Overview of the Investment
Company Complex
Fatima S. Sulaiman
DC 9736275 v1
OVERVIEW OF FEDERAL AND STATE
REGULATION OF INVESTMENT COMPANIES
Principal Regulatory Statutes
Applicable to Investment Companies










Securities Act of 1933
Securities Exchange Act of 1934
Investment Company Act of 1940
Investment Advisers Act of 1940
State Corporate Laws
State Securities Laws – “Blue Sky”
Internal Revenue Code of 1986
Employee Retirement Income Security Act of 1974
Sarbanes-Oxley Act of 2002
Others (e.g., USA Patriot Act, Dodd-Frank Act)
2
Principal Governmental Authorities
Applicable to Investment Companies




Securities and Exchange Commission
State Securities Commissions
Internal Revenue Service
Commodity Futures Trading Commission
Self-Regulatory Organizations
 Financial Industry Regulatory Authority
 Stock Exchanges
3
Typical Structure of Fund Complex
INVESTMENT ADVISER
CUSTODIAN BANK
LAW FIRMS
CONSULTANTS
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRMS
ADMINISTRATOR
FOREIGN
SUBCUSTODIANS
& DEPOSITORIES
FUND
PRINCIPAL UNDERWRITER
(DISTRIBUTOR)
BOARD OF DIRECTORS
• Management
• Independent Directors
FUND ACCOUNTING
AGENT
BROKER-DEALERS
THIRD-PARTY
ADMINISTRATORS
TRANSFER AGENT
INVESTORS
4
Securities Act of 1933
 Regulates public offerings of securities,
including investment company shares
 Purpose: “to provide full and fair disclosure…
and to prevent frauds… .”
 Registration of Securities
 Prospectus Delivery Requirements
 Liability for False or Misleading Registration
Statement
5
Securities Exchange Act of 1934
 Purpose: “to provide for the regulation of securities
exchanges and over-the-counter markets … and… to prevent
inequitable and unfair practices on such exchanges and
markets.”
 Registration of certain Issuers, Exchanges, Broker-Dealers
and Transfer Agents
 Disclosure Requirements
 Proxy Solicitation material
 Periodic Reports to SEC
 Periodic Reports to Shareholders
 Other Reports
 Anti-fraud Provisions – Rule 10b-5
6
Investment Company Act of 1940
 Background and Objectives: prevention of enumerated
abuses
 Definition of Investment Company
 Types of Investment Companies
 Broad Scope of Substantive Regulation, including:






Registration and reporting
Transactions between investment company and its “affiliated persons”
Contracts with investment adviser and principal underwriter
Offering and redemption of fund shares
Capital structure and investment policies and practices
Responsibilities of investment company Board of Directors/Trustees,
including its disinterested directors or trustees
7
Investment Advisers Act of 1940
 Registration: the investment adviser to an
investment company registered under the
Investment Company Act must be
registered under the Advisers Act
 Performance Fee Requirements
 Compliance Program Requirements
8
State Law
 State Corporate or Trust Law – source of various
requirements relating to:
 Organization
 Governing documents
 Dividends and other distributions
 Directors/Trustees and Officers
 Shareholders and shareholder meetings
 Reorganizations
 State Securities Laws – impact of National
Securities Markets Improvement Act of 1996
9
OVERVIEW OF INVESTMENT COMPANY
SERVICE PROVIDERS AND BASIC
AGREEMENTS
Service Providers
INVESTMENT ADVISER
• Develop Products
• Manage Portfolios
• Place Trades
• Compliance
• Monitor Sub-Advisers
ADMINISTRATOR
• Office Space
• Corporate Officers
• Board Meetings
• Minutes
• Preparing SEC
Documents and reports
• Compliance
PRINCIPAL UNDERWRITER
(DISTRIBUTOR)
• Advertising
• Marketing
• Wholesaling
BROKER-DEALERS
• Sales and Redemptions
of Fund Shares
• Execute Portfolio
Brokerage Orders
• Research
• Clearance and Settlement
• Settlement Pricing Assistance
LAW FIRMS
• Legal
• Consulting
CONSULTANTS
• Marketing Plans
• Contract
Review Data
• Performance
Data
• Board
Governance
Advice
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTANTS
• Audit
• Internal Controls
• Tax Returns
• Consulting
CUSTODIAN BANK
• Safekeeping for Assets
• Deposit Accounts
• Fed Wire Orders
• Securities Loans
• Dividend Disbursing
• Repurchase Agreements
• Line of Credit
FOREIGN
SUBCUSTODIANS
& DEPOSITORIES
FUND
BOARD OF DIRECTORS
• Management
• Independent Directors
INVESTORS
THIRD-PARTY
ADMINISTRATORS
• Sales and Redemptions
of Fund Shares
• Shareholder Records
FUND ACCOUNTING AGENT
• Pricing of Portfolio
Assets
• Fund Accounting
• Share Price
Calculations
TRANSFER AGENT
(REGISTRAR)
• Shareholder Records
• Process Orders
• Confirmation Statements
• Monthly Statements
11
INVESTMENT COMPANY SERVICE
PROVIDERS AND THE BASIC AGREEMENTS
Investment Advisers and Investment
Advisory Contracts
 Scope of investment adviser’s responsibilities
 Contract requirements, including:
 Written contract
 Manner of approval and amendment
 Description of compensation
 Manner of continuance
 Termination
 Other advisory contract considerations
13
Principal Underwriters and
Underwriting Contracts
 Responsibilities – Marketing and
Distribution of Fund Shares
 Contract requirements, including:
 Written contract
 Manner of approval and amendment
 Termination
 Other underwriting contract considerations
14
Administrators and
Administration Arrangements
 Responsibilities – Corporate Matters,
Regulatory Filings
 Contract considerations
Transfer Agents and Providers of
Related Shareholder Servicing
 Responsibilities
 Contract considerations
15
Custodians and Custody
Arrangements
 Safekeeping of the Fund’s Assets
 General Investment Company Act requirements
applicable to types of custody arrangements:






