05/10/2021 | News release | Distributed by Public on 05/10/2021 13:22
Each quarter the UMB Fund Services registered fund accounting, administration and tax teams consolidate the most impactful regulatory and tax developments in the fund industry. To guide your strategic and operational planning, our registered funds servicing team recommends you review and consider these developments from the prior quarter.
In February 2021, the Securities & Exchange Commission (SEC) Office of Investor Education and Advocacy issued an investor bulletin to provide investors with important information and considerations for investments in ESG funds, such as mutual funds and ETFs.
The bulletin addressed a variety of topics, including:
Understanding ESG Funds
Important Considerations for Investing in ESG Funds
The Department of Labor (DOL) issued a statement in March 2021 announcing that it would not enforce its two recently finalized rules on ESG and Proxy Voting to allow for further DOL review.
The DOL finalized two rules, 'Financial Factors in Selecting Plan Investments' and 'Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.' Both rules, as written, contain potentially significant implications for fiduciaries who include any ESG factors in the financial evaluation process. Subsequent to the finalization of these rules, the presidential administration changed. On January 20, 2021, President Joe Biden directed all federal agencies to review and consider any recently adopted climate-related regulations. As a result of the President's directive, the DOL issued a temporary non-enforcement order of the two rules to allow for further analysis of each rule.
In January 2021, the U.S. Congress enacted the Anti-Money Laundering Act of 2020 (AML Act) as part of the National Defense Authorization Act for Fiscal Year 2021‡.
The AML Act makes several changes to U.S. AML laws and regulations, notably changing the AML requirements for certain private funds. Affected funds must implement these changes no later than January 1, 2022.
The AML Act of 2020:
Additionally, the AML Act allows for increased penalties for certain violations, removes the cap on whistleblower awards and adds new whistleblower protections, and facilitates information sharing among government agencies and financial institutions.
In November 2020, former President Trump signed Executive Order 13959‡ Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.
The Executive Order prohibits trading by U.S. persons in the securities (and derivatives thereof) of Chinese entities identified as supporting the People's Liberation Army of China (the 'CCMC Covered Companies'). The Office of Foreign Assets Control (OFAC) has made available a current listing‡ of the entities identified as CCMC Covered Companies.
The U.S. Department of Treasury issued a FAQ‡ and the Securities and Exchange Commission released a risk alert‡ regarding the Executive Order.
In March 2021, the SEC's Division of Examinations (EXAMS), formerly the Office of Compliance Inspections and Examinations, released its 2021 examination priorities‡.
EXAMS' 2021 examination priorities are as follows:
In addition to EXAMS' 2021 priorities, the release includes observations regarding the impact of the Covid-19 pandemic on the financial services industry, the implementation of Regulation Best Interest, the importance of compliance programs and compliance staff, and trends in risk, technology and the industry.
In December 2020, the SEC issued a statement‡ and request for comment regarding the custody of digital asset securities by broker-dealers (the 'Statement'). Through the Statement, the SEC seeks to encourage innovation regarding the application of Rule 15c3-3 under the Securities Exchange Act (the 'Rule') to digital asset securities.
In the Statement, the SEC details circumstances under which broker-dealers may operate for a period of five years, subject to certain conditions, without being subject to enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities as required by paragraph (b)(1) of the Rule. Conditions that must be met by broker-dealers include, limiting its business to digital asset securities, implementation of procedures reasonably designed to mitigate risks of operating a digital asset securities business, and providing customers with certain disclosures regarding the risks of transacting in digital asset securities.
In February 2021, the SEC's Division of Examinations (EXAMS) published a Risk Alert which outlines its framework for vetting digital asset investments‡ and the use of distributed ledger or blockchain technology.
The Risk Alert provides EXAMS' observations assembled through examinations of investment advisers, broker-dealers, and transfer agents with regard to digital asset securities that may serve as a guide to such firms in developing and enhancing their compliance programs. EXAMS encourages market participants to review their own practices and seek improvements to supervisory, oversight and compliance programs, and to engage with the SEC through its Strategic Hub for Innovation and Technology‡ as questions arise.
The Investment Company Institute (ICI) conducts an annual survey to track U.S. households' ownership of mutual funds and to gather information on their demographic and financial characteristics. The most recent survey was conducted from May to June 2020.
ICI released a report‡ summarizing findings of the survey.
In 2020, ICI reports the 'typical' mutual fund-owning head of household:
The Staff of the SEC's Division of Investment Management prepared a series of FAQs regarding the implementation of the new Rule 2a-5 under the Investment Company Act (the 'Rule'). The Staff expects to update FAQs over time in response to additional questions. In addition, the SEC prepared a Small Entity Compliance Guide to assist in the good faith determination of fair value. The Rule went into effect on March 8, 2021 and has a compliance date of September 8, 2022.
In January 2021, the SEC issued a no-action‡ providing flexibility regarding the cumbersome rule requirements related to the custody of loan interests under the Investment Company Act.
Generally, Section 17(f) and Rule 17f-2 under the Investment Company Act‡ (the 'Rule') govern the conditions and procedures under which registered funds may maintain custody of their own investments. Specifically, the Rule requires that documents evidencing a fund's investments 'shall be deposited in the safekeeping of, or in a vault or other depository maintained by, a bank or other company whose functions and physical facilities are supervised by Federal or State authority.'
The Rule also imposes restrictions on which persons may have access to a fund's investments and requires that each person withdrawing or depositing a fund's investments sign a notation confirming the transaction. The SEC's Division of Investment Management Staff determined that it would not recommend enforcement action if a fund were to maintain custody of its own interests in corporate loans if the following conditions are met instead of meeting the above requirements:
In March 2021, the SEC's Division of Investment Management Staff (the 'Staff') issued a statement‡ addressing certain aspects of investment company cross trading and requesting information related to how the SEC could enhance the regulatory regime regarding cross trading.
In its statement, the Staff commented on 'ways to enhance the regulatory regime' in light of the SEC's recent adoption of Rule 2a-5, the 'Valuation Rule.' In conjunction with the recently adopted Valuation Rule, the SEC provided a definition of the term 'readily available market quotations' that is narrower than that previously used in the industry. This narrower definition has served to restrict the ability of registered funds to effect cross transactions in compliance with the Investment Company Act because such transactions are permissible only as to securities for which there are readily available market quotations. Accordingly, the Staff asked for comment as to whether any changes to Rule may be appropriate. Among the things the Staff requested information about were:
Special purpose acquisition companies (SPACs) are a type of a blank check company that raises cash through an initial public offering, typically priced at $10 a share, after which the shell company has a specified timeframe (generally two years) to use the raised funds to acquire or merge with a private company, thereby making that company a public company. The time it takes for the SPAC to merge with a private company may be completed in as little as three or four months, which can be substantially shorter than an initial public offering timeframe. Sometimes the SPAC garners additional funds to complete the transaction and may raise additional capital through a private investment in public equity which generally will close in conjunction with the merger. If the SPAC does not complete the merger within the timeframe, the SPAC liquidates, and the proceeds are returned to the shareholders.
Asset managers may invest in SPACs within a fund structure or an asset manager may set up a SPAC structure. To learn more, visit the SEC's glossary and related content on SPACs.‡
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