Investment Management Update
A service to our clients.
February 2009
Inside This Issue
Money Market Fund
Update
Treasury Extends
Temporary Insurance
Program for Money
Market Funds - page 2
SEC Adopts
Temporary Exemption
for Liquidation of
Money Market Funds
that Participate in
Treasury Insurance
Program - page 2
SEC Allows Money
Market Fund Shadow
Pricing Relief to
Expire - page 3
Amicus Brief in
Jones v. Harris
Defends Gartenberg
Factors - page 3
SEC Staff: Regulatory
Compliance Critical
to Restoring Healthy
Markets - page 4
Summary Prospectus
and New Prospectus
Delivery Option for
Mutual Funds - page 5
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© 2009 Bell, Boyd & Lloyd LLP. All rights reserved.
Investment Management Update is published by Bell, Boyd & Lloyd LLP for clients and friends of the firm and is for information only. It is not a substitute for legal advice or
individual analysis of a particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this publication does not create
an attorney-client relationship.
Money Market Fund Update
Group of Thirty Proposes Drastic Reforms for Money Market Funds
The Group of Thirty, a private, nonprofit, group with members from the private and
public sectors and academia, recently published Financial Reform: A Framework
for Financial Stability. The report is important to the fund industry because it
includes two proposals that, if implemented, could materially affect money
market funds. The steering committee responsible for the report is led by Paul
Volcker, former chairman of the Federal Reserve and chairman of the newly formed
Economic Recovery Advisory Board under President Barack Obama.
Recommendations. The Group made two recommendations regarding money
market funds:
• Money market funds that provide traditional banking services, such as
transaction account services including check-writing, withdrawals on demand
at par value, and assurances about maintaining a stable NAV should be
required to reorganize as special-purpose banks. These special-purpose
banks would be (i) subject to bank-like regulation and supervision; (ii) federally
insured; and (iii) authorized to use lender-of-last-resort funds.
• Vehicles remaining as money market funds (that is, those that do not
offer traditional banking services) should only provide conservative
investment options. It should be made clear to investors that these vehicles
(i) are not federally insured banks and (ii) offer no assurances that assets can
be withdrawn on demand at par (that is, at $1.00 a share). These funds would
not be allowed to use amortized cost pricing, meaning they would carry a
variable NAV.
Implications of the Recommendations. The Group’s proposals could radically
alter the regulatory landscape for SEC-registered money market funds. First, the
Group’s report suggests that only bank and special-purpose bank issuers, subject
to bank-like regulation and supervision, could sell funds with a stable NAV. These
“banks” might be subject to another layer of regulation if required to register as
investment companies. Second, money market funds that were not reorganized
as special-purpose banks would likely be precluded from allowing redemptions
by check or from maintaining a constant NAV of $1.00 per share. The result of
all this could be that SEC-registered money market funds, as the public has
come to know them, would cease to exist.
Investment Management Update
These proposals carry significant weight, but are
only among many that we expect to see presented
as the government grapples with regulatory reform.
beyond April 30, 2009, the fees to participate in
the extension will be published at that time. The
Secretary of the Treasury retains the option to
extend the program for any length of time up to a
year, ending no later than September 18, 2009. If
a fund did not participate in this extension, it will not
be eligible to participate in any further extension of
the program.
Treasury Extends Temporary Insurance
Program for Money Market Funds
“To support ongoing stability in the market,”
the U.S. Department of the Treasury recently
extended, through April 30, 2009, the temporary
insurance program to cover participating money
market funds that “break the buck.” As described
in our November Newsletter, the program, which is
voluntary, acts as a guarantee of a shareholder’s
SEC Adopts Temporary Exemption for
Liquidation of Money Market Funds
That Participate in Treasury Insurance
Program
Under the temporary insurance program for money
market funds described above, if a fund whose NAV
drops below $0.995 (which the Treasury refers to as
a “guarantee event”) wishes to receive support from
the Treasury pursuant to the program, it must notify
the Treasury the next day and begin liquidation
within five business days, unless it can, within those
five business days, raise its NAV to at least $0.995.
If the money market fund is unable to raise its
NAV, the fund’s board must promptly suspend the
redemption of its outstanding shares “in accordance
with applicable [SEC] rules, orders and no-action
letters,” and the fund must fully liquidate its holdings
within 30 days.
investment in a participating money market fund
as of September 19, 2008. Only money market
funds that currently participate in the program
are eligible to continue to participate. In
addition, for a fund to continue to participate in the
program, the fund must have met certain conditions,
including the following:
• The fund did not “break the buck” during
the initial period of the program or on
December 19, 2008.
• The fund’s board, including a majority of its
“independent directors,” has determined,
among other things, that the fund’s
continued participation in the program is
in the best interests of the fund and its
shareholders.