Bank custody
Broker-dealer custody
Self-custody
Central depositories and book-entry systems
Margin for futures contract transactions
Foreign custody
16
Insurance Contracts
 Required fidelity bond




Amount
Form of bond
Annual consideration
Filing of bond
 Directors and officers/errors and omissions liability
insurance
 Industry practice
 Form of policy
 Supplemental coverage for disinterested
directors/trustees
17
Independent Auditors
 Selection of Accounting Firm
 Independent directors
 Shareholders
 Rule 32a-4
 Defining the Scope of Services
 Sarbanes-Oxley Act imposes additional
requirements regarding auditor
independence
18
Organizing A Mutual Fund
Nicole Trudeau
DC 9736284 v1
Overview
1. Organizing a Mutual Fund
2. Registering with the SEC
3. Maintaining a Continuous Offering
1
Organizing a Mutual Fund
Time and Responsibility Schedule
 Decide form and content early
 Allow appropriate review time
 Reviewers include:
 Internal Personnel
 Portfolio Managers
 Legal/Compliance
 Operations
 Fund Counsel (Tax Counsel)
 Directors/Independent Director Counsel
 Independent Accountants (consent required)
2
Organizing a Mutual Fund
 Form of Organization
 Corporations
 (Maryland, Delaware)
 Business/Statutory Trusts
 Massachusetts Business Trusts
 Delaware Statutory Trusts
3
Organizing a Mutual Fund
 Governing State Law
 Maryland Corporate Law
 A well-developed and detailed statute
 Massachusetts Business Trust Law
 Virtually no substantive statutory provisions
 Delaware Statutory Trust/Corporate Law
 Highly developed case law
4
Organizing a Mutual Fund
 Organizational and Corporate Documents
 Charter (Declaration of Trust, Trust Instrument
or Articles of Incorporation)




Name
Number of Directors
Powers Clause
Purpose Clause
 Bylaws





Election of Directors
Board Committees
Duties of Officers
Conduct of Board and Shareholder Meetings
Indemnification
5
Organizing a Mutual Fund
 Organizational Meeting
 Approving the Charter and Adopting the By-laws
 Formal election of directors and officers
 Establishing Board Committees (e.g., Audit,
Nominating, Valuation)
 Ratification of prior actions
 Business transactions (e.g., approve
arrangements with fund service providers)
 Authorization to file the fund’s registration
statement
6
Organizing a Mutual Fund
 Structure and Distribution




Separate Fund Entities
Series Funds
Multiple Class
Master-Feeder Arrangements
7
SEC Registration
 Primary Laws Governing Federal
Registration
 Securities Act of 1933 (the ’33 Act)




Section 5 – Registration of Securities
Section 10 – Information Required in a Prospectus
Regulation C – Rules 421, 480-486 and 495-497
Sections 11 and 12 – Liability
 Investment Company Act of 1940 (the ’40 Act)
 Section 8 - Registration of Investment Companies
8
SEC Registration
 The Registration Process
 Notification of Registration (Form N-8A)
 Registers entity as an investment company
 Registration Statement (Forms N-1A and N-2)




Registers the fund and its shares
SEC Staff Review
Registration Statement ordered “effective” by SEC
File definitive prospectus and SAI within 5 days of
effectiveness
 XBRL (15 business days after effectiveness)
9
SEC Registration
 Form N-8A: Notification of Registration
 Registers entity as investment company
 Short Form (file concurrent with Form N-1A)
 Long Form (file Form N-1A within 3 months)
10
SEC Registration
 Form N-1A: Registration Statement







