Skip to Search
Skip to Main Content
Main Content


News & Publications


Godfrey & Kahn Updates


Press Room


Investment Management Legal and Regulatory Update - July 2012

July 13, 2012

Investment Adviser Oversight
The Dodd-Frank Act required the SEC to conduct a study regarding investment adviser regulation. The findings of the study, reported to Congress in January 2011, offered three proposals to strengthen adviser regulation. The SEC proposed (1) allowing the SEC to charge user fees, (2) establishing a self-regulatory organization (SRO) to conduct oversight of investment advisers or (3) granting FINRA jurisdiction over advisers who are dually registered as brokers.

On April 25, 2012, Chairman Spencer Bachus and Representative Carolyn McCarthy, members of the House Financial Services Committee (Committee), introduced the Investment Adviser Oversight Act of 2012 (Oversight Act) in the U.S. House of Representatives. The bill would amend the Advisers Act to require advisers that conduct business with retail customers to become members of a registered national investment adviser association (NIAA). These NIAAs would be registered with and overseen by the SEC.

The Oversight Act contains exemptions for an adviser to a registered investment company and an adviser that has total assets under management 90% or more of which are attributable individually or in the aggregate to one or more of the following persons: foreign clients; "qualified purchasers"; issuers that would be an "investment company" but for Section 3(c)(10), 3(c)(5)(C) or 3(c)(11) of the Investment Company Act or Rule 3a-7 thereunder; private funds; and other advisers.

On June 6, 2012, the Committee held a hearing where the North American Securities Administrators Association, Inc. (NASAA) expressed its opposition to the Oversight Act and took the position that the regulation of advisers should continue to be the responsibility of the state and federal governments and that these regulators must be given sufficient resources to carry out this responsibility. NASAA believes that the best way to improve adviser oversight at the federal level is through SEC user fees.

According to InvestmentNews, U.S. Representative Maxine Waters has drafted a bill that would subject all advisers registered with the SEC to a fee, providing the SEC with additional resources to conduct more adviser examinations. The SEC would determine the fees based on firm size, number and types of clients and their risk profiles. This bill has not yet been introduced in the U.S. House of Representatives.

According to a poll conducted by InvestmentNews, industry support for an SRO has declined, with 31% of advisers polled reporting that they would back an SRO, down from 51.5% last year. According to the same poll, support for user fees has increased since last year, with 59% of advisers supporting a fee. Finally, 75% of advisers polled stated that they opposed extending FINRA's jurisdiction.

Sources: Mark Schoeff Jr., SEC or FINRA? No Contest Which One Advisers Chose, IN Survey Shows, InvestmentNews, June 15, 2012; Chairman Bachus and Rep. McCarthy Propose Bipartisan Bill for More Effective Oversight of Investment Advisers, The Committee on Financial Services Press Release, April 25, 2012; Investment Adviser Oversight Act of 2012, 112th Cong., 2d Sess. (2012); Written Testimony of John Morgan, Securities Commissioner of Texas on behalf of the North American Securities Administrators Association, Inc., June 6, 2012.

ICI and U.S. Chamber of Commerce File Lawsuit Regarding CFTC Rule Amendments
The CFTC recently adopted rule amendments narrowing the available exclusion from the definition of commodity pool operator (CPO) under Rule 4.5 of the Commodity Exchange Act. Advisers to mutual funds that invest in more than a de minimis amount of commodity interests -- including futures, commodity options and swaps -- for other than bona fide hedging purposes will generally be required to register as CPOs. (See "CFTC Rescinds and Narrows Registration Exemptions for Funds" in Godfrey & Kahn's Investment Management Legal and Regulatory Update - April 2012.)