However, under current law, a fund may not
suspend the right of redemption absent certain
specified circumstances or an SEC order and may
not postpone the date of payment or satisfaction
upon redemption for more than seven days. To
“facilitate orderly liquidations and help prevent
the sale of fund assets at “fire sale” prices”
by funds availing themselves of the temporary
insurance program, the SEC recently adopted
an interim final rule that permits those funds to
suspend the right of redemption, subject to the
following conditions:
For funds with a NAV greater than or equal to
$0.9975 on September 19, 2008, the fee for
extending participation in the program was 1.5
basis points, an increase of 0.5 basis points
from the fee for participation by those funds
during the initial period. Those higher fees cover
a longer period, so the effective rate is unchanged,
but they do not cover any further extensions of
the program. If the Treasury extends the program
2
• an investor must be able to permanently
Compliance Date
retain an electronic version of the documents
through downloading or otherwise, free of
The effective date of these amendments is
March 31, 2009. All initial registration statements,
annual updates, and post-effective amendments
that add a new series, filed on or after January 1,
2010 must comply with the new requirements. The
charge;
• the statutory prospectus and the SAI must
include a table of contents that links directly
to the related section within the document;
final compliance date is January 1, 2011. A fund’s
registration statement must comply with the new
requirements before it can rely on a Summary
Prospectus to satisfy its prospectus delivery
• a reader must be able to link between the
Summary Prospectus and the related
sections within the statutory prospectus
and the SAI.
obligations.
The SEC’s goal in requiring “linkable” documents is
to provide investors with “online information that is
in a better and more useable format than the same
information when provided in paper.” Funds are
Investment Management and
financial MARKETS Group
also required to send an investor, upon request,
a paper copy or an email containing an electronic
copy or a direct link to all the documents required
to be online. The SEC wants investors “to choose
whether to review a fund’s information on the
Internet or whether to receive that information
directly, either in paper or through an email.”
Incorporation by reference
A fund is permitted to incorporate by reference
into the Summary Prospectus information
contained in its statutory prospectus, SAI, and
shareholder reports. In allowing this, the SEC
acknowledged that part of the industry’s reluctance
to use the earlier adopted “profile prospectus” were
liability concerns stemming from the abbreviated
nature of the document and the inability to
incorporate by reference important portions of a
fund’s registration statement. The SEC explained
Cheryl A. Allaire
858-509-7424
callaire@bellboyd.com
Anna Paglia
312-781-7163
apaglia@bellboyd.com
Cameron S. Avery
312-807-4302
cavery@bellboyd.com
Joanne Phillips
202-955-6824
jphillips@bellboyd.com
Kevin R. Bettsteller
312-807-4442
kbettsteller@bellboyd.com
Paulita A. Pike
312-781-6027
ppike@bellboyd.com
Paul H. Dykstra
312-781-6029
pdykstra@bellboyd.com
Eric S. Purple
202-955-7081
epurple@bellboyd.com
David P. Glatz
312-807-4295
dglatz@bellboyd.com
Bruce A. Rosenblum
202-955-7087
brosenblum@bellboyd.com
Alan Goldberg
312-807-4227
agoldberg@bellboyd.com
Donald S. Weiss
312-807-4303
dweiss@bellboyd.com
Mark R. Greer
312-807-4393
mgreer@bellboyd.com
Gwendolyn A. Williamson
202-955-7059
gwilliamson@bellboyd.com
Stevens T. Kelly
312-807-4240
skelly@bellboyd.com
Stacy H. Winick
202-955-7040
swinick@bellboyd.com
Mary C. Moynihan
312-955-7027
mmoynihan@bellboyd.com
that the Summary Prospectus is not a “selfcontained” document but “one piece in a
layered disclosure regime.”
Celeste L. Clayton • Paralegal • 312-558-5019
cclayton@bellboyd.com
7
Investment Management Update
The Summary Section must be written in plain
English. Funds generally cannot omit, add or
change the order of any information explicitly
required in the Summary Section. A multiple fund
prospectus must contain a separate Summary
Section for each fund sequentially and cannot
integrate the information for more than one fund.
However, a multiple fund prospectus may integrate
certain information if it is identical for all funds
covered in the statutory prospectus. A Summary
Section may pertain to multiple classes of the
same fund. The SEC would like each Summary
Section to be about three to four pages, though no
page limits have been adopted.
satisfy the prospectus delivery obligation for mutual
funds (Summary Prospectus). The goal of these
amendments is to provide mutual fund investors
with “streamlined and user-friendly information
that is key to an investment decision.”
Summary Section
The Summary Section must include the
following disclosure about the fund in a prescribed
order:
• investment objectives and goals;
• fees and expenses, including (i) a brief
narrative alerting investors to the availability
of “breakpoint discounts,” (ii) disclosure of
portfolio turnover rate for the most recent fiscal
year as a percentage of the average value
of the portfolio, and (iii) a brief explanation
of the effect of that portfolio turnover rate on
transaction costs and performance;
Summary Prospectus
The Summary Prospectus generally will
contain the same information as the Summary
Section. As a result, if a fund “stickers” its
statutory prospectus to change any information in
the Summary Section, the Summary Prospectus
also must be “stickered” to reflect the changed
information.
