2009/cref041309.htm 
 

On April 22, 2009, a hedge fund consultant, and its principal settled an SEC enforcement proceeding that charged them with violations of the Investment Advisers Act of 1940, (the “Advisers Act”) in connection with hedge fund recommendations. The SEC found that the investment adviser and its principal had represented to clients that due diligence would be conducted before their recommending hedge fund investments; they then had recommended, and their clients had invested in, funds that later collapsed as a result of fraud. The SEC found that the parties had failed to perform key elements of the due diligence they represented would be performed. Among other things, they failed to conduct portfolio and trading analysis as advertised, and they failed to verify the fund’s relationship with its auditors despite red flags. The SEC found that the adviser violated Section 206(2) of the Adviser Act, which makes it unlawful for investment advisers to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Penalties included over $800,000 in disgorgement and penalties and a cease and desist order.

 
For more information, please see:
http://www.sec.gov/news/press/2009/2009-86.htm 
 

On April 17, 2009, Andrew Donohue, Director of the SEC Division of Investment Management, addressed the American Bar Association Spring Meeting and discussed his concerns on a perceived gap between funds’ use of derivatives and leverage, on the one hand, and investors’ understanding of funds’ use of derivatives and leverage, on the other. After reviewing the history of regulatory limitations on funds’ use of leverage and the focus on risk disclosure for addressing SEC staff with derivatives leverage, he turned to current use of leverage by funds and their risk disclosure practices. He emphasized that he was not questioning the legal adequacy of current disclosure; rather he was suggesting that investors, particularly retail investors, might not have fully understood the risk disclosure regarding derivatives leverage or appreciated the impact it could have on their investments. Finally, he articulated three broad concerns regarding funds’ use of derivatives: (i) funds should have a means to deal with derivatives outside of disclosure; (ii) funds use of leverage should address both implicit and explicit leverage; and (iii) funds should address diversification from investment exposures in addition to diversification from amount of money invested.
This speech expanded on the theme Mr. Donohue had introduced at the Practising Law Institute’s Investment Management Institute on April 2, 2009. At that conference, while he was careful not to suggest that the SEC become a merit regulator, he challenged the fund industry to take the issue of leverage and investors’ understanding of the impact of leverage seriously.

For more information, please see the complete speeches at:
http://www.sec.gov/news/speech/2009/spch041709ajd.htm 
http://www.sec.gov/news/speech/2009/spch040209ajd.htm 
 

On April 6, 2009, the New York Attorney General filed civil fraud charges against a New York hedge fund manager and its principal who allegedly funneled $2.4 billion to Bernard Madoff without telling investors where their money was going. The complaint alleges that the manager charged its investors $470 million in management fees but did little actual work other than “routine bookkeeping.” The complaint also charges that the manager ignored red flags related to Madoff’s investments.

The suit is the second major action by a state in connection with a Madoff feeder fund. On April 1, the Massachusetts Secretary of the Commonwealth filed a similar lawsuit against another manager, charging it had failed to disclose internal concerns about Madoff’s operation.

In related news, a court-appointed trustee has begun attempts to claw back certain “profits” paid out by Madoff to investors. On April 9, the trustee, charged with recovering assets for investors, filed a lawsuit in bankruptcy court seeking recovery of $150 million paid out to investors in the British Virgin Islands approximately six weeks prior to the revelation of Madoff’s scheme.

For more information, please see the New York Office of the Attorney General’s press release, available at:
http://www.oag.state.ny.us/media_center/2009/apr/apr6b_09.html 
Also please see the Secretary of the Commonwealth, Securities Division, at:
http://www.sec.state.ma.us/sct/sctfairfield/fairfieldidx.htm 
And for information relating the bankruptcy trustee claw backs, please see:
http://online.wsj.com/article/SB123930717747706017.html 
https://ecf.nysb.uscourts.gov/cgi-bin/login.pl  

On April 2, 2009, FASB decided to make significant modifications to proposed FSP FAS 157-e, Determining Whether a Market is Not Active and a Transaction is Not Distressed. FASB determined that the final rule will, among other things:

• Affirm that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction (not a forced liquidation or distressed sale) between market participants under current market conditions;                                                 
• Clarify the factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active;                                                 
• Eliminate the presumption that all transactions are distressed (not orderly) unless proven otherwise;                                                 
• Require disclosure of changes in valuation techniques resulting from the application of the new FSP and quantify its effects, if practicable.