The Rule 4.5 amendments have generated significant industry concern. In April, the Investment Company Institute (ICI) and U.S. Chamber of Commerce filed a lawsuit seeking to vacate the amendments. The complaint notes that "investment companies and their advisers already are among the most highly regulated entities in the financial industry" and that the CFTC failed to adequately consider the costs and benefits of amended Rule 4.5. The complaint also asserts that the recent amendment to Rule 4.5 overturns the CFTC's 2003 determination that investment companies be excluded from CFTC registration, as they were already regulated by the SEC.

On May 29, 2012, the Mutual Fund Directors Forum (MFDF) filed an amicus brief on behalf of its membership in the case, arguing that requiring the increased registration obligations would increase costs to shareholders without generating significant regulatory benefit. On
June 18, 2012, the CFTC filed a motion for summary judgment. The ICI and the U.S. Chamber of Commerce will file a response to the motion for summary judgment in July.

Sources: Complaint, Investment Company Institute and Chamber of Commerce of the United States of America v. United States Commodity Futures Trading Commission, April 17, 2012; Brief for the Mutual Fund Directors Forum as Amicus Curiae in Support of Plaintiffs' Motion for Summary Judgment, May 25, 2012.

OppenheimerFunds Settles With SEC for $35M
On June 6, 2012, the SEC announced that OppenheimerFunds, Inc. and OppenheimerFunds Distributor, Inc. (Oppenheimer) agreed to pay more than $35 million to settle SEC charges stemming from misleading statements on the use of derivatives in the Oppenheimer Champion Income and Oppenheimer Core Bond funds. According to the SEC, its investigation indicated that Oppenheimer used derivative instruments, specifically total return swaps (TRS), to add exposure to commercial mortgage-backed securities (CMBS) in the funds. The SEC alleged that the 2008 prospectus for the Champion Income fund failed to disclose the fund's practice of assuming substantial leverage using the TRS contracts. Declines in the CMBS market created large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce the exposure. Subsequently, according to the SEC, Oppenheimer "disseminated misleading statements about the funds' losses and their recovery prospects."

The SEC's order indicated that the TRS contracts provided substantial exposure to commercial mortgages without the funds purchasing actual bonds. This also created large amounts of leverage in the funds. When the CMBS market declined, the net asset values of the funds plunged. These losses "forced Oppenheimer to raise cash for month-end TRS contract payments by selling securities into an increasingly illiquid market."

The SEC alleges that during this time Oppenheimer represented to investors that the funds were maintaining their holdings and strategies and that the losses were recoverable. The SEC found that these statements were materially misleading because "the funds were committed to substantially reducing their CMBS exposure, which dampened their prospects for recovering CMBS-induced losses."

Without admitting or denying the SEC's findings, Oppenheimer agreed to pay $24 million in penalties, disgorgement of more than $9 million and prejudgment interest of $1.5 million. The money will be used to benefit the funds' investors.

Sources: OppenheimerFunds to pay $35 Million to Settle SEC Charges for Misleading Statements During Financial Crisis, SEC Press Release June 6, 2012; In the Matter of OppenheimerFunds, Inc. and OppenheimerFunds Distributor, Inc., SEC Administrative Proceeding File No. 3-14909, June 6, 2012.

SEC Denies No-Action Relief Regarding Family Offices
On April 3, 2012, the SEC staff denied no-action relief to an individual seeking to act as a "key employee, director, partner, manager or trustee" with respect to up to 10 separate family offices. Each family office would represent an individual family. Mr. Peter Adamson III requested that he conduct this business without being required to register under the Advisers Act in reliance on Rule 202(a)(11)(G)-1 thereunder.

The Dodd-Frank Act amended the Advisers Act to add Rule 202(a)(11)(G)-1, excluding a family office from the definition of investment adviser. The rule defines a family office as a company that (1) has no clients other than family clients, (2) is wholly owned by family clients and controlled by one or more family members and (3) does not hold itself out to the public as an investment adviser. The rule's adopting release specifies that the definition does not include a family office that provides advisory services to multiple families (a "multifamily office"). The SEC denied no-action relief to Mr. Adamson, noting that it was unclear how his proposed services would avoid creating a multifamily office. Thus, Mr. Adamson could not rely on the family office exclusion to avoid registration under the Advisers Act.