• principal investment strategies, risks and
performance;
• investment adviser (and subadviser) and
portfolio managers;
• purchase and sale and tax information (briefly
stated); and
purpose of this change is to “alert investors to
the potential conflicts of interest arising from”
compensation arrangements with financial
intermediaries.
event by raising its NAV to at least $0.995
within five business days of the guarantee
event.
SEC Allows Money Market Fund Shadow
Pricing Relief to Expire
As described in a previous article, the SEC staff
issued a no-action letter last fall, in response to a
request from the ICI, temporarily allowing money
Because the program cannot extend beyond
September 18, 2009, and a money market fund
has 30 days to liquidate, the rule will expire on
market funds to “shadow price” certain portfolio
securities by reference to their amortized cost value
rather than using available market quotations.
According to the ICI, “based on current market
conditions,” the SEC staff has determined not
October 18, 2009. The SEC also may announce
an earlier expiration date for the rule if the program
terminates before September 18, 2009.
The Investment Company Institute (ICI) recently
expressed its support for the SEC’s adoption of
the rule. In a comment letter submitted to the SEC,
the ICI agreed with the SEC’s rationale for the rule,
stating:
Mutual funds may meet their prospectus delivery
obligations by delivering the Summary Prospectus if
specific requirements are met, including:
for at least 90 days after the Summary
Prospectus is delivered to investor;
requests also can outpace the [SEC]’s ability
to grant a timely exemptive order. Under these
circumstances, requiring individual applications for
exemptive relief from Section 22(e) does not serve
the public interests.”
• The fund must not have cured the guarantee
redeemable security is, in fact, redeemable and
that funds do not institute barriers to redemption
or suspend the right of redemption for ulterior
• these documents must be accessible online
The SEC had proposed that a list of the fund’s
10 largest holdings be included in the Summary
Section. However, commenters argued that this
information would be misleading, and the SEC
eliminated this requirement in the final rule.
promptly commence liquidation of the fund
under the terms of the fund’s agreement with
the Treasury.
The purpose of Section 22(e) is to ensure that a
prospectus, SAI, and most recent annual
and semi-annual reports to shareholders
are accessible, free of charge, at a Web site
(the website must be disclosed on the cover or
at the beginning of the Summary Prospectus);
requests can outpace the fund’s ability to sell
its portfolio instruments, to the detriment of the
remaining shareholders … similarly … these
the required notice indicating that it has
experienced a guarantee event and will
Satisfying Prospectus Delivery Obligations
• the fund’s Summary Prospectus, statutory
• payments to financial intermediaries - the
• The fund must have delivered to the Treasury
to extend the relief granted by the letter, which
expired on January 12, 2009. Since that date,
money market funds have had to resume shadow
pricing all of their portfolio securities, regardless of
the time of maturity, based on market factors and
not their amortized cost value.
Amicus Brief in Jones v. Harris
Defends Gartenberg Factors
motives such as to prevent a reduction in
management fees as a result of significant
redemptions. As the Release recognizes,
however, liquidation of a money market fund
under the [p]rogram eliminates a source of
advisory fees for the adviser, removing the
“ulterior motives” for suspending redemptions.
A group of law professors claiming that they are
“interested in ensuring a uniform and coherent
interpretation” of the Investment Company Act has
asked the Supreme Court of the United States “to
clarify the proper scope of the fiduciary duty that
investment advisers owe to fund shareholders
with respect to the compensation that advisers
receive.” The professors’ request was made in
The ICI also urged “the [SEC], at the expiration
of the temporary rule, to adopt a similar final
exemptive rule available to all money market
funds preparing to liquidate.” The ICI reasoned
that, “when the net asset value of a money market
an amicus brief filed in support of a request for
writ of certiorari in the Jones v. Harris Associates
L.P. excessive advisory fee case that was decided
in mid 2008 by the U.S. Court of Appeals for the
fund falls below $1.00 per share and the fund’s
board decides to liquidate the fund, redemption
6
3
Investment Management Update
Seventh Circuit. As reported to you in prior articles,
that panel decision, over an intense dissent from
Judge Richard Posner, created a circuit split among
the U.S. courts of appeals by adopting a market
based standard for evaluating advisory fees and
abandoning the “reasonableness” standard adopted
by the Second Circuit in Gartenberg v. Merrill Lynch
Asset Management Inc.
split, the importance of the issue to the mutual fund
industry, and the one-sided character of the panel’s
analysis.’”
“Imaginative” Approach Taken by the Seventh
Circuit. In the professors’ view, the holding
in Jones v. Harris Associates L.P. represents
an “entirely new” and “imaginative economic
reinterpretation of Section 36(b) … that elides
[the] critical provision of the statute” that obligates
advisers to act as fiduciaries with regard to
advisory fees. That obligation, the brief states,
“requires an investment adviser to vouchsafe
good faith, fair dealing, and the other trappings
of a fiduciary duty specifically in conjunction with
the fees it charges…[and the] Seventh Circuit
completely reads this language out of its analysis.”