Facing Sheet
Part A: Prospectus
Part B: Statement of Additional Information (SAI)
Part C: Other Information
Signature Pages
Exhibit Index/Exhibits
Transmittal Letter
11
Part A: Prospectus
 Cover/Back Page
 Fund Summary
 Objectives, Performance, Fee Table, Summary of Investments, Risks,
Fund Management Information, Purchase/Sale Information, Tax
Information and Financial Intermediary Compensation
 Fund Details
 Investment Objectives, Principal Investment Strategies, Related Risks
and Disclosure of Portfolio Holdings
 Fund Management, Organization and Capital Structure
 Adviser
 Portfolio Managers
 Shareholder Services
 Shareholder Information including Valuation, Purchase/Sale and Tax
Information and Policies about Frequent Purchases and Sales
 Distribution Arrangements
 Financial Information
12
Part B: Statement of Additional
Information (SAI)
Detailed description of fund matters (incorporated into
prospectus)











Investment Policies and Limitations
Investment Descriptions
Fund Management/Board of Directors/Service Providers
Description of the Trust/Corporation
Control Persons
Portfolio Transactions
Valuation
Tax Information
Performance
Portfolio Holdings Disclosure
Financial Statements
13
Part C: Other Information
 Exhibits:






Organizational documents
Fund contracts
Legal opinions and consents
Rule 12b-1 Plan(s)
Rule 18f-3 Plan
Code of Ethics
 Indemnification, Business Connections of Adviser
and Underwriter, Recordkeeping, Undertakings
 Signature Pages
14
SEC Registration
 Signature Pages (Directors, certain Officers)
 Powers of Attorney
 Section 11 of the 1933 Act
 Civil remedy for purchasers
 Liability for content of registration statement
 Liability extends to:
 Each person that signs the registration statement (directors are
required to sign)
 Each person that provides an expert opinion (attorney and
accountants)
 Underwriter
 Any controlling person
15
SEC Registration
 SEC Staff Review




Division of Investment Management
Selective Review
Comments (typically oral, within 30 days)
Responses (oral, supplemental letter or pre-effective
amendment)
 Tandy Representations
 Order of Effectiveness
 Delaying amendment
 Definitive prospectus and SAI (file within 5 days of receipt
of the Order of Effectiveness)
 Summary Prospectus (file on day of first use)
16
Post-Effective Requirements
 Maintain good standing with the State of organization
 Annual update of registration statement
 Update no later than 16 months (stale financials)
 120 days for 1940 Act compliance
 Rule 485(a): Non-routine “material” changes
 Automatically effective 60 days after filing
 75 days for new series
 Rule 485(b): Non-material “routine” changes
 Automatically effective upon filing
 May use to update 485(a) filing
 Rule 497(c) stickers: Update material changes
17
Post-Effective Requirements
Due Diligence Checklist for Post-Effective
Amendments








Updated copy of Form N-1A
New SEC rules not yet incorporated into Form N-1A
Board materials and resolutions
Proxy statements
Stickers/Supplements
Shareholder reports
Exemptive Orders/No-Action Letters
Sign-off (portfolio managers, counsel, accountants)
18
Post-Effective Requirements
Useful Resources
 Plain English Handbook
 Proposing and Adopting Releases of
Disclosure Rules
 Generic Comment Letters, “Dear Registrant”
and “Dear Financial Officer” Letters
 Old N-1A Disclosure Guidelines
 SEC Staff No-Action and Interpretive Letters
19
Post-Effective Requirements
 Shareholder Reports
 Annual and semi-annual delivered to shareholders
within 60 days of period end date
 Form N-CSR
 Used to file shareholder reports with the SEC within
10 days such reports are sent to shareholders
 Sarbanes-Oxley Act certifications
 Includes additional information
20
Post-Effective Requirements
 Form N-Q
 File complete portfolio holdings with the SEC within
60 days of the end of the first and third fiscal quarter
 No delivery to shareholders, but available to
shareholders upon request
 Sarbanes-Oxley Act certifications
 Form 24F-2
 Filing fees
 File notice within 90 days of fiscal year end
 Fees based on shares sold less shares redeemed
21
Post-Effective Requirements
 Form N-SAR
 Filed with the SEC within 60 days of the end of a fund’s semiannual period and fiscal year end
 Not distributed to shareholders
 Form N-PX
 Record of proxy votes for 12-month period ending June 30
 Due no later than August 31 for all funds
 Form N-MFP
 Applies only to money market funds
 Shows all portfolio holdings
 File by the 5th business day of each month
22
Questions?
 Keep a time and responsibility chart when
organizing a mutual fund
 Keep a compliance calendar of ongoing
reporting, filing and amendment
requirements
23
Advertising and Social Media
for Mutual Funds
DC 9567389 v5
Chris Healey
Meg Laurent
Examples of “Real” Advertising
Demonstrating
Product
(Infomercials)
Building Image
Changing
Perceptions
1
Example of a Typical Mutual
Fund Advertisement
This ad is not an offer to sell nor
solicitation of
an offer to purchase.
The offer is only made
by the prospectus.
ABC Fund
Copies of the prospectus
may be obtained by calling
800-555-1212 or by
going to abcfund.com
Past performance is not indicative of
future results
2
Q: Why is mutual fund advertising so
different from regular advertising?
A: Securities Regulation
3
SEC Regulation
 Section 5 of 1933 Act: Limitations in Advertising
 Omitting Prospectus – Rule 482
 Standardized Performance Disclosures
 Money Market Fund Disclosures
 Prominence and Disclaimer Requirements