For more information, see the Summary of Board Decisions on FASB’s website, available at:
http://www.fasb.org/action/sbd040209.shtml

• Provides guidance for enhanced disclosure and investor protection;                                                 
• Establishes a framework for valuation for assets;                                                 
• Establishes an overall approach to risk monitoring and management;                                                 
• Establishes policies to enhance trading and business operations;                                                 
• Provides guidance on developing compliance manuals, record keeping, and training and education of personnel;                                                 
• Updates anti-money laundering guidance;                                                 
• Develops a general approach to contingency planning and disaster recovery.

For more information, please see the MFA’s press release, available at:
http://www.managedfunds.org/downloads/MFA%20Takes%20Steps%20to%20Restore%20Investor%20Confidence%20with%20Enhanced%20Sound%20Practices%20FINAL%202%20_2_.pdf

On April 1, 2009, Treasury announced an extension of its Temporary Guarantee Program for Money Market Funds through September 18, 2009. The program had been scheduled to end on April 30, 2009. The premium for continued participation during the extension period is 1.5 basis points based on the net asset value of each participating fund as of September 19, 2008 if the fund’s market-based net asset value on that date was equal to or greater than $0.9975 (or 2.3 basis points if its market-based net asset value on that date was between $0.9950 and $0.9975).

Money market funds that wish to continue participation in this Temporary Guarantee Program are required to submit a Program extension payment, an extension notice, and an updated Annex A by April 13, 2009, and a Bring-Down Notice by May 11, 2009. Money market funds currently not participating in the Program are not eligible to participate in the extension period.

For more information, please see the Treasury Department press release, available at:
http://www.treasury.gov/press/releases/tg76.htm  

The SEC’s concern with Ponzi schemes is illustrated by a series of recent enforcement actions. The SEC has charged investment managers located throughout the country with running various Ponzi schemes. Several of these schemes have been targeted at affinity groups, such as Chinese-Americans and religious community and charitable investors.

For more information, please see the SEC press releases, available at:
http://www.sec.gov/news/press/2009/2009-75.htm  
http://www.sec.gov/news/press/2009/2009-74.htm  
http://www.sec.gov/news/press/2009/2009-73.htm  
http://www.sec.gov/news/press/2009/2009-71.htm  

In an address to the Council of Institutional Investors on April 6, 2009, Mary L. Schapiro, Chairman of the SEC, discussed the SEC’s role in protecting investors in broad terms. Her remarks included a call for several new industry reforms, possibly including:

• Third-party audits of custodians of client assets;                                                 
• Harmonization of regulation of investment advisers and broker-dealers, so investors can expect a uniform level of professionalism and accountability;                                                 
• Mandating certain investment advisers have third-party compliance audits;                                                 
• Registering hedge fund advisers, and potentially the hedge funds themselves.

For more information, please see:
http://www.sec.gov/news/speech/2009/spch040609mls.htm

In a speech at the Practising Law Institute’s Investment Management Institute on April 2, 2009, Andrew Donohue, Director, SEC Division of Investment Management, addressed the increasing use of leverage by funds. He expressed concern that, unlike sophisticated investors, retail investors might lack the ability to evaluate the impact of employing leverage and cited one innovative leveraged fund that was down 20% when the relevant index was up 50%. While not suggesting the SEC become a merit regulator, he did challenge the investment company industry to take the issue of leverage and investors understanding the impact of leverage seriously.

At the same conference, Gene Gohlke, Assistant Director of the Office of Compliance Inspections and Examinations (“OCIE”), elaborated on OCIE’s intention to confirm security positions directly with clients in circumstances where they otherwise could not be verified. He pointed out that OCIE intends to give advisers the opportunity to notify clients that they might receive inquiries from the SEC staff. He added that OCIE recognized, and was attempting to address, advisers’ concerns with the SEC staff contacting their clients.

For more information, please see:
http://www.sec.gov/news/speech/2009/spch040209ajd.htm  

At an open meeting on April 8, 2009, the SEC voted unanimously to publish a release requesting comment on several alternative proposed rules relating to short sales.

Specifically, the SEC intends to seek comment on two alternative forms of price restrictions on short sales. First, the SEC proposes a price restriction substantially similar to former Rule 10a-1 (the “uptick rule”), which would restrict orders for short sales unless at a price higher than the last sale price of a security. Alternatively, the SEC proposes a price restriction similar to Nasdaq’s former bid test (the “modified uptick rule”), which would restrict the execution or display of short sales except at a price higher than the national best bid.