Additionally, the professors write that the Supreme
Court should review the Seventh Circuit’s decision
Rejection of Gartenberg a “Harmful” Disruption
of Precedence and Process. The professors’
amicus brief explains that Gartenberg was “a
seminal ruling that has dominated professional,
judicial and regulatory understandings” of
Section 36(b) of the Investment Company
Act, which imposes on investment advisers a
fiduciary duty with respect to the compensation
they receive for providing services to investment
companies. Gartenberg and its reasonableness
factors, the professors note, have become “the
foundation of a sprawling edifice of compliance
for Section 36(b).” Moreover, “the SEC has
endorsed and encoded the Gartenberg standards in
regulations and [registration and proxy statement]
disclosure requirements,” and the industry has
widely incorporated the Gartenberg factors into
“the preparation of lengthy reports that compare
fund fees and performance for annual approval
of advisory contracts.” If this regulatory structure
were dismantled, the professors argue, there will
be “wide-ranging consequences for millions of
American investors and the trillions of dollars they
entrust” to investment advisers.
because, as Judge Posner’s dissent pointed out,
if comparative market data alone is used to gauge
the reasonableness of advisory fees, excessive
fees could “become the industry’s floor, not its
ceiling.” They posit that the Jones panel relied
on data regarding institutional investors, which is
“badly misplaced” in a case affecting average retail
investors, and note that “if markets are to be the
sole check on excessive advisory compensation,
Congress must make that decision … no court has
grounds to ignore [the] congressionally enacted
language” of Section 36(b).
SEC Staff: Regulatory Compliance
Critical to Restoring Healthy Markets
The amicus brief also highlights the fact that a
lawsuit similar to Jones is pending in the U.S. Court
of Appeals for the Eighth Circuit, and impresses
upon the Supreme Court the ripeness of the Court’s
“opportunity to clarify the Section 36(b) fiduciary
duty and to develop the more robust economic
reexamination that Judge Posner [in his dissent
articulates] is warranted ‘by the creation of a circuit
In public speeches and correspondence, high
ranking SEC staff members have recently reminded
mutual funds and other SEC-registered companies,
including investment advisers, broker/dealers and
transfer agents, that it is essential that they “comply
with the law and rules for industry participation,”
4
especially “during this time of financial and market
turmoil.”
valuation and risk controls are followed, and that
all disclosure obligations are met – as well as … all
other obligations in conformity with the securities
laws.” An adequate compliance program, Director
SEC Chairman. “You can’t have a strong
company without strong compliance,” SEC
Chairman Christopher Cox told chief compliance
Richards noted, would also ensure that “CCOs
and compliance personnel are integrated into the
officers (CCOs) at the SEC’s November 2008
“CCOutreach” program. Referring to what he
activities of the firm.”
deemed “the dramatic events in our economy and
markets in recent months,” Chairman Cox said that
with strict compliance, CCOs could “help reduce the
market’s uncertainty about a company’s operations,
Division of Investment Management.
Speaking at the December 2008 Securities
Law Developments Conference sponsored by
the ICI, Director of the Division of Investment
increase the confidence of its counterparties,
and protect its investors.” He added that
Management, Buddy Donohue, stressed that,
particularly in volatile markets, “embracing a core
compliance, “from internal procedures to regulatory
fiduciary culture” is key to maintaining investor
requirements, audits, investigations and controls,” is
most important “when the future is uncertain, when
markets are unstable, when investor confidence
is shaken.” “Experience has taught us again
and again,” Chairman Cox said, “that giving
short shrift to regulatory compliance subjects a
confidence and the strength of the mutual
fund industry. He questioned whether some
funds “have become too fancy, too complicated,”
with portfolio investment strategies that are “too
complex for fund investors to understand as well
as for fund managers to manage effectively.”
company’s investors, employees, management,
directors, and every other stakeholder to
unacceptable risks.” In his speech, Chairman
Cox also asked CCOs to “be vigilant in this difficult
environment” and to be assertive in reporting
compliance violations to the SEC.
Director Donohue suggested that instead of unduly
complex investment techniques, funds and their
managers should focus on compliance with rules
and regulations designed to protect investors and
the industry as a whole. Director Donohue noted
that “fund managers and fund regulators need to
expect and be prepared for more frequent market
Office of Compliance Inspections and
Examinations (OCIE). In an open letter to chief
executive officers (CEOs) of SEC-registered
companies, OCIE Director Lori Richards stated
that by providing adequate resources to their
companies’ compliance programs, CEOs can
“bolster public confidence in the fairness
disruptions than in the past,” and urged that basic
fiduciary principles should serve as the guide
through such market turbulence.
Summary Prospectus and New
Prospectus Delivery Option for
Mutual Funds
and integrity of our markets and market
participants.” With the letter Director Richards
encouraged CEOs to be “proactive in preventing,
detecting and correcting [compliance] problems that
could occur.” She also stated that CCOs should
The SEC has adopted an “improved mutual
fund disclosure framework.” The amendments to
existing rules provide for a new summary section to
be placed at the beginning of a statutory prospectus
(Summary Section) and for a summary document,
“pay attention to ensuring that their interactions
with investors meet high standards, that sales and
trading practices are appropriate, that financial,
which along with online documents, can be used to
5
Investment Management Update
Seventh Circuit. As reported to you in prior articles,
that panel decision, over an intense dissent from
Judge Richard Posner, created a circuit split among
the U.S. courts of appeals by adopting a market
based standard for evaluating advisory fees and
abandoning the “reasonableness” standard adopted
by the Second Circuit in Gartenberg v. Merrill Lynch
Asset Management Inc.
split, the importance of the issue to the mutual fund
industry, and the one-sided character of the panel’s
analysis.’”