Shortly thereafter, on April 27, 2012, the SEC staff updated their frequently asked questions (FAQ) regarding the family office rule. Notably, the revised FAQ now states that when "two or more families staff their family offices with the same or substantially the same employees that provide investment advice to families, such employees would be managing a de facto multifamily office."

Sources: Peter Adamson III, SEC No-Action Letter IM Ref. No. 20123201551, April 3, 2012; Family Offices, SEC Rel. No. IA-3220, June 22, 2011; Staff Responses to Questions About the Family Office Rule, April 27, 2012.

Money Market Fund Woes Continue
The SEC is considering a new plan to stabilize money market funds, which could include the adoption of a floating net asset value (NAV) or a capital buffer provision requiring money market funds to hold back 3 to 5% of shareholder redemption proceeds temporarily when they attempt to liquidate their holdings. (See "SEC Considering Money Market Fund Reforms" in Godfrey & Kahn's Investment Management Legal and Regulatory Update - April 2012.)

On May 2, 2012, the Independent Directors Council (IDC) and the MFDF issued a joint statement expressing their concerns about the money market fund reforms. The statement highlighted several areas of concern, including that the reforms would render money market funds substantially less attractive to investors and will likely result in investors moving their cash to less-regulated or less-transparent products, that the movement of investor money would increase the systemic risk posed by these alternative products and that the SEC needs to conduct further analysis on the issues. In addition, the IDC and MFDF noted that money market funds provide benefits to the capital markets and American economy and have been highly resilient in volatile markets.

The proposed changes have been a controversial topic in the industry with many fund managers strongly opposing the reforms. On June 11, 2012, the Wall Street Journal entered the fray with a pointed editorial in support of the reforms. The industry responded, including ICI president Paul Schott Stevens, who posted to the ICI website his position that a floating NAV would "force millions of individual and institutional investors to give up the convenience, stability, and liquidity of money market funds."

Sources: Mutual Fund Independent Directors and Trustees Express Concern About Further Money Market Fund Regulation, Press Rel., May 2, 2012; Republicans Against Reform: Congress Protects the Business Model of Money-Market Funds, Wall Street Journal, June 11, 2012; Paul Schott Stevens, Forcing Money Market Funds to "Float": Hurting Investors, Increasing Risk, June 11, 2012 (

SEC Approves New FINRA Advertising Rules
The SEC has approved sweeping changes to FINRA's rules governing communications with the public. In June, FINRA published a regulatory notice addressing the rule revisions and specifying that firms must comply with the revisions by February 4, 2013.

The most significant changes are contained in Rule 2210, which reduces the number of communication categories from six to three. The new communication categories are:

- Institutional Communications. Written (including electronic) communications distributed or made available only to institutional investors, not including internal communications. Under the new rules, communications that were previously "institutional sales material" generally fall in this category.

- Retail Communication. Written (including electronic) communications distributed or made available to more than 25 retail investors within any 30-calendar-day period. "Retail investor" includes any person other than an institutional investor, regardless of whether the person has an account with the firm. Communications that were previously categorized as "advertisements" and "sales literature" generally fall into this category.

- Correspondence. Written (including electronic) communications distributed or made available to 25 or fewer retail investors within any 30-calendar-day period. The revised rules alter the definition of correspondence to remove any distinction between existing and prospective retail customers. In addition, while correspondence rules previously applied only to written letters, electronic mail messages and market letters, the new rules apply to any written communication, including, for example, a seminar handout provided to 25 or fewer retail investors within a 30-calendar-day period.

Pre-Use Approval. In addition to reducing the number of communication categories, the revised rules also address principal pre-use approval requirements for retail communications. FINRA Rule 2210(b) currently requires pre-use principal