Supplemental Sales Materials – Rule 34b-1
Generic Advertising – Rule 135a
Advertising Standards – Rule 156
Profile/Summary (Short form prospectus)
4
Use of Related Performance
in Advertising
 SEC No-Action Letters and required
conditions for use
 FINRA ban on use
5
FINRA Regulation and Review
 NASD/FINRA Rules
 FINRA Advertising Review Rules
 General FINRA Standards – Rule 2210
 Consolidation / Reorganization of rules about
communication with the public
6
EXAMPLES OF NON-COMPLIANT
ADVERTISEMENTS
The following slides include examples of advertisements that are
non-compliant for the following reasons:
1. Includes Promissory Language
2. Includes Misleading Images
3. Inappropriate Presentation and Proximity of Performance Information
4. Problematic Graphics
Can you guess which number goes with which slide?
7
EXAMPLE A
LAURENT SMALL CAP FUND
The Laurent Small Cap Fund seeks to achieve its
investment objective by investing at least 80% of its net
assets in the equity securities of smaller companies with
market capitalizations at the time of investment between
$400 million and $1.5 billion.
Past performance is not indicative of
future results
8
EXAMPLE B
Are you ready to maximize your returns? Are you
ready to invest with peace of mind? Then invest in
the Laurent Extraordinary Returns Fund.
Laurent Extraordinary Returns Fund = Guaranteed
Returns.
9
EXAMPLEC
PERFORMANCE TABLE
K&L Top Notch Fund -10.0%
Benchmark Index - 9.2%
The equity market performed well during the first half of
this year and positive security selection in the Industrials
and Financials sectors benefited the performance of the
K&L Top Notch Fund as compared to its benchmark.
Looking ahead, the Fund remains overweight in both of
these sectors as they will certainly perform exceptionally.
The performance data quoted represents past performance of the Fund’s primary class and does not guarantee future results.
Current performance may be lower or higher than the performance data quoted. To obtain the most recent performance data or
the prospectus for the Fund, please call 1-800-555-5555.
10
EXAMPLE D
MEG’S LARGE CAP FUND
(projected performance)
30
25
20
Meg's Fund
FUND A
15
10
5
0
2011
2012
2013
2014
11
Healey-Laurent Awesome Commodities Fund
Goal: Guaranteed Returns.
PERFORMANCE TABLE
Healey-Laurent Awesome Commodities Aggressive
Growth Fund - 25.6%
The Healey-Laurent Awesome Commodities
Aggressive Growth Fund always achieves its
investment objective by investing in
commodity-linked instruments and fixed
income instruments or equity securities of
smaller companies.
The team at Healey-Laurent Awesome
Commodities Fund made me a ton of money last
year!
- K.L. Gates, current investor
MCSI China Index - 9.2%





Ideal investment to maximize returns
with zero risk.
Risk? What risk?
We will generate at least 15% total
return this year.
Ranks first against comparable funds!
The performance data quoted represents past performance of the Fund’s primary class
and does not guarantee future results. Current performance may be lower or higher than
the performance data quoted. To obtain the most recent performance data or the
prospectus for the Fund, please call 1-800-555-5555.
12
The Use of Social Media By
Investment Companies, Investment
Advisers and Broker-Dealers
I.
What is Social Media and Why is it Important?
II. Legal Framework and Regulatory Guidance
III. Third-Party Posts and Content
IV. Drafting Social Media Policies
13
WHAT IS SOCIAL MEDIA?
WHY IS IT IMPORTANT?
From SEC National Exam Risk Alert
“Social media is an umbrella term that
encompasses various activities that integrate
technology, social interaction and content
creation. Social media may use many
technologies, including, but not limited to,
blogs, microblogs, wikis, photos and video
sharing, podcasts, social networking and
virtual worlds.”
15
16
Common Uses of Social Media:








Marketing
Expanding brand awareness
Promoting firm’s website
Building customer loyalty
Connecting with clients and potential clients
Educating clients/potential clients
Servicing clients
Customer/market research
17
Potomac Capital Management
@potomaccap
Potomac Capital Management is an investment management firm with an
unyielding focus on helping investors achieve their long-term goals.
Follow @potomaccap
@potomaccap
Call us to learn more about our financial products!
@potomaccap
When it comes to investment advice, there’s no
substitute for our personal service.
@HealeyLaurant Advisers
Two@potomaccap
attorneys trned financial
Thinking about a student loan? Go to our website for
some helpful
advisers
whotips.
want to manage
your money.
@potomaccap
At Potomac Capital Management, we strive to meet
our clients’ needs every day.
18
Grand Slam Investment Advisers LLP
A Prospectus is available at
http://gsia.pro.com/qwerty.
19
Ty Lannister
Portfolio Manager/Kings Landing Debt Fund
Westeros
Current: Kings Landing Capital Management, Inc.
Previous: Casterly Rock Advisors LLC
20
LEGAL FRAMEWORK AND
REGULATORY GUIDANCE
Federal Securities Laws and SEC/FINRA Rules Applicable to
Investment Advisers, Broker-Dealers and Private Funds
 Anti-Fraud Provisions:
 Compliance/Supervision Rules:

