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Article
Publication date: 27 November 2007

Christopher D. Menconi

This paper aims to discuss a recently‐decided Seventh Circuit case in which the Securities and Exchange Commission (SEC) alleged that National Presto Industries, Inc., a…

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917

Abstract

Purpose

This paper aims to discuss a recently‐decided Seventh Circuit case in which the Securities and Exchange Commission (SEC) alleged that National Presto Industries, Inc., a seller of household goods and munitions, was unlawfully operating as an investment company. The paper also aims to explain concisely the definition of investment company under the Investment Company Act of 1940 (the 1940 Act).

Design/methodology/approach

Using the Seventh Circuit's decision as an introduction, this paper summarizes the definition of investment company under the 1940 Act, highlights a statutory exclusion from the definition and a related SEC interpretation, reviews the judicial opinion and offers commentary on the court's decision.

Findings

The study finds that a typical investment company, such as a mutual fund, is nothing more than a pool of securities and cash. Most operating companies, such as manufacturers or service providers, look nothing like an investment company. Their assets consist of buildings, plants, inventory, computers and more. Yet, it is possible for an operating company to become an investment company. The definition under the 1940 Act provides a rather mechanical test for making this determination. The Seventh Circuit's decision concerned an operating company that the SEC believed satisfied the definition. In disagreeing with the SEC, the court seemed to focus on how a reasonable investor would perceive the company's business.

Originality/value

This paper provides a useful summary of how an operating company inadvertently could become an investment company. It should be valuable to officers and employees, particularly those who are engaged in cash management activities, of both public and private operating companies because it raises awareness of the ease with which an operating company can become an investment company and the availability of options to avoid such an outcome.

Details

Journal of Investment Compliance, vol. 8 no. 4
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 October 2005

F. Scott Thomas and John C. Jaye

The purpose of this article is to describe the process for forming and registering a new investment company (or mutual fund) or converting an existing hedge fund into a…

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626

Abstract

Purpose

The purpose of this article is to describe the process for forming and registering a new investment company (or mutual fund) or converting an existing hedge fund into a mutual fund and registering the converted fund. This article discusses the timing, tax and regulatory implications under Delaware law, the US Internal Revenue Code of 1986, the Investment Company Act of 1940 (the “1940 Act”), the Investment Advisers Act of 1940 (the “Advisers Act”), the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”).

Design/methodology/approach

This article summarizes and analyzes rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to forming and registering new mutual funds and converting existing hedge funds into mutual funds under the 1940 Act and Advisers Act.

Findings

For smaller hedge fund managers who have recently registered with the SEC and desire to sponsor a new registered fund product as part of their advisory business, converting and registering an existing hedge fund is a viable alternative to forming an entirely new fund. The conversion process involves converting an existing hedge fund into a Delaware trust and then registering the new trust as a mutual fund under the 1940 Act. The adviser may, under certain circumstances, advertise the past performance of the hedge fund when marketing the new mutual fund. In addition, the adviser may continue to receive performance based or incentive compensation within the boundaries established by the Advisers Act. The authors believe that the conversion process is a viable and cost‐effective method for smaller hedge fund advisers to expand their existing investment advisory products and more easily grow assets under management.

Originality/value

This article provides a useful summary of the process for forming a new mutual fund or converting an existing hedge fund, including a brief outline of the SEC rules and regulations applicable to the fund registration process generally under the 1940 Act. Many hedge fund managers have recently incurred significant compliance costs as a result of registering as an investment adviser with the SEC. This article provides insight into the fund conversion process, which the authors believe is an overlooked and viable option for smaller hedge fund advisers to leverage existing compliance costs through sponsoring a registered fund product.

Details

Journal of Investment Compliance, vol. 6 no. 4
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 April 2004

Robert N Sobol

A pooled income fund (PIF) is one of the methods created under the 1969 Tax Reform Act whereby a taxpayer may make a tax‐deductible remainder gift to a charitable…

Abstract

A pooled income fund (PIF) is one of the methods created under the 1969 Tax Reform Act whereby a taxpayer may make a tax‐deductible remainder gift to a charitable organization. The fund, established by a charitable organization to receive irrevocable gifts from at least two donors, pays current income to the individual beneficiaries for life, but at the termination of each income interest, the allocable principal must revert permanently to the charitable organization. In recent years, a number of PIFs have been offered to the public by charitable organizations through broker‐dealers or related entities. There are numerous securities‐law issues implicated by the sales of these PIFs, including: (i) whether broker‐dealers may solicit donations to such funds and receive compensation for their solicitations; (ii) the effect of the broker‐dealers’ solicitation and receipt of compensation have on securities registration for the PIF or units offered therein under the Securities Act of 1933, the Securities Exchange Act of 1934, or the Investment Company Act of 1940; (iii) whether staff and persons affiliated with the sponsoring charity, including parties assisting them in the marketing of such pooled income funds, also should be permitted to solicit donations; (iv) whether such charities or persons, or parties assisting them in the marketing of such pooled income funds, then should be required to register as broker‐dealers; (v) what securities licenses may be required of the aforementioned parties; and (vi) whether there are ways to design the manner in which third parties other than broker dealers are compensated to resolve any potential issues arising from answers to the previous questions. This article first sets forth the applicable law involved in the analysis and then attempts to answer each of the issues presented above.

