Investment Management Regulation
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Investment Management Regulation Investment Management Regulation Document Transcript

  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch Full Table of Contents Summary Table of Contents Table of Contents Table of Cases Table of Statutes Investment Company Act of 1940 Investment Advisers Act of 1940 Securities Exchange Act of 1934 Table of Regulations Rules Under Investment Company Act of 1940 Rules Under Investment Advisers Act of 1940 Introduction Chapter 1 Introduction to Investment Management A. The Investment Management Industry 1. What Do Investment Managers Do? a. Investment Analysis Thomas Lee Hazen, The Short-Term/Long-Term Dichotomy and Investment Theory: Implications for Securities Market Regulation and for Corporate Law Hearings on S.1659 Before the Senate Comm. on Banking and Currency b. Diversification Harry Markowitz, Portfolio Selection: Efficient Diversification of Investment 3. The Evolution of the Various Advisory Services (e.g., financial planners, asset allocation services, investment companies) a. The Adviser’s Family Tree: The Boston Trustee and Broker-Dealer b. Custom-made Personal Advice to Individuals. Mass-produced Advice to Large Groups Directly or Through Investment Companies c. Non-discretionary and Discretionary Advice 4. The Impact of Investment Advisers and Investment Companies on Society and the Financial Markets a. Benefits to the Economy b. Liquidity and Volatility 1 Tamar Frankel, Securitization (Structured Financing, Financial Asset Pools, and Asset-Backed Securities) c. The Place of Investment Companies in the Financial System 5. The On-Going Problems Managers Pose for Investors, the Markets, and the Economy John Kenneth Galbraith, The Great Crash, 1929 Investment Trust Study, Investment Company Act of 1940 and Investment Advisers Act of 1940 6. The Responses of the Markets to the Problems Posed by Investment Companies B. The Pattern of Investment Management Regulation 1. Federal Statutes: The Investment Company Act and the Investment Advisers Act a. The Substance of the Regulation Remarks by Paul F. Roye, Director, Division of Investment Management, U.S. Securities & Exchange Commission, Before the American Law Institute/American Bar Association Investment Company Regulation and Compliance Conference, The Exciting World of Investment Company Regulation b. Exemptive Authority, General and Particular. Procedures Applicable to Requests for Exemptions. Sections 6(c), (e) and Sections 6(b), (d), 9(c), 10(f), 17(b), 23(c)(3) Vanguard Special Tax-Advantaged Retirement Fund, Inc. c. No-Action Letters. Procedures Applicable to Requests for No-Action and Interpretive Letters
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch d. Rulemaking e. Enforcement Authority 4 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) 2. Other Laws Applicable to Investment Management a. State Laws b. Tax c. Self Regulatory Organizations (SROs) Tamar Frankel, Should Funds and Investment Advisers Establish A Self-Regulatory Organization?* Chapter 2 The Investment Advisers Act A. The Investment Advisers Act: History and Outline B. The Basic Definition: Who is an Adviser? Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services Lowe v. SEC SEC v. Gun Soo Oh Park C. The Relationship Between Federal and State Law D. Fiduciary Duty of Advisers SEC v. Capital Gains Research Bureau, Inc. E. Registration and Disclosure Requirements Clifford E. Kirsch, Investment Adviser Regulation, A Step-by-Step Guide to Compliance and the Law F. Regulation of Advisers 1. Attracting Business: Referrals and Advertising Referrals Clifford E. Kirsch, Investment Adviser Regulation, A Step-by-Step Guide to Compliance and the Law Advertising Clifford E. Kirsch, Investment Adviser Regulation, A Step-by-Step Guide to Compliance and the Law Testimonials Past Specific Recommendations Automatic Selection Devices Free Services Catch-All Category In the Matter of Patricia Owen-Michel* 2. Fees a. Limitation on Performance Fees b. Disclosure of Fees Clifford E. Kirsch, Investment Adviser Regulation, A Step-by-Step Guide to Compliance and the Law 3. Brokerage Selection. Soft Dollars. Section 28(e), Securities Exchange Act of 1934 Brokerage and Research Services 4. Principal and Agency Transactions Investment Advisers Act Release No. 40 5. Duty to Supervise In re Western Asset Management Co. Chapter 3 What is an Investment Company? A. Introduction to the Basic Definition B. Who is an Issuer? 1. Who is a Person? What is a Company?