Section 206 of the Investment Advisers Act (“IAA”)

Rule 206(4)-7 under the IAA

Section 17(a) of the Securities Act of 1933
(“Securities Act”)

Rule 38a-1 under the ICA

FINRA Rule 3130

Section 10(b) and Rule 10b-5 under the Securities
Exchange Act of 1934 (“Exchange Act”)

NASD Rule 2010 (FINRA Rule 3110 effective
December 1, 2014)

Section 34(b) of the Investment Company Act (“ICA”)

CFTC Regulation 23.602

FINRA Rule 2210

NFA Compliance Rules 2-29 and 2-36

CFTC Regulation 180.1

NFA Compliance Rules 2-29 and 2-36
 Advertising Rules:
 Recordkeeping Rules:

Rule 204-2 under the IAA

Exchange Act Rules 17a-3 and 17a-4

Rule 206(4)-1 under the IAA

FINRA Rules 2210 and 4511

FINRA Rule 2210

Section 31 and Rule 31a-2 under the ICA

Securities Act Rules 482 and 156

CFTC Regulations 1.31, 4.7(b), 4.12, 4.23 and 4.33

Rule 34b-1 under the ICA

NFA Compliance Rules 2-29 and 2-36

CFTC Regulation 4.41

NFA Compliance Rules 2-29 and 2-36
 Suitability:

FINRA Rule 2111
22
General: IAA Rule 206(4)-1

Advertising is any written communication addressed to more than one
person or any notice or announcement in any publication or by radio or
television which offers any analysis, report or publication regarding
securities; any graph, chart, formula or other device for making securities
decisions; or any other investment advisory services regarding securities
 May include emails, websites or social media posts

Investment advisers are prohibited from using advertisements that contain
“untrue statements of material fact” or are “otherwise misleading”

Investment advisers are generally prohibited from publishing, distributing or
circulating advertisements with:
 Testimonials
 Past specific recommendations
 Graphs, charts and formulas
 Free reports and services
 Untrue statements of material fact
23
SEC Guidance – OCIE National Examination Risk
Alert, Investment Adviser Use of Social Media
(January 2012)
 Social media is subject to the advertising rules, including
recordkeeping and production requirements
 Firms should identify risk exposure given their operations
 Firms should test if their compliance policies and
procedures effectively address risks
 Firms may be responsible for third-party content
24
National Examination Risk Alert (continued)
 Rule 204-2 and Recordkeeping:
 Records relating to a firm’s “advisory business” must
be kept
 If records are kept in electronic format, must be
arranged and indexed to promote easy access
 Conduct employee training regarding required
records and periodically test to make sure employees
are not destroying required records
 Consider use of third-party vendors to keep records
25
FINRA Guidance

Targeted Examination Letter, June 2013 Re: Spot-Check of Social Media
Communications

FINRA Regulatory Notice 11-39 (Aug. 2011) – Social Media Websites and
the Use of Personal Devices for Business Communications

FINRA Regulatory Notice 10-06 (Jan. 2010) – Guidance on Blogs and Social
Networking Web Sites

FINRA Regulatory Notice 07-59 (Dec. 2007) – Supervision of Electronic
Communications
Key Topics from FINRA Guidance

Recordkeeping

Suitability

Prior approval vs. supervision
 Static vs. interactive content

Third-party posts
26
Suitability
(FINRA Rule 2111)

Recommending a specific investment product or investment strategy in a
social media post can trigger “suitability” requirements

Must “have a reasonable basis to believe that a recommended transaction or
investment strategy involving a security or securities is suitable for the
customer”
 This belief must be based on “reasonable diligence of the member or associated
person to ascertain the customer’s investment profile”

Best practice to require pre-approval by a registered principal of any
recommendations of a specific investment product or investment strategy