“Imaginative” Approach Taken by the Seventh
Circuit. In the professors’ view, the holding
in Jones v. Harris Associates L.P. represents
an “entirely new” and “imaginative economic
reinterpretation of Section 36(b) … that elides
[the] critical provision of the statute” that obligates
advisers to act as fiduciaries with regard to
advisory fees. That obligation, the brief states,
“requires an investment adviser to vouchsafe
good faith, fair dealing, and the other trappings
of a fiduciary duty specifically in conjunction with
the fees it charges…[and the] Seventh Circuit
completely reads this language out of its analysis.”
Additionally, the professors write that the Supreme
Court should review the Seventh Circuit’s decision
Rejection of Gartenberg a “Harmful” Disruption
of Precedence and Process. The professors’
amicus brief explains that Gartenberg was “a
seminal ruling that has dominated professional,
judicial and regulatory understandings” of
Section 36(b) of the Investment Company
Act, which imposes on investment advisers a
fiduciary duty with respect to the compensation
they receive for providing services to investment
companies. Gartenberg and its reasonableness
factors, the professors note, have become “the
foundation of a sprawling edifice of compliance
for Section 36(b).” Moreover, “the SEC has
endorsed and encoded the Gartenberg standards in
regulations and [registration and proxy statement]
disclosure requirements,” and the industry has
widely incorporated the Gartenberg factors into
“the preparation of lengthy reports that compare
fund fees and performance for annual approval
of advisory contracts.” If this regulatory structure
were dismantled, the professors argue, there will
be “wide-ranging consequences for millions of
American investors and the trillions of dollars they
entrust” to investment advisers.
because, as Judge Posner’s dissent pointed out,
if comparative market data alone is used to gauge
the reasonableness of advisory fees, excessive
fees could “become the industry’s floor, not its
ceiling.” They posit that the Jones panel relied
on data regarding institutional investors, which is
“badly misplaced” in a case affecting average retail
investors, and note that “if markets are to be the
sole check on excessive advisory compensation,
Congress must make that decision … no court has
grounds to ignore [the] congressionally enacted
language” of Section 36(b).
SEC Staff: Regulatory Compliance
Critical to Restoring Healthy Markets
The amicus brief also highlights the fact that a
lawsuit similar to Jones is pending in the U.S. Court
of Appeals for the Eighth Circuit, and impresses
upon the Supreme Court the ripeness of the Court’s
“opportunity to clarify the Section 36(b) fiduciary
duty and to develop the more robust economic
reexamination that Judge Posner [in his dissent
articulates] is warranted ‘by the creation of a circuit
In public speeches and correspondence, high
ranking SEC staff members have recently reminded
mutual funds and other SEC-registered companies,
including investment advisers, broker/dealers and
transfer agents, that it is essential that they “comply
with the law and rules for industry participation,”
4
especially “during this time of financial and market
turmoil.”
valuation and risk controls are followed, and that
all disclosure obligations are met – as well as … all
other obligations in conformity with the securities
laws.” An adequate compliance program, Director
SEC Chairman. “You can’t have a strong
company without strong compliance,” SEC
Chairman Christopher Cox told chief compliance
Richards noted, would also ensure that “CCOs
and compliance personnel are integrated into the
officers (CCOs) at the SEC’s November 2008
“CCOutreach” program. Referring to what he
activities of the firm.”
deemed “the dramatic events in our economy and
markets in recent months,” Chairman Cox said that
with strict compliance, CCOs could “help reduce the
market’s uncertainty about a company’s operations,
Division of Investment Management.
Speaking at the December 2008 Securities
Law Developments Conference sponsored by
the ICI, Director of the Division of Investment
increase the confidence of its counterparties,
and protect its investors.” He added that
Management, Buddy Donohue, stressed that,
particularly in volatile markets, “embracing a core
compliance, “from internal procedures to regulatory
fiduciary culture” is key to maintaining investor
requirements, audits, investigations and controls,” is
most important “when the future is uncertain, when
markets are unstable, when investor confidence
is shaken.” “Experience has taught us again
and again,” Chairman Cox said, “that giving
short shrift to regulatory compliance subjects a
confidence and the strength of the mutual
fund industry. He questioned whether some
funds “have become too fancy, too complicated,”
with portfolio investment strategies that are “too
complex for fund investors to understand as well
as for fund managers to manage effectively.”
company’s investors, employees, management,
directors, and every other stakeholder to
unacceptable risks.” In his speech, Chairman
Cox also asked CCOs to “be vigilant in this difficult
environment” and to be assertive in reporting
compliance violations to the SEC.