In addition, the SEC intends to seek comment on a variety of circuit breaker proposals that could be imposed together with, or separate from, a price restriction on short sales. The SEC proposes that a circuit breaker would apply to any NMS Stock that experiences a 10% intraday decline in price. The tripping of a circuit breaker could trigger one of three different outcomes: an outright ban on short selling; imposition of an uptick rule; or imposition of a modified uptick rule (as described above). The SEC proposes that these limitations on short selling would remain in effect for the remainder of the trading day.

For more information, please see the WilmerHale Investment Management Practice Group Alert, dated April 8, 2009, available at:
http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8950 
Also see the SEC press release, available at:
http://www.sec.gov/news/press/2009/2009-76.htm  

In determining that the settlor of a trust was a “qualified purchaser” as defined in Section 2(a)(51) of the Investment Company Act of 1940, the SEC staff has broadened its test for determining whether a settlor meets the requirements of that definition.
Section 2(a)(51)(A) of the Investment Company Act establishes four categories of qualified purchasers that are eligible to invest in private investment companies that are excluded from the definition of “investment company” by Section 3(c)(7) of the Investment Company Act. A trust may be a qualified purchaser if it “was not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust is [a qualified purchaser].” In Meadowbrook Real Estate Fund, SEC No-Action Letter (Aug. 26, 1998), the staff stated that, generally, the settlor must be found to be a qualified purchaser at the time that he or she contributed assets to the trust. However, the staff also stated in the Meadowbrook letter that there may be other situations in which a settlor would have, at the appropriate time, the requisite financial sophistication to appreciate the risks presented by a 3(c)(7) fund.

In the staff’s most recent letter, the trusts at issue were created under the terms of the settlor’s will following her death in 1959. At the time of the settlor’s death, her estate was valued at approximately $3.5 million. Section 2(a)(51), enacted in 1996, requires that a natural person own at least $5 million in investments. Accordingly, the settlor arguably did not own the requisite amount of investments at the time that she contributed her assets to the trusts. Nonetheless, the staff accepted the argument that the settlor’s wealth in 1959, as measured in 1996 dollars, exceeded the $5 million qualified purchaser threshold, and therefore agreed that the settlor is a qualified purchaser. This result may give Section 3(c)(7) funds some additional flexibility in determining whether certain trusts are qualified purchasers.

Trusts under the Will of Marion Searle, SEC No-Action Letter (March 29, 2005).  

FINRA issued guidance to members on its enforcement of the rules contained in the FINRA Rulebook, the rules of the Municipal Securities Rulemaking Board and the federal securities laws and rules. Included in the notice are insights into the process FINRA uses in its investigations, evidence review, the Wells Process and disciplinary and litigation considerations.

Notably, FINRA’s guidance stresses the non-public and confidential nature of investigations and described the steps it takes in its enforcement process.

For more information, please see: 
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p118171.pdf

FINRA filed a proposal with the SEC for which it requested accelerated approval related to the margining of CDS by FINRA members that clear CDS transactions on the Chicago Mercantile Exchange (“CME”), other central counterparty platforms or via other platforms.

FINRA expects the creation of central counterparties for CDS transactions to result in an increase in the number of CDS transactions handled through broker-dealers. FINRA has requested comment on whether the potential risks to the broker-dealer channel are prudent as part of an effort to improve systemic stability. The SEC has granted temporary exemptions for the CME to operate as a central counterparty for CDS transactions.

For more information please see:
http://www.finra.org/Newsroom/NewsReleases/2009/P118159  
http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8848

The SEC has approved FINRA’s proposed change to FINRA Rule 5122, which would subject members engaging in private offerings to requirements governing underwriting terms and arrangements and conflicts of interest similar to those of public offerings. Specifically, the proposed rule would require member entities to:

• Disclose to investors in a private placement memorandum, term sheet or other offering document the intended use of the proceeds from the offering and the offering expenses;                                       
• File such disclosure document with FINRA; and
• Commit at least 85 percent of the offering proceeds to business purposes.

Proposed Rule 5122 would include a number of exemptions, including private offerings solely to institutional investors, qualified purchasers, qualified institutional buyers, investment companies and banks. In addition, sales of exempted securities under Section 3(a)(12) of the Securities Exchange Act of 1934, offerings made pursuant to Rule 144A under the Securities Act of 1933 or Regulation S, and other types of sales would be exempted under the rule. Finally, sales to investors expected to have access to sufficient information about the issuer, such as sales to employees and affiliates, would also be exempted.