Some firms prohibit references to specific investment products or strategies
due to these issues
27
Prior Approval vs. Supervision
(FINRA Rule 2210)
Static Communications
Interactive Communications
 Social Media Profiles
 Comments
 Blogs
 Status Updates
 Message Boards
 Retail communications require preapproval by a registered principal
 Retail communications may not
require pre-approval
 May become static communications
if reposted, thus trigging the preapproval requirement
Recordkeeping requirement apply equally to both types of communications
(Retail communications are those made available to more than 25 people)
28
THIRD-PARTY POSTS
AND CONTENT
Testimonials and Endorsements
 Includes an explicit or implicit statement of a client’s experience with,
or endorsement of, an investment adviser
 Testimonials are prohibited under Rule 206(4)-1 under the Advisers
Act because they may suggest that all of the adviser’s clients or
investors have the same favorable experience as described in the
testimonial
 SEC Risk Alert: Social “plug-ins,” Facebook Likes and LinkedIn
Recommendations could be testimonials depending on facts and
circumstances
30
Grand Slam Investment Advisers LLP
A Prospectus is available at
http://gsia.pro.com/qwerty.
31
Our 128,877 “Likes” are a testament
to the services we provide.
Grand Slam Investment Advisers LLP
A Prospectus is available at
http://gsia.pro.com/qwerty.
32
Ty Lannister
Portfolio Manager/Kings Landing Debt Fund
Westeros
Current: Kings Landing Capital Management, Inc.
Previous: Casterly Rock Advisors LLC
Tommy Baratheon
King of the Seven Kingdoms
Grandpa Ty is the best. He is super friendly and does a lot of community service! I
have absolutely no idea how good he is at his job and that doesn’t matter to me
because he is a good person…
33
Ty Lannister
Portfolio Manager/Kings Landing Debt Fund
Westeros
Current: Kings Landing Capital Management, Inc.
Previous: Casterly Rock Advisors LLC
James Fallon
Comedian and Investor
I have invested in the Kings Landing Debt Fund for over ten years and think that Ty
is a great portfolio manager. The Fund’s average annual returns are always above
the Lipper benchmark and the Fund frequently outperforms the other funds in its
peer group…
34
Adoption and Entanglement Theories
 Advisers are responsible for the content that
they or their representatives put on their
webpage
 An adviser may also be responsible for content
that it did not author if:
 The adviser had some responsibility for its creation
(entanglement)
 The adviser has somehow endorsed it (adoption)
after the content was created
35
Examples of Entanglement:
 A firm pays for an industry study
 Soliciting a recommendation on LinkedIn
 A firm employee posts a review of the firm
Examples of Adoption:
 Selectively removing content, such as
unfavorable material
 “Retweeting” a post from a third party
36
Potomac Capital Management
@potomaccap
Check out this article about how emerging markets funds are
guaranteed to have the best returns this quarter:
www.badadvice.com
37
Links to third-party sites:
 The SEC has employed adoption and
entanglement theories in the context of a
company’s responsibility for third-party
information that is hyperlinked to its Website
 Firm can’t know or have reason to know that the
site contains false or misleading information
38
SEC Guidance on the Testimonial Rule and Social Media
(March 2014)

Genuine third-party social media commentary can be useful to investors

Linking to commentary on third-party social media sites does not implicate the
testimonial rule if three conditions are met:
 The social media site provides independent content
 There is no material connection to the independent site that could jeopardize
its independence or the independence of the commentary posted on the site
 All testimonial commentary from the site is included

For example:
See us on
or

Entanglement and adoption may implicate the testimonial rule

Placing advertisements on the third party site does not jeopardize the site’s
independence
39
Commenting Guidelines

No personal information or information about your accounts

No testimonials about how well you have done by investing with the firm

No investment advice or recommendations about specific stocks or funds

No attacks on the firm or fellow viewers

No offensive or defamatory comments

No illegal information, such as material, non-public information (insider trading)

No customer-service related questions – contact us directly

Read [third-party social media site’s] terms of service and privacy policy, as
they apply to communications through the page/account
40
Disclaimers

Firm is not affiliated with [third-party social media site] - use at your own risk

Firm is not responsible for and does not endorse any content, advertising,
advice, opinions, recommendations or other information from third parties,
including [the social media site]

Opinions, comments expressed by [friends or followers] are those of the
persons submitting them and do not represent the views of the firm or its
management

Firm does not endorse or approve content submitted by third parties, or
endorse individuals or organizations, by using any features on this site

Firm reserves the right to block any third-party content deemed illegal,
inappropriate or offensive

Firm may block any posts that are testimonials, advice, recommendations,
advertisements for specific products or services
41
DRAFTING
SOCIAL MEDIA POLICIES
Social Media Use by
Investment Advisers
 As of 2013, 83% of firms had adopted formal written policies and
procedures to govern the use of social networking by the firm and/or
employees (another 6% had informal policies)
 As of 2013, 49% of firms prohibited the use of personal social
networking websites for business purposes
 28% of firms report that the firm’s social media testing has increased
in the past year
 Approximately 5% of firms reported finding material social mediarelated compliance issues in the past year
Sources: 2013 and 2014 Investment Management Compliance Testing Surveys (The Investment Adviser Association,
ACA Compliance Group, IM Insight and Old Mutual Asset Management)
43
Key Takeaways in Drafting
Social Media Policies
 Identify business purposes for which firm wants to use social media,
identify risks and draft procedures around purposes and risks
 Perform cost-benefit analysis and identify resources available
 Coordinate legal/compliance, IT, privacy departments on enterprise-wide
basis to ensure policy addresses applicable laws.
 Be specific about permitted or prohibited sites and permitted/prohibited
features of those sites, and who can represent the firm
 Specify account ownership, particularly for accounts used mostly for
business purposes
 Monitor changes to features/settings on permitted sites and modify
policy, as appropriate
 Incorporate regular training and education into the policy
44
Key Takeaways in Drafting Social
Media Policies (continued)

Organize and identify the process for pre-approving required content and
monitoring interactive content/consider live monitoring

Make sure employees separate business and personal accounts

Establish the extent to which personal use is permitted during business hours

Identify inappropriate personal uses of social media (e.g., defamatory or illegal
content, disparagement of competitors, use of company logo or other suggestions
of endorsement, etc.)

