Recent Blog Posts

SEC's New Proxy Disclosure Enhancements Require Updates to Registration Statements and Trustee & Officer Questionnaires

Cynthia Baughman — Sat, 15 May 2010 17:28:00 GMT

On February 28, 2010, the SEC's new proxy disclosure enhancements went into effect. Not only do the new disclosure rules make changes to proxy statements and information statements, they also require funds to make updates to their registration statements and, in turn, to their annual trustee and officer questionnaires to elicit additional information from trustees.

Mutual fund registration statements will now need to disclose information on each individual trustee's qualifications to serve on the board. Additionally, funds will need to disclose information on leadership structure and the board's role in the risk management process.

Fund trustee and officer questionnaires typically solicit information on a trustee's or trustee candidate's prior service on public and investment company boards and any legal proceedings in which the trustee or candidate was involved. The new rules expand the disclosure information required for prior board service and add several new legal proceedings that trustees and candidates should ensure they have not been subject to as well as increase the relevant time periods for such proceedings.

We offer fixed fees for providing your firm with assistance in drafting the newly required registration statement disclosure and on reviewing or providing you with an up-to-date annual trustee and officer questionnaire that will satisfy the new SEC requirements.

Please contact us at 704-806-2387 for rates.

Mutual Fund Summary Prospectus

Daphne Chisolm — Tue, 05 Jan 2010 13:00:00 GMT

Form and Rule Changes

The SEC adopted revisions to Form N-1A that require mutual funds to provide a new summary section at the front of the prospectus with key information about the fund such as its investment objective and strategies, risks, costs and performance. The SEC also adopted rules allowing funds to satisfy their delivery obligations with a summary prospectus in lieu of a full statutory prospectus. Whether or not a fund group elects to use the summary prospectus for its shareholders, it still must update its current form of prospectus to provide for an up-front summary section.

Budget Additional Time for Annual Updates

The changes to Form N-1A are the most significant changes made to the Form since 1998 and, depending on the number of funds offered in the prospectus and the style in which they are described, could result in significant hours added to the annual update process. Note that mutual funds must file their re-formatted summary prospectus via a 485(a) filing rather than a 485(b) filing which means you must allocate 60 days for SEC staff review and comment on the registration statement.

Not to mention the changes to the registration statement itself, if a fund opts to use a summary prospectus there are Information Technology (IT) issues that must be addressed. The SEC’s summary prospectus rule provides that the statutory (or full) prospectus be posted on a fund’s Web site and have certain links built into it as well as links to other documents, such as the new summary prospectus. If a fund elects to use the summary prospectus, then time should be budgeted in order to bring IT professionals into the process in terms of making sure the correct links are established and maintained.

Timing

Funds with 12/31 fiscal year ends must file annual update with SEC by 2/28 to be effective by 5/1/2010.

If a fund cannot plan for sufficient time to allow a 60 day SEC review period then it will have to make an additional filing during 2010 so that it will have its summary version prospectus effective prior to January 1, 2011.

SEC Adopts Safeguards to Protect Client Assets Controlled by Investment Advisers

Daphne Chisolm — Fri, 18 Dec 2009 14:37:00 GMT

On December 16, 2009, the SEC announced that it had adopted rules to increase the protections for investors who turn their money and securities over to SEC-registered investment advisers.

The new rules stem in large part from the recent Madoff Ponzi scheme and other frauds where client assets were misappropriated by advisers and address two main areas of risk:

Where an adviser serves as custodian to client assets (as in the Madoff case); and
Where the custodian of client assets is an adviser affiliate.

Highlights of the new rules include a surprise exam and certain custody controls. An adviser that holds client assets must engage an independent public accountant to conduct an annual surprise exam. If the surprise exam indicates any evidence of missing client assets or material misrepresentations, the accountant would have one day to notify the SEC of its findings. Additionally, when the adviser or an affiliate serves as custodian, the adviser must obtain a written report from an independent public accountant that would describe the custodian controls in place, the testing of the operating effectiveness of those controls, and the results of those tests.

The new rules will impose an important new control on investment advisers of hedge funds and other private funds by requiring that any auditor that audits a private fund be registered with and subject to regular inspection by the Public Company Accounting Oversight Board (“PCAOB”). At the SEC open meeting on December 16, 2009, SEC Chairman Mary L. Schapiro stated that “[i]t is my expectation that the new rules will encourage the use of fully independent custodians because these measures would not be required under such arrangements and I encourage all advisers and their clients to consider that approach.”

The SEC has not yet released the final text of the new rules.

Fund Reorganizations Could Cut Costs and Improve Efficiency

Daphne Chisolm — Sat, 07 Nov 2009 17:30:00 GMT

In the current economic climate, ways to streamline, downsize and generally become more efficient can prove valuable in the long run. For the fund industry, one way to realize some efficiencies may be to consider a reorganization of one or more similar funds into another. Reorganizations may be easier than you think. The basic document to be prepared and filed with the SEC is the Form N-14 which serves as both a registration statement and a proxy statement and typically is reviewed by the SEC staff and becomes effective in 30 days. In certain cases, shareholder votes may not be required for a reorganization.

Reorganizations could save in expenses down the road – such as auditor fees or other service provider fees that may be fund-based as well as the fact that having fewer funds can save in amount and length of SEC-required fund filings.

Questions you may want to ask to determine whether a reorganization may be an option are as follows:

--Are the funds to be reorganized similar?

--Do they have similar investment objectives, policies and restrictions and are they managed by the same portfolio manager?

--Do the funds hold similar securities?

--Are the fees of the funds similar?

--Are the service providers of the funds similar?

--What are the asset sizes of the funds? If the reorganizing fund is significantly smaller than the surviving fund, pro forma financial statements may not need to be prepared, thus saving some workload and cost.

Reorganizations may benefit shareholders as well – in the form of economies of scale due to funds with larger asset bases. If liquidating a fund is an option, a shareholder may do better tax-wise with having the option of converting their shares into another fund via a tax-free reorganization.