Director Donohue suggested that instead of unduly
complex investment techniques, funds and their
managers should focus on compliance with rules
and regulations designed to protect investors and
the industry as a whole. Director Donohue noted
that “fund managers and fund regulators need to
expect and be prepared for more frequent market
Office of Compliance Inspections and
Examinations (OCIE). In an open letter to chief
executive officers (CEOs) of SEC-registered
companies, OCIE Director Lori Richards stated
that by providing adequate resources to their
companies’ compliance programs, CEOs can
“bolster public confidence in the fairness
disruptions than in the past,” and urged that basic
fiduciary principles should serve as the guide
through such market turbulence.
Summary Prospectus and New
Prospectus Delivery Option for
Mutual Funds
and integrity of our markets and market
participants.” With the letter Director Richards
encouraged CEOs to be “proactive in preventing,
detecting and correcting [compliance] problems that
could occur.” She also stated that CCOs should
The SEC has adopted an “improved mutual
fund disclosure framework.” The amendments to
existing rules provide for a new summary section to
be placed at the beginning of a statutory prospectus
(Summary Section) and for a summary document,
“pay attention to ensuring that their interactions
with investors meet high standards, that sales and
trading practices are appropriate, that financial,
which along with online documents, can be used to
5
Investment Management Update
The Summary Section must be written in plain
English. Funds generally cannot omit, add or
change the order of any information explicitly
required in the Summary Section. A multiple fund
prospectus must contain a separate Summary
Section for each fund sequentially and cannot
integrate the information for more than one fund.
However, a multiple fund prospectus may integrate
certain information if it is identical for all funds
covered in the statutory prospectus. A Summary
Section may pertain to multiple classes of the
same fund. The SEC would like each Summary
Section to be about three to four pages, though no
page limits have been adopted.
satisfy the prospectus delivery obligation for mutual
funds (Summary Prospectus). The goal of these
amendments is to provide mutual fund investors
with “streamlined and user-friendly information
that is key to an investment decision.”
Summary Section
The Summary Section must include the
following disclosure about the fund in a prescribed
order:
• investment objectives and goals;
• fees and expenses, including (i) a brief
narrative alerting investors to the availability
of “breakpoint discounts,” (ii) disclosure of
portfolio turnover rate for the most recent fiscal
year as a percentage of the average value
of the portfolio, and (iii) a brief explanation
of the effect of that portfolio turnover rate on
transaction costs and performance;
Summary Prospectus
The Summary Prospectus generally will
contain the same information as the Summary
Section. As a result, if a fund “stickers” its
statutory prospectus to change any information in
the Summary Section, the Summary Prospectus
also must be “stickered” to reflect the changed
information.
• principal investment strategies, risks and
performance;
• investment adviser (and subadviser) and
portfolio managers;
• purchase and sale and tax information (briefly
stated); and
purpose of this change is to “alert investors to
the potential conflicts of interest arising from”
compensation arrangements with financial
intermediaries.
event by raising its NAV to at least $0.995
within five business days of the guarantee
event.
SEC Allows Money Market Fund Shadow
Pricing Relief to Expire
As described in a previous article, the SEC staff
issued a no-action letter last fall, in response to a
request from the ICI, temporarily allowing money
Because the program cannot extend beyond
September 18, 2009, and a money market fund
has 30 days to liquidate, the rule will expire on
market funds to “shadow price” certain portfolio
securities by reference to their amortized cost value
rather than using available market quotations.
According to the ICI, “based on current market
conditions,” the SEC staff has determined not
October 18, 2009. The SEC also may announce
an earlier expiration date for the rule if the program
terminates before September 18, 2009.
The Investment Company Institute (ICI) recently
expressed its support for the SEC’s adoption of
the rule. In a comment letter submitted to the SEC,
the ICI agreed with the SEC’s rationale for the rule,
stating:
Mutual funds may meet their prospectus delivery
obligations by delivering the Summary Prospectus if
specific requirements are met, including:
for at least 90 days after the Summary
Prospectus is delivered to investor;
requests also can outpace the [SEC]’s ability
to grant a timely exemptive order. Under these
circumstances, requiring individual applications for
exemptive relief from Section 22(e) does not serve
the public interests.”
• The fund must not have cured the guarantee
redeemable security is, in fact, redeemable and
that funds do not institute barriers to redemption
or suspend the right of redemption for ulterior
• these documents must be accessible online
The SEC had proposed that a list of the fund’s
10 largest holdings be included in the Summary
Section. However, commenters argued that this
information would be misleading, and the SEC
eliminated this requirement in the final rule.
promptly commence liquidation of the fund
under the terms of the fund’s agreement with
the Treasury.
The purpose of Section 22(e) is to ensure that a
prospectus, SAI, and most recent annual
and semi-annual reports to shareholders
are accessible, free of charge, at a Web site
(the website must be disclosed on the cover or
at the beginning of the Summary Prospectus);
requests can outpace the fund’s ability to sell
its portfolio instruments, to the detriment of the
remaining shareholders … similarly … these
the required notice indicating that it has
experienced a guarantee event and will
Satisfying Prospectus Delivery Obligations
• the fund’s Summary Prospectus, statutory
• payments to financial intermediaries - the
• The fund must have delivered to the Treasury
to extend the relief granted by the letter, which
expired on January 12, 2009. Since that date,
money market funds have had to resume shadow
pricing all of their portfolio securities, regardless of
the time of maturity, based on market factors and
not their amortized cost value.
