Investment Company Act

SEC Adopts New Rules Governing Funds’ Use of Derivatives


On November 2, the SEC adopted final rule 18f-4 under the Investment Company Act. The new rule intends to update the regulation of funds’ use of derivatives. Under the new framework, funds using derivatives will generally have to adopt a derivatives risk-management program administered by a derivatives risk manager and comply with an outer limit on fund leverage risk based on certain calculations. Final Rule.

SEC Adopts Rule Amendments to Applications for Exemption Under the Investment Company Act


On July 6, the Securities and Exchange Commission (SEC) announced that it had voted to adopt rule amendments to establish an expedited review process for applications for exemption for funds under the Investment Company Act. The new process is intended to make the process of applying for more routine exemptions quicker and less expensive for applicants. Release.

SEC Removes References to NRSRO Ratings

On December 27, the SEC adopted amendments to eliminate references in certain of its rules and forms to credit ratings.  The changes were mandated by Dodd-Frank.  Rating references were removed from the following rules and forms:

  • Rule 5b-3 under the Investment Company Act;
  • Forms N-1A, N-2, and N-3;
  • Rule 15c3-1 (and certain appendices) under the Securities Exchange Act of 1934;
  • Rule 15c3-3 under the Securities Exchange Act of 1934; and
  • Rule 10b-10 under the Securities Exchange Act of 1934.

Release.  Final Rules #1.  Final Rules #2.

SEC No Action Relief for Advisory Agreement Amendment Without Shareholder Approval

On February 27, the SEC Division of Investment Management granted no action relief to Emerging Global Advisors, LLC (EGA) and Emerging Global Shares Trust (Trust), allowing EGA to amend its investment advisory agreement with the Trust without obtaining majority shareholder approval as required under Section 15(a) of the Investment Company Act.  This no action relief is preconditioned upon (i) the proposed amendments not reducing or modifying the nature and level of advisory services provided by EGA and (ii) the total advisory fees paid to EGA under the amended advisory agreement would not exceed the advisory fees payable under the current agreement.  SEC No Action Letter.

SEC Amends Net Worth Standard for Accredited Investors

On December 21, pursuant to Section 413(a) of the Dodd-Frank Act, the SEC amended several rules under the Securities Act, the Investment Company Act, and the Investment Advisers Act to exclude the value of an individual’s home from net worth calculations used to determine whether such individual qualifies as an accredited investor. The amendments also: (i) clarify the treatment of loans secured by a primary residence for purposes of this new net worth calculation and (ii) permit individuals who qualified as accredited investors under the prior definition of accredited investor to use the previous net worth standard for certain follow-on investments. The amendments will be effective on February 27. SEC Release. SEC Final Rule.

SEC Seeks Comment on Use of Derivatives by Mutual Funds

On August 31, the SEC requested comments on issues raised by the use of derivatives by mutual funds and other investment companies regulated under the Investment Company Act, including: (i) how different types of funds use derivatives; (ii) how to measure the amount of leverage a fund incurs when investing in a derivative; (iii) how a fund should value a derivative for diversification purposes; (iv) how investing in a derivative from a broker-dealer differs from investing in the broker-dealer’s stocks or bonds; (v) how funds determine the industries to which they may be exposed through a derivative; and (vi) whether the SEC should issue guidance on how funds should value derivatives. Comments must be submitted within 60 days after publication in the Federal Register. SEC Release.

SEC ANPR on Rule 3a-7 and Concept Release on 3(c)(5)(C)

On August 31, the SEC issued an advance notice of proposed rulemaking on possible amendments to Rule 3a-7 of the Investment Company Act relating to the treatment of ABS issuers. The SEC also issued a concept release seeking comment on interpretations of Section 3(c)(5)(C) of the Investment Company Act that is used by some companies (such as REITs) in connection with the acquisition of mortgages and mortgage-related instruments. Comments on both the ANPR and the concept release must be submitted within 60 days after publication in the Federal Register. SEC Release. 3a-7 ANPR. 3(c)(5)(C) Concept Release.