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch Prudential Insurance Co. v. SEC Comdisco, Inc. 2. What is a Security? SEC v. W. J. Howey Co. Status of Investment Advisory Programs Under the Investment Company Act of 1940 Investment Company Act Release No. 22,579; U.S. Sec. & Exch. Comm’n, Letter in Response to Petition for Rulemaking from Investment Company Institute C. Definition of Investment Company by the Nature of Its Business and by the Nature of Its Assets. Section 3(a)(1)(A); Section 3(a)(1)(C) SEC v. Fifth Avenue Coach Lines, Inc. Bank of America Canada D. Classification of Investment Companies. Sections 4, 5 Chapter 4 Companies Not Covered by the Investment Company Act A. Introduction B. Exceptions for Operating Companies. Section 3(b) ICOS Corp. Certain Prima Facie Investment Companies C. “Special Situation” Companies, Venture Capital Companies, and Business Development Companies. Sections 2(a)(48), 54-63 Entrepreneurial Assistant Group, Inc. D. Private Investment Companies 1. Section 3(c)(1) 2. Section 3(c)(7) Privately Offered Investment Companies Lamp Technologies, Inc. Andrew Poon, How the Rich Get Richer William H. Donaldson, Chairman, U.S. Securities and Exchange Commission, Testimony Concerning Investor Protection Implications of Hedge Funds Before the Senate Comm. on Banking, Housing and Urban Affairs Complaint, State v. Canary Capital Partners E. Banks and Savings and Loan Associations. Section 3(c)(3) Robert M. Garsson, OCC Stirs Debate on Banks’ Role in Mutual Funds Testimony of Richard C. Breeden, Chairman, U.S. Securities and Exchange Commission, Concerning Proposed Revisions to Rules Governing Bank Common Trust Funds F. Insurance Companies. Section 3(c)(3) G. Financing, Factoring, and Real Estate Companies. Section 3(c)(5) 1 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) H. Charitable Corporations. Section 3(c)(10) 1 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) I. Pension Plans. Section 3(c)(11) Division of Investment Management, Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation Chapter 5 Financial Products Outside the 1940 Act A. Pools Used to Securitize Financial Assets 1. Introduction 2. Pooling 3. Highlights of Securitization
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch a. Benefits and Disadvantages, Winners and Losers b. Securitization as a Tool for Creating a Structurally Sound Issuer and Flexible Design of Securities c. Where is Securitization Heading? 4. The Legal Issues Concerning Securitization Exclusion from the Definition of Investment Company for Structured Financings B. Offshore Funds Robert W. Helm, Offshore Investment Funds* C. Commodity Pools Susan C. Ervin, Commodity Pools: Collective Investment Funds Under the Futures Regulatory Framework Chapter 6 Registration and Disclosure A. Registration Under the Investment Company Act B. Disclosure: The Prospectus and the Statement of Additional Information White v. Melton C. Efforts to Enhance Effectiveness of Prospectus Disclosure 1. Prospectus Simplification and the Profile Prospectus Registration Form Used by Open-End Management Investment Companies Letter from Lawrence J. Latto, Shea & Gardner, Washington, D.C. to the Director of the Division of Investment Management, U.S. Securities and Exchange Commission. 2. Improving Risk Disclosure Improving Descriptions of Risk by Mutual Funds and Other Investment Companies D. Electronic Delivery of Disclosure Use of Electronic Media for Delivery Purposes E. Prospectus Updates F. Liability for a Misleading Prospectus Tabankin v. Kemper Short-Term Global Income Fund In re Hyperion Securities Litigation G. Advertising 1. Background1 2. Performance Advertising Philadelphia Fund, Inc. Remarks of Isaac C. Hunt, Jr. Commissioner, U.S. Securities and Exchange Commission, 1997 Investment Adviser Conference, Investment Company Institute In re Van Kampen Investment Advisory Corp. Proposed Amendments to Investment Company Advertising Rules 3. NASD Requirements Robert A. Grunburg H. Periodic Reporting Requirements Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies I. Transaction Costs Request for Comments on Measures to Improve Disclosure of Mutual Fund Transaction Costs J. Disclosure of Abusive Trading Practices Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings K. Confirmation Disclosure / Point of Sale Disclosure Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, and Other Confirmation Requirement Amendments, and Amendments to the Registration Form for Mutual Funds