Consider issues related to personal devices (e.g., monitoring, recordkeeping,
unauthorized access, ability to separate business and personal communications)

Monitor whether employee usage complies with policies and procedures and
consider employee certifications

If budget permits, use vendors for monitoring, site-blocking and recordkeeping
45
Financial Regulatory Reform
and the New World Order
Daniel F. C. Crowley
DC 9736039 v4
U.S. POLITICAL
AND POLICY LANDSCAPE
114th Congress:
House Financial Services Committee
Jeb Hensarling (R-TX)
Chairman
Maxine Waters (D-CA)
Ranking Member
3
114th Congress:
Senate Banking Committee
Tim Johnson
(D-SD)
Chairman,
113th Congress
Sherrod Brown (D-OH)
Richard Shelby (R-AL)
Mike Crapo (R-ID)
Ranking Member,
113th Congress
4
Executive Branch Officials
?
SEC Chair
Mary Jo
White
CFPB
Director
Richard
Cordray
X
Treasury
Secretary
Jack Lew
FRB Chair
Janet Yellen
CFTC
Chairman
Tim Massad
5
CURRENT EVENTS IN U.S. POLITICS
The Perception Of
Washington Activity…
Legislative Gridlock…
7
99
Hamstrung By Extremely
High Political Polarization…
8
100
Public’s Disapproval of President Obama’s
Performance Covers Broad Range Of Issues
Issue
Approve
Disapprove
Overall
44%
52%
Economy
42%
56%
Foreign Affairs
42%
54%
Health Care
42%
56%
Source: CNN/Opinion Research as of September 29, 2014
9
Obama Administration's Competency
Questioned As Management Failures Multiply









Affordable Care Act (Obamacare) Rollout
VA Hospital Patient Treatment Delays
IRS Targeting Of Select Political Groups
Benghazi Terrorist Attack Missteps
Secret Service Failures
Underestimation of ISIS Terrorist Threat
Guantanamo Prisoner Swap
NSA Spying on Foreign Leaders
AP Phone Records Scandal
10
Congress: The Most Unproductive Year Ever
Source: Steve Benen, Maddow Blog as of 9/18/14
11
Election Projections
 Republicans must win six seats to control
Senate
 Poll averages show Republicans leading for
eight Senate seats currently held by Democrats
 Runoffs possible in Louisiana and Georgia, with
elections not until December and January
 Slim majorities may affect with which party
independent senators choose to caucus
12
FINANCIAL SERVICES IN THE
POST DODD-FRANK ERA
Context Of U.S. Regulatory Reform
 Unprecedented government intervention
 Apprehension about “systemic” risk
 Concern about regulatory gaps and redundancies
14
Unprecedented Rulemaking Activity
15
The New World Order
 Looking at financial
services through a new
global lens
 Regulators collaborating
in some instances and
conflicting in others
 Understanding regulatory reform is key
 Institutions must consider whether to influence the
direction of reform
16
THE DODD-FRANK ACT
Key Areas To Reform











