Wednesday, January 20, 2016

Software Bug Leads to SEC Censure

Author: David Schwartz J.D. CPA

On January 14, 2016, the SEC announced that a large U.S. broker dealer had agreed to settle charges that its securities lending practices violated federal securities regulations.  According to the SEC’s order, the dealer violated Regulation SHO by providing "locates" to customers without an adequate review as to whether the securities could be borrowed reasonably at settlement. As a result, some customer short sales may have been executed improperly.

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Tuesday, January 19, 2016

Pushback on SEC Liquidity Proposals

Author: David Schwartz J.D. CPA

The Securities and Exchange Commission’s September 2015 rule proposals addressing mutual fund liquidity issues have not been received with great enthusiasm by the fund industry.  Some major players have made it quite clear in their comment letters that they feel the SEC has missed the mark with this proposal.  

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Wednesday, January 6, 2016

Just How do Mutual Funds Use Derivatives Anyway?

Author: David Schwartz J.D. CPA

As a companion to the SEC’s recent proposed rules on the use of derivatives by registered investment companies, the SEC’s Office of Risk Analysis has published a white paper studying just how funds use derivatives.  Based on data from Forms N-CSR and N-SAR supplemented with information from Morningstar, the study’s authors assembled data on derivatives positions held by 10 percent of funds registered in 2014.  Because section 18 of the Investment Company Act restricts the ability of a fund to issue “senior securities,” the study focuses on those derivatives (and certain financial commitment transactions) that implicate section 18. These kinds of derivative positions can potentially present “senior security” issues because a fund that enters into these transactions is or may be required to make a payment or deliver cash or other assets during the life of the instrument or at maturity or early termination. 

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Tuesday, January 5, 2016

Transfer Agent Regulation Poised to Step Into the 21st Century

Author: David Schwartz J.D. CPA

On December 22, 2015, the Securities and Exchange Commission left a present in all our stockings with its publication of a 208-page advanced notice of proposed rule making and concept release on the regulation of transfer agents. Modernizing the aging rules for transfer agents has been rumored for awhile, but no doubt fell behind other priorities related to the financial crisis and Dodd-Frank mandates.  Commissioner Luis Aguilar and now former Commissioner Daniel Gallagher have both been fairly vocal about the need for new transfer agency rules.  Both would have preferred an actual rule proposal, but apparently will have to settle for an advanced notice/concept release at this stage.  

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Tuesday, December 15, 2015

SEC Proposes Derivatives Regime for Mutual Funds, ETFs, and BDCs

Author: David Schwartz J.D. CPA

On Friday, December 11, as previously announced, the SEC voted to propose a new rule regarding the use of derivatives by mutual funds, closed-end funds, ETFs, and business development companies.    Since as far back as the 1990s under Chairman Aurthur Levitt, the SEC has been concerned about the multitude of risks derivatives can raise for funds, including risks related to leverage and liquidity. But, with the dramatic growth in the volume and complexity of the derivatives markets over the past two decades and the increased use of derivatives by certain funds, the risks to funds and the associated investor protection concerns are now significantly greater.  The 420-page proposal is a recognition that the existing framework under the Investment Company Act (the “Act”) is outdated, and with this proposal the SEC is seeking to bring regulation of funds’ use of derivatives into the 21st Century.  According to Chairman Mary Jo White, the “proposal is designed to modernize the regulation of funds’ use of derivatives and safeguard both investors and our financial system.” This new rule is intended to address those concerns at least in part by requiring funds to monitor and manage derivatives-related risks and to provide limits on their use. 

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