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch Chapter 7 Fund Management: The Advisory Function, Fees and Contract Terms A. Introduction Report of the SEC on the Public Policy Implications of Investment Company Growth B. Structuring Advisory Services 1. External and Internal Advisory Services 2. The Subadvisory Relationship Penn Series Funds, Inc., et al.; Notice of Application C. Regulatory Response to the Potential Conflicts of Interest Posed by the Determination of the Adviser’s Fees Report of the SEC on the Public Policy Implications of Investment Company Growth Krinsk v. Fund Asset Management, Inc. Division of Investment Management, Securities and Exchange Commission, Report on Mutual Fund Fees and Expenses D. The Advisory Contract. Section 15 Rosenfeld v. Black Chapter 8 Corporate Governance: Fund Directors and Shareholder Voting A. Introduction 1. Popular Forms of Organization Under State Law Tamar Frankel, The Delaware Business Trust Act Failure as the New Corporate Law 2. Investment Company Act Regulation of Corporate Structure. Sections 2(a)(19), 10, 16, 36(a) B. Relationship between State Law and the Investment Company Act Burks v. Lasker John Nuveen & Co., Inc. C. Composition of the Board. Section 10(a) Investment Company Governance Strougo v. Scudder, Stevens & Clark, Inc. D. The Role of the Board Mutual Fund Directors as Investor Advocates, Remarks by Chairman Arthur Levitt, U.S. Securities and Exchange Commission, The Second Annual Symposium for Mutual Fund Trustees and Directors 2 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) Interpretive Matters Concerning Independent Directors of Investment Companies Disclosure Regarding Approval of Investment Advisory Contracts by Directors of Investment Companies E. Shareholder Voting 3 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) F. Proposals for Reform of Corporate Governance Model Division of Investment Management, Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation Chapter 9 Capital Structure A. Issuance of Stock. Redeemability. Sections 2(a)(32), 22(c), 22(e). Rule 22c-1 1. Definition of Redeemability 2. Pricing of Shares Mitchell Hutchins Asset Management Inc. Remembering the Past: Mutual Funds and the Lessons of the Wonder Years[,] Barry P. Barbash, Director, Division of Investment Management, U.S. Securities and Exchange Commission, 1997 ICI Securities Law Procedures Conference Investment Company Institute
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch Amendments to Rules Governing Pricing of Mutual Fund Shares 3. Payment of Redemptions. Section 22(e) 4. Redemption Fees. Rule 22c-2 Mandatory Redemption Fees for Redeemable Fund Securities Mutual Fund Redemption Fees B. Issuance of Senior Securities (e.g., Bonds). Section 18 Mutual Funds and Derivative Instruments Memorandum from the Division of Investment Management, U.S. Securities and Exchange Commission to Chairman Levitt 1. Use of Borrowed Money The Mutual Fund Industry: A Legal Survey 2. Structural Issues Involving Different Versions of the Same Fund Exemption for Open-End Management Investment Companies Issuing Multiple Classes of Shares; Disclosure by Multiple Class and Master-Feeder Funds; Class Voting on Distribution Plans 3. Leveraged Investments Mutual Funds and Derivative Instruments, Memorandum from the Division of Investment Management, U.S. Securities and Exchange Commission to Chairman Levitt Merrill Lynch Asset Mgmt., L.P. Chapter 10 The Investment Company as Investor Introduction A. Restrictions on Investments of Investment Companies. Section 