Amicus Brief in Jones v. Harris
Defends Gartenberg Factors
motives such as to prevent a reduction in
management fees as a result of significant
redemptions. As the Release recognizes,
however, liquidation of a money market fund
under the [p]rogram eliminates a source of
advisory fees for the adviser, removing the
“ulterior motives” for suspending redemptions.
A group of law professors claiming that they are
“interested in ensuring a uniform and coherent
interpretation” of the Investment Company Act has
asked the Supreme Court of the United States “to
clarify the proper scope of the fiduciary duty that
investment advisers owe to fund shareholders
with respect to the compensation that advisers
receive.” The professors’ request was made in
The ICI also urged “the [SEC], at the expiration
of the temporary rule, to adopt a similar final
exemptive rule available to all money market
funds preparing to liquidate.” The ICI reasoned
that, “when the net asset value of a money market
an amicus brief filed in support of a request for
writ of certiorari in the Jones v. Harris Associates
L.P. excessive advisory fee case that was decided
in mid 2008 by the U.S. Court of Appeals for the
fund falls below $1.00 per share and the fund’s
board decides to liquidate the fund, redemption
6
3
Investment Management Update
These proposals carry significant weight, but are
only among many that we expect to see presented
as the government grapples with regulatory reform.
beyond April 30, 2009, the fees to participate in
the extension will be published at that time. The
Secretary of the Treasury retains the option to
extend the program for any length of time up to a
year, ending no later than September 18, 2009. If
a fund did not participate in this extension, it will not
be eligible to participate in any further extension of
the program.
Treasury Extends Temporary Insurance
Program for Money Market Funds
“To support ongoing stability in the market,”
the U.S. Department of the Treasury recently
extended, through April 30, 2009, the temporary
insurance program to cover participating money
market funds that “break the buck.” As described
in our November Newsletter, the program, which is
voluntary, acts as a guarantee of a shareholder’s
SEC Adopts Temporary Exemption for
Liquidation of Money Market Funds
That Participate in Treasury Insurance
Program
Under the temporary insurance program for money
market funds described above, if a fund whose NAV
drops below $0.995 (which the Treasury refers to as
a “guarantee event”) wishes to receive support from
the Treasury pursuant to the program, it must notify
the Treasury the next day and begin liquidation
within five business days, unless it can, within those
five business days, raise its NAV to at least $0.995.
If the money market fund is unable to raise its
NAV, the fund’s board must promptly suspend the
redemption of its outstanding shares “in accordance
with applicable [SEC] rules, orders and no-action
letters,” and the fund must fully liquidate its holdings
within 30 days.
investment in a participating money market fund
as of September 19, 2008. Only money market
funds that currently participate in the program
are eligible to continue to participate. In
addition, for a fund to continue to participate in the
program, the fund must have met certain conditions,
including the following:
• The fund did not “break the buck” during
the initial period of the program or on
December 19, 2008.
• The fund’s board, including a majority of its
“independent directors,” has determined,
among other things, that the fund’s
continued participation in the program is
in the best interests of the fund and its
shareholders.
However, under current law, a fund may not
suspend the right of redemption absent certain
specified circumstances or an SEC order and may
not postpone the date of payment or satisfaction
upon redemption for more than seven days. To
“facilitate orderly liquidations and help prevent
the sale of fund assets at “fire sale” prices”
by funds availing themselves of the temporary
insurance program, the SEC recently adopted
an interim final rule that permits those funds to
suspend the right of redemption, subject to the
following conditions:
For funds with a NAV greater than or equal to
$0.9975 on September 19, 2008, the fee for
extending participation in the program was 1.5
basis points, an increase of 0.5 basis points
from the fee for participation by those funds
during the initial period. Those higher fees cover
a longer period, so the effective rate is unchanged,
but they do not cover any further extensions of
the program. If the Treasury extends the program
2
• an investor must be able to permanently
Compliance Date
retain an electronic version of the documents
through downloading or otherwise, free of
The effective date of these amendments is
March 31, 2009. All initial registration statements,
annual updates, and post-effective amendments
that add a new series, filed on or after January 1,
2010 must comply with the new requirements. The
charge;
• the statutory prospectus and the SAI must
include a table of contents that links directly
to the related section within the document;
final compliance date is January 1, 2011. A fund’s
registration statement must comply with the new
requirements before it can rely on a Summary
Prospectus to satisfy its prospectus delivery
• a reader must be able to link between the
Summary Prospectus and the related
sections within the statutory prospectus
and the SAI.
obligations.
The SEC’s goal in requiring “linkable” documents is
to provide investors with “online information that is
in a better and more useable format than the same
information when provided in paper.” Funds are
Investment Management and
financial MARKETS Group
also required to send an investor, upon request,
a paper copy or an email containing an electronic
copy or a direct link to all the documents required
to be online. The SEC wants investors “to choose
whether to review a fund’s information on the
Internet or whether to receive that information
directly, either in paper or through an email.”