Systemic risk
Bank regulatory structure
Consumer financial protection
Private funds
OTC derivatives
Investor protection
Municipal securities
Risk retention
Credit rating agencies
Executive compensation and corporate governance
Federal insurance regulation
18
NEW INSTITUTION –
Financial Stability Oversight Council
Secretary of the
Treasury
19
Key Members Of FSOC
Treasury Secretary
Jack Lew
SEC Chair
Mary Jo White
FDIC Chairman
Marty Gruenberg
OCC Chairman
Tom Curry
FRB Chair
Janet Yellen
CFTC Chairman
Tim Massad
20
MAJOR FINANCIAL SERVICES
ISSUES
FSOC And SIFI Designations
 FSOC designates significant firms as SIFIs
 Federal Reserve regulation of bank holding companies with assets
> $50B and designated SIFIs
 Prudential, reporting, and disclosure requirements
 Required reports to assess financial system risks
 2013: AIG, Prudential, and GE Capital designated SIFIs
 MetLife requested an oral hearing on its proposed SIFI designation in
October 2014
 Still no final SIFI enhanced prudential standards from Federal
Reserve
22
Asset Management Review
 The regulators’ dilemma: regulate risky activities
or largest firms?
 OFR Asset Management report (October 2013)
 Data gaps prohibit optimal regulatory responses
 Reviews sources of instability and risk in industry
(interconnectedness, “search for yield”)
 OFR Asset Management conference (May 2014)
 FSOC staff studying activities of asset managers
to determine whether they pose systemic risk
23
Derivatives
“In my view, derivatives are financial weapons of mass destruction,
carrying dangers that, while now latent, are potentially lethal.”
 Most major rulemakings now complete
 Unresolved issues:
 Position limits
 Margin requirements for uncleared swaps (reproposed Sept. 2014)
 Cross-border regulation of derivatives (clearing, substituted compliance)
 CFTC subject to legal challenge
 ISDA v. CFTC (vacated original position limits rule)
 ICI v. CFTC (upheld CPO / CTA registration)
 Bloomberg LP v. CFTC (dismissed, margin requirements for cleared swaps
and futures)
 SIFMA v. CFTC (dismissed, upheld cross border guidance issued by CFTC)
24
The Volcker Rule
 Prohibits proprietary trading and
sponsorship/ investment in hedge funds and
private equity funds
 After considerable delays, Rule finally
published in December 2013
 Response: banks are divesting from “covered
funds” under the Rule, including private equity
and hedge funds
 Will investment shift to the non-bank space
and alternative sources of funding?
25
Qualified Residential Mortgage Rule
 “QRM” loans will be exempt from 5% lender risk retention
requirement in Dodd-Frank Act (“skin in the game”)
 Revised proposal for QRM definition includes 2 options:
 Option 1: QRM = QM as published by the CFPB
 Option 2: Only includes loans with 30% down payments and loans
insured by FHA, VA, and USDA
 Final rule adopted on October 22
26
Money Market Mutual Fund Reform
 New rules finalized in August 2014
 Require use of floating NAV by “prime” money market funds; retail
and certain government funds exempt from floating NAV
requirement
 Allow funds to impose liquidity fees and temporarily suspend
redemptions
 Impose new disclosure, diversification, and stress testing obligations
27
Housing Finance Reform
 First steps in government-sponsored enterprise reform
process:
 Senate: Corker-Warner, Johnson-Crapo
 Replace GSEs with FDIC-modeled government guarantee
 More robust role for private capital in assuming mortgage credit risk
 House: PATH Act
 Eliminates GSEs and government guarantee in mortgage market
 Movement in 114th Congress unlikely without Senate support
 Next steps depend heavily on new Senate leadership
28
2015 Regulatory Agenda
 Harmonization of fiduciary duty rule for investment
advisers and broker-dealers
 Total loss absorption capital and SIFI “surcharge” bank
capital rules
 Executive compensation rules
 Credit rating agency reform?
 New SEC stress testing rules for asset managers?
29
INTERNATIONAL FINANCIAL
SERVICES OUTLOOK
New Leadership in the EU
European Commission
President Jean-Claude
Juncker (S&D)
European Commission
Financial Services
Commissioner Jonathan
Hill (Conservative)
European Parliament
Economic and Monetary
Affairs Committee
Chair Roberto Gualtieri
(S&D)
31
Financial Stability Board
 Composed of global central bankers,
treasury officials (including the Federal
Reserve Board and Treasury), and
international regulators (IOSCO, IAIS,
BCBS, etc.)
 Key areas of focus
 Systemic risk (G-SIFIs, G-SIBs, G-SIIs, FMIs)
 Shadow banking (Repo markets, securitizaiton)
 Recovery and resolution plans
Mark Carney, Chair,
Financial Stability Board,
and Governor of
the Bank of England
 Financial benchmarks
 Finalized consultation papers incorporated
into domestic law
32
A Torrent of Legislative and
Regulatory Activity Since the Crisis
 In Europe alone:
 Markets in Infrastructure Directive / Regulation (“MiFID / MiFIR”)
 European Market Infrastructure Regulation (“EMIR”)
 Capital Requirements Directive / Regulation (“CRD IV / CRR”)
 Alternative Investment Fund Managers Directive (“AIFMD”)
 Packaged Retail Investment and Insurance Products (“PRIIPs”)
 Undertakings for Collective Investments in Transferable Securities
(“UCITS”)
 Directives on benchmarking, money market reform, “shadow
banking”
 “Rulemaking” continues at FSB, IOSCO, and BCBS
33
2015 EU Regulatory Agenda
 Consumer protection (including PRIIPs)
 Review of financial conglomerates
 Anti-money laundering
 Credit rating agency reform
 Securitization
 Benchmark reform and supervision
 Possible directive on non-bank recovery and resolution
(which may extend to asset managers)
34
NEXT STEPS:
GLOBAL GOVERNMENT ENGAGEMENT
Government Relations Strategy
 No geographic barriers exist for financial services
 Regulators compare foreign regulatory schemes and dialogue on
domestic and international financial services regulatory policy
 A coordinated effort is necessary to achieve policy success for
multinationals
 Best strategy is worldwide proactive engagement
36
 Captures US and EU
financial services regulation
 Weekly updates on notices,
comment periods, and
agency meetings
 Subscriber access to
dedicated website
 Comprehensive resource
on regulatory developments
37
QUESTIONS?