12 1. Investments in Broker-Dealers, Underwriters, and Advisers Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities-Related Businesses Calvert Social Index Fund 2. Investments in Insurance Companies 3 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) 3. Acquisition of the Securities of Other Investment Companies. Fund of Funds. Section 12(d)(1) T. Rowe Price Spectrum Fund Inc. Letter of Richard C. Breeden, Chairman, Securities and Exchange Commission, to The Honorable John D. Dingell,Chairman, House Committee on Energy and Commerce 4. Liquidity Clifford E. Kirsch, Investment Adviser Regulation, A Step-by-Step Guide to Compliance and the Law 5. Diversification Requirements Clifford E. Kirsch, Investment Adviser Regulation, A Step-by-Step Guide to Compliance and the Law 6. Investment Policies and Industry Concentration First Australia Fund, Inc. B. Effecting Trades. Restrictions on Relationship with Broker-Dealers and Underwriters. Sections 10, 17(e) C. The Role of the Investment Company in the Portfolio Company’s Board Room Mark J. Roe, Political Elements in the Creation of a Mutual Fund Industry* Letter from Tamar Frankel, Professor of Law, Boston University School of Law, to Securities and Exchange Commission, Mutual Funds as Shareholders of Corporate America: Should Funds Be Required to Disclose Their Voting Record? Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies David Franecki, Pension Trustees Pressed to Quit Tobacco Paul R. Carey, Commissioner, U.S. Securities & Exchange Commission, Remarks to the Investment Company Institute Procedures Conference D. Custody of Investment Company Assets. Section 17(f) 1. Regulation of Custodians 2. Foreign Custodians. Rule 17f-5 3. Bonding of Persons Having Access to Investment Company Assets E. Personal Investment Activities of Investment Company Personnel. Section 17(j)
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch Personal Investment Activities of Investment Company Personnel and Codes of Ethics of Investment Companies and Their Investment Advisers and Principal Underwriters Investment Adviser Codes of Ethics Ronald V. Speaker F. Portfolio Managers’ Access to Information Selective Disclosure and Insider Trading Investment Company Institute, Re: Proposed Rules Relating to Selective Disclosure and Insider Trading Chapter 11 Distribution of Investment Company Shares A. Regulation of Sales Loads; Different Methods of Paying for Distribution Proposed Exemptions for Certain Registered Open-End Management Investment Companies to Impose Deferred Sales Loads National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to the Limitation of Asset-Based Sales Charges as Imposed by Investment Companies Bearing of Distribution Expenses by Mutual Funds Tamar Frankel, Advisory Fees: Evolving Theories Investment Company Institute Prohibition on the Use of Brokerage Commissions to Finance Distribution B. Retail Price Maintenance Exemption from Section 22(d) to Permit the Sale of Redeemable Securities at Prices that Reflect Different Sales Loads C. Buying Mutual Fund Shares on Margin Extension of Credit by Broker-Dealers on Investment Company Shares D. Exchanging Investment Company Shares Offers of Exchange Involving Open-End Investment Companies and Unit Investment Trusts Chapter 12 Protection Against Conflicts of Interests A. Introduction 1. The Nature of Conflicts 2. The Legal Response 3. The Investment Company Act B. The Coverage of Section 17 C. Affiliates Acting as Principal. Section 17(a) 1. The Reach of Section 17(a) 2 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) Sierega & Co. 2. Exemptions from Section 17(a) Mergers and Consolidations Involving Registered Investment Companies Transactions of Investment Companies with Portfolio and Subadvisory Affiliates Vanguard Municipal Bond Fund, Inc. D. Conflict of Interest in Joint Transactions. Section 17(d) and Rule 17d-1 SEC v. Talley Industries, Inc. Notice of Proposal to Amend Rule 17d-1 Under the Investment Company Act of 1940 to Provide an Exemption from the Rule for Affiliated Persons with Respect to Certain Service Agreements with Investment Companies E. Conflict of Interest in Agency Transactions. Section 17(e) United States v. Deutsch Agency Transactions by Affiliated Persons on a Securities Exchange F. Conflict of Interest by Underwriters. Section 10(f) 1. Capital Allocation: The Role of Primary and Secondary Markets
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch 2. Exemptions under Section 10(f)(3). Rule 10f-3 Exemption of Acquisition of Securities During the Existence of Underwriting Syndicate G. Disclosure Regarding Portfolio Managers H. Conclusion Merrill Lynch Asset Management, L.P. Chapter 13 Money Market Funds A. The History of Money Market Funds B. Regulatory Framework. Rule 2a-7 1. Introduction Revisions to Rules Regulating Money Market Funds 2. Money Market Fund Investments in Derivatives Investment Company Institute C. Enforcement USAA Investment Management Co. Chapter 14 Unit Investment Trusts A. Introduction 1. Organization of Unit Investment Trusts 2. Registration of UITs 3. Governance of UITs 4. History of UITs and Distribution of Their Units 5. The Main Actors a. Sponsors-Depositors b. Trustees c. Underwriters d. Evaluators B. Regulation of UITs 1. Charges to UITs 2. Protection of UITs’ Assets 3. Orphan UITs 4. Substitution of UITs’ Assets 5. Affiliated Transactions 6. Minimum Size of UITs 7. Switching of UIT Units 8. Distribution of UITs’ Securities Merrill Lynch, Pierce, Fenner & Smith Inc. 9. Dividend Distributions C. 1940 Act Regulation Which Does Not Apply to UITs Chapter 15 Closed-End Investment Companies A. Use and Nature of Closed-End Investment Companies B. Distribution of Closed-End Fund Shares. The Puzzle of Closed-End Investment Companies: Their Shares Sell at a Discount from Their Net Asset Value J. Bradford De Long & Andrei Shleifer, Closed-End Fund Discounts C. Proposed Solutions to the Discount Problem 1. Interval Funds Repurchase Offers by Closed-End Management Investment Companies 2. Exchange-Traded Funds 4 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) 3. Conversion into Open End Companies
  • Investment Management Regulation Third Edition Tamar Frankel and Clifford E. Kirsch Investment Company Institute D. Repurchases Division of Investment Management, U.S. Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation E. Capital Structure of Closed-End Investment Companies F. Hostile Takeovers of Closed-End Investment Companies Chapter 16 Variable Insurance Products A. The History and Structure of Variable Insurance Products 1 Tamar Frankel & Ann Taylor Schwing, The Regulation of Money Managers (Mutual Funds and Advisers) B. The Status of Variable Products as Securities SEC v. Variable Annuity Life Insurance Co. of America C. The Status of “Mixed” Contracts as Securities Equity Index Insurance Products D. The Status of Separate Accounts as Investment Companies Equitable Life Assurance Society of the United States E. 1940 Act Regulation of Variable Products Division of Investment Management, U.S. Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation Chapter 17 Ethical Issues A. The Investment Management Industry B. Responsibility of Lawyers for Securities Violations of Their Clients William R. Carter Commissioner Norman S. Johnson, U.S. Securities and Exchange Commission, American Bar Association, Federal Securities Law Committee, Suits Against Lawyers C. Responsibility of Lawyers to Disclose Clients’ Misdeeds The Kaye Scholer Case* D. In-House Counsel Mark A. Tarasiewicz, Rules of Conduct Get Personal, Specific Examples Cited for In-House Lawyers John H. Gutfreund E. Behavior of Lawyers Engaged in Non-Lawyering Occupations Kansas Formal and Informal Opinions No. 93-07 F. Investment Managers’ Ethical Issues 1. Investment by Portfolio Managers 2. “Social Investing” Clarence C. Walton, Pension Funds and Social Investments: A Tale of Two Cities 3. Relation to Two or More Clients G. Issues Regarding Fund Directors Carole Gould, Who’s Watching Out for the Shareholders? Index