For more information, please see:
http://www.sec.gov/rules/sro/finra/2009/34-59599.pdf  

On March 19, 2009 the SEC charged the former Deputy Comptroller and Chief Investment Officer for the New York State Common Retirement Fund and a top political advisor to the former New York State Comptroller with fraud in connection with an alleged “pay-to-play” scheme that allegedly resulted in billions of dollars being invested with private equity and hedge fund managers in exchange for millions of dollars of payments in the form of “finder” or “placement agent” fees paid to Morris and Loglisci.

The SEC alleges that the men concealed the fraud from members of the Comptroller’s office by funneling improper payments through a third party, sometimes without the knowledge of investment managers. SEC Chairman Mary Schapiro stated in a March 19, 2009 speech that the SEC “will continue this investigation and will pursue anyone who unlawfully profited from their privileged access to the hard-earned contributions of public employees.” The New York Attorney General’s Office also announced the indictment of Morris and Loglisci on parallel criminal charges.

For more information, please see the SEC press release, available at:
http://www.sec.gov/news/press/2009/2009-62.htm
 
the SEC’s complaint, available at:
http://www.sec.gov/litigation/complaints/2009/comp20963.pdf
 
and the SEC Chairman’s speech, available at:
http://www.sec.gov/news/speech/2009/spch031909mls.htm 
 

On March 12, 2009 the SEC issued a no-action letter to the ICI stating that it would not recommend enforcement action against a liquidity provider or a fund with respect to a liquidity provider under provisions of the Investment Company Act of 1940 (the “1940 Act”) and the rules thereunder applicable to affiliated persons in certain circumstances. In particular, the SEC stated that it would not recommend enforcement against a liquidity provider that becomes an affiliated person of a fund solely based on the acquisition of liquidity protected preferred shares (“LPPS”) issued by the fund or on the liquidity provider’s contractual right to sell to the fund, or an affiliated person of the fund, such acquired shares.

LPPS would offer an alternative form of leverage for closed-end funds and a new permissible investment for open-end funds that hold themselves out as money market funds in reliance on Rule 2a-7 under the 1940 Act. A liquidity provider is an entity that agrees to purchase LPPS in order to provide last-resort liquidity to holders of LPPS. As such, LPPS would provide closed-end funds with an alternative source of leverage and would provide closed-end fund investors with protection from liquidity problems like those that hit the auction rate securities market in 2008.

The ICI sought such guidance in order to ensure liquidity providers that they would not become affiliated persons of the fund by virtue of the fact that they had purchased LPPS. While the no-action letter issued in June 2008 to Eaton Vance provided some certainty with respect to certain potential risks associated with LPPS, the affiliated transaction restrictions were not addressed. The ICI contends that liquidity providers would be reluctant to agree to purchase LPPS if they risked triggering the affiliated transaction restrictions and that further guidance with respect to these restrictions will promote the continued use of leverage by closed-end funds despite the disruption in the auction rate securities markets.

For more information please see the ICI No-Action Letter, available at:
http://www.sec.gov/divisions/investment/noaction/2009/ici031209.htm
 
the ICI request for guidance, available at:
http://www.sec.gov/divisions/investment/noaction/2009/ici031209-incoming.pdf
 
and the Eaton Vance Management No-Action Letter, available at:
http://www.sec.gov/divisions/investment/noaction/2008/eatonvance061308.pdf

On March 26, 2009, Treasury Secretary Timothy F. Geithner and SEC Chairman Mary L. Schapiro testified before separate Congressional committees about money market fund regulatory reforms. Without going into specifics, both Geithner and Schapiro stated that regulations applicable to money market funds should be strengthened to reduce the risk associated with money market fund investments.

The investment management industry has already published proposals of its own. On March 18, 2009, the Investment Company Institute (“ICI”) released the report (the “Report”) of its Money Market Working Group (the “ICI Working Group”). The Report contains detailed recommendations for money market fund reforms.

Several of the specific recommendations can be implemented by money market funds without SEC action, and the ICI Working Group has urged their swift voluntary adoption by all ICI members. The recommendations address several areas of concern with regard to money market funds, including:

• Portfolio Liquidity
• Portfolio Maturity
• Credit Analysis
• Client Risk
• Risk of a Run on the Fund
• Confusion About Money Market Funds with Other Types of Investments
• Need for Enhanced Government Oversight

For more information, please see: WilmerHale Investment Management Practice Group Alert, dated March 30, 2009, available at:
http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8854
 
and the ICI Report available at:
http://www.ici.org/pdf/ppr_09_mmwg.pdf