Incorporation by reference
A fund is permitted to incorporate by reference
into the Summary Prospectus information
contained in its statutory prospectus, SAI, and
shareholder reports. In allowing this, the SEC
acknowledged that part of the industry’s reluctance
to use the earlier adopted “profile prospectus” were
liability concerns stemming from the abbreviated
nature of the document and the inability to
incorporate by reference important portions of a
fund’s registration statement. The SEC explained
Cheryl A. Allaire
858-509-7424
callaire@bellboyd.com
Anna Paglia
312-781-7163
apaglia@bellboyd.com
Cameron S. Avery
312-807-4302
cavery@bellboyd.com
Joanne Phillips
202-955-6824
jphillips@bellboyd.com
Kevin R. Bettsteller
312-807-4442
kbettsteller@bellboyd.com
Paulita A. Pike
312-781-6027
ppike@bellboyd.com
Paul H. Dykstra
312-781-6029
pdykstra@bellboyd.com
Eric S. Purple
202-955-7081
epurple@bellboyd.com
David P. Glatz
312-807-4295
dglatz@bellboyd.com
Bruce A. Rosenblum
202-955-7087
brosenblum@bellboyd.com
Alan Goldberg
312-807-4227
agoldberg@bellboyd.com
Donald S. Weiss
312-807-4303
dweiss@bellboyd.com
Mark R. Greer
312-807-4393
mgreer@bellboyd.com
Gwendolyn A. Williamson
202-955-7059
gwilliamson@bellboyd.com
Stevens T. Kelly
312-807-4240
skelly@bellboyd.com
Stacy H. Winick
202-955-7040
swinick@bellboyd.com
Mary C. Moynihan
312-955-7027
mmoynihan@bellboyd.com
that the Summary Prospectus is not a “selfcontained” document but “one piece in a
layered disclosure regime.”
Celeste L. Clayton • Paralegal • 312-558-5019
cclayton@bellboyd.com
7
Investment Management Update
A service to our clients.
February 2009
Inside This Issue
Money Market Fund
Update
Treasury Extends
Temporary Insurance
Program for Money
Market Funds - page 2
SEC Adopts
Temporary Exemption
for Liquidation of
Money Market Funds
that Participate in
Treasury Insurance
Program - page 2
SEC Allows Money
Market Fund Shadow
Pricing Relief to
Expire - page 3
Amicus Brief in
Jones v. Harris
Defends Gartenberg
Factors - page 3
SEC Staff: Regulatory
Compliance Critical
to Restoring Healthy
Markets - page 4
Summary Prospectus
and New Prospectus
Delivery Option for
Mutual Funds - page 5
70 West Madison Street
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t. 312-372-1121
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t. 858-509-7400
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t. 202-466-6300
www.bellboyd.com
© 2009 Bell, Boyd & Lloyd LLP. All rights reserved.
Investment Management Update is published by Bell, Boyd & Lloyd LLP for clients and friends of the firm and is for information only. It is not a substitute for legal advice or
individual analysis of a particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this publication does not create
an attorney-client relationship.
Money Market Fund Update
Group of Thirty Proposes Drastic Reforms for Money Market Funds
The Group of Thirty, a private, nonprofit, group with members from the private and
public sectors and academia, recently published Financial Reform: A Framework
for Financial Stability. The report is important to the fund industry because it
includes two proposals that, if implemented, could materially affect money
market funds. The steering committee responsible for the report is led by Paul
Volcker, former chairman of the Federal Reserve and chairman of the newly formed
Economic Recovery Advisory Board under President Barack Obama.
Recommendations. The Group made two recommendations regarding money
market funds:
• Money market funds that provide traditional banking services, such as
transaction account services including check-writing, withdrawals on demand
at par value, and assurances about maintaining a stable NAV should be
required to reorganize as special-purpose banks. These special-purpose
banks would be (i) subject to bank-like regulation and supervision; (ii) federally
insured; and (iii) authorized to use lender-of-last-resort funds.
• Vehicles remaining as money market funds (that is, those that do not
offer traditional banking services) should only provide conservative
investment options. It should be made clear to investors that these vehicles
(i) are not federally insured banks and (ii) offer no assurances that assets can
be withdrawn on demand at par (that is, at $1.00 a share). These funds would
not be allowed to use amortized cost pricing, meaning they would carry a
variable NAV.
Implications of the Recommendations. The Group’s proposals could radically
alter the regulatory landscape for SEC-registered money market funds. First, the
Group’s report suggests that only bank and special-purpose bank issuers, subject
to bank-like regulation and supervision, could sell funds with a stable NAV. These
“banks” might be subject to another layer of regulation if required to register as
investment companies. Second, money market funds that were not reorganized
as special-purpose banks would likely be precluded from allowing redemptions
by check or from maintaining a constant NAV of $1.00 per share. The result of
all this could be that SEC-registered money market funds, as the public has
come to know them, would cease to exist.