Details

Journal of Investment Compliance, vol. 5 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 18 June 2021

Christopher Palmer, Paul Delligatti, Andrew Zutz and William Lane

To explain the new U.S. Securities and Exchange Commission (“SEC”) Rule 2a-5 (the “Fair Value Rule”) under the Investment Company Act of 1940 (the “1940 Act”), which…

Abstract

Purpose

To explain the new U.S. Securities and Exchange Commission (“SEC”) Rule 2a-5 (the “Fair Value Rule”) under the Investment Company Act of 1940 (the “1940 Act”), which addresses the valuation practices of registered investment companies and business development companies.

Design/methodology/approach

Provides an overview of the Fair Value Rule, followed by a more detailed summary of the key provisions, including relevant guidance provided by the SEC in the release adopting the Fair Value Rule.

Findings

The Fair Value Rule establishes a specific framework, a standard of baseline practices across funds, and a set of required functions that must be performed in order to determine in good faith the fair value of a fund’s investments for purposes of applying Section 2(a)(41) of the 1940 Act.

Originality/value

Practical guidance from experienced investment management lawyers.

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Article
Publication date: 6 July 2015

Michael McGrath and Pablo J. Man

To explain that the Securities and Exchange Commission (“SEC”) brought and settled charges against an investment adviser to several alternative mutual funds alleging…

Abstract

Purpose

To explain that the Securities and Exchange Commission (“SEC”) brought and settled charges against an investment adviser to several alternative mutual funds alleging, among other charges, failure to comply with the custody requirements of the Investment Company Act of 1940, as amended (the “1940 Act”).

Design/methodology/approach

To explain that the Securities and Exchange Commission (“SEC”) brought and settled charges against an investment adviser to several alternative mutual funds alleging, among other charges, failure to comply with the custody requirements of the Investment Company Act of 1940, as amended (the “1940 Act”).

Findings

The enforcement action serves as an important reminder for the growing number of advisers of alternative mutual funds to be mindful of specific restrictions and obligations when managing registered funds that do not apply to private funds and separate accounts. This action shows that the SEC will bring charges even when the alleged violations do not result in harm to investors.

Practical implications

The 1940 Act, the rules thereunder, and SEC staff guidance relating to alternative investment strategies are complicated and not intuitive. These standards can constrain a registered fund’s ability to employ options, futures, swaps, prime brokerage, repurchase and reverse repurchase agreements, enhanced leverage through securities lending, and other facilities. As the SEC continues to examine alternative mutual funds, advisers to these funds should remain cognizant of the obligations arising under the 1940 Act and the implementation of fund policies and procedures.

Originality/value

Practical guidance from experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 16 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 26 June 2021

Leslie S. Cruz and Stephanie M. Monaco

To inform readers of the challenges that fintech companies can have regarding investment company status, using two recent examples.

Abstract

Purpose

To inform readers of the challenges that fintech companies can have regarding investment company status, using two recent examples.

Design/methodology/approach

The article provides an introduction to the subject, discusses two examples of fintech companies that had investment company status challenges, and provides concluding remarks regarding each.

Findings

Navigating investment company status can be challenging for fintech companies, and in some cases, as was the case with the two companies discussed in the article, it may be necessary, or at least advisable, to seek to obtain an order from the SEC.

Practical implications

It is important for fintech companies to evaluate their investment company status in early stages and continue to monitor their status thereafter, particularly if they are considering a public offering.

Originality/value

Technical guidance from experienced investment company status lawyers.

Details

Journal of Investment Compliance, vol. 22 no. 3
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 4 September 2017

Mark Amorosi, George Zornada, Todd Gibson, Joel Almquist and Pablo J. Man

To analyze the recent SEC no-action relief allowing a non-US investment company to invest as a feeder fund in a US registered open-end management investment company

Abstract

Purpose

To analyze the recent SEC no-action relief allowing a non-US investment company to invest as a feeder fund in a US registered open-end management investment company without complying with all of the conditions of Section 12(d)(1)(E) of the Investment Company Act of 1940.

Design/methodology/approach

This article discusses the various conditions that a non-US investment company investing as a foreign feeder in a US registered open-end management investment company must satisfy in order to avoid complying with certain provisions of Section 12(d)(1)(E) of the Investment Company Act of 1940. In addition, the article analyzes certain potential tax and regulatory challenges facing firms seeking to rely on the relief.

Findings

This article concludes that the SEC no-action relief is an incremental step in reducing barriers to global distribution of US registered funds and may marginally increase the use of cross-border master-feeder arrangements as contemplated by the no-action letter. Nevertheless, this article cautions that significant impediments to global distribution of US registered funds remain, including tax withholding and non-US law issues.

Originality/value

This article contains valuable information about the regulatory impediments to global distribution of US registered funds, as well as learned assessments of the impact of recent developments in this space by experienced securities lawyers.

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Article
Publication date: 23 November 2010

Thomas John Holton, Paul B. Raymond and Curtis Stefanak

The purpose of this paper is to explain certain SEC and state registration, disclosure, and recordkeeping requirements for US and non‐US investment advisers and fund…

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276

Abstract

Purpose

The purpose of this paper is to explain certain SEC and state registration, disclosure, and recordkeeping requirements for US and non‐US investment advisers and fund managers as defined in the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.

Design/methodology/approach

The paper explains SEC and US state registration requirements; the elimination of the “private adviser” exemption; the creation of new, narrower adviser registration exemptions; reporting and recordkeeping requirements relating to private funds; information and confidentiality provisions for private funds; the SEC's authority to make rules and regulations defining technical, trade, and other terms used in the amendments set forth in the Act; provisions of the “Volcker Rule” concerning banking entities' ownership interests in hedge funds and private equity funds; the adjustment of the “qualified client” test for inflation; the definition of an “accredited investor”; and disqualifications from using Regulation D.

Findings

The Act will require many US and non‐US investment advisers and fund managers to register with the SEC under the Investment Advisers Act of 1940, particularly those advisers that have previously relied on the “private adviser” exemption from SEC registration, which has been eliminated by the Act. The Act will also impose new disclosure and recordkeeping requirements on many investment advisers, including some who are not required to register with the SEC.

Originality/value

The paper provides expert guidance from experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 11 no. 4
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 December 2005

Jarunee Wonglimpiyarat

Given that the stock market is essential for the venture capitalists to exit through an initial public offering (IPO), this study explores how the laws and regulations…

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1227

Abstract

Given that the stock market is essential for the venture capitalists to exit through an initial public offering (IPO), this study explores how the laws and regulations governing the capital markets affect the venture capital industry. The paper discusses the impact of US federal state laws and Securities and Exchange Commission (SEC) regulations to the venture capital markets, arguing if the rules and regulatories are burdensome to entrepreneurs and new‐growth businesses. The impact of Sarbanes‐Oxley Act and the future Investment Act on venture capital funds and entrepreneurial companies going public are also discussed. The paper proposes the model of venture capital financing describing the process from fund raising to investment exits, the linkages of the venture capital market to the financial/capital markets and the related capital market laws. The policy implications on SEC regulations essential to the development of venture capital industry are suggested.

Details

Journal of Financial Regulation and Compliance, vol. 13 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 1 January 2002

Terrance J. O’Malley and Kenneth E. Neikirk

Wrap fee programs are an increasingly popular product offered by broker‐dealers and investment managers to their clients. Wrap fee programs present unique issues under…

Abstract

Wrap fee programs are an increasingly popular product offered by broker‐dealers and investment managers to their clients. Wrap fee programs present unique issues under both the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Advisers Act”), the two primary bodies of law that govern the product and those who offer and manage it. The regulations and rules under those Acts applicable to wrap fee programs and related interpretive statements made by the SEC staff, however, are wide ranging and have not been provided in a single format. This article attempts to present a comprehensive discussion on the regulation of wrap fee programs, as well as the many compliance issues associated with these programs. The article is delivered in two parts. Part I, presented in this issue, addresses the regulation of wrap fee programs under the Investment Company Act. Part I also begins a review of unique issues arising under the Advisers Act, including registration requirements for wrap fee sponsors and other persons who manage or offer the product to their clients, as well as required contents for wrap fee brochures and related disclosure issues. Part II, which will be presented in the next issue, will discuss additional Advisers Act issues such as suitability, fees and advertising. It also will briefly review issues arising under the Securities Exchange Act of 1934 (“Exchange Act”) and the Employee Retirement Income Security Act of 1974 (“ERISA”).

Details

Journal of Investment Compliance, vol. 3 no. 1
Type: Research Article
ISSN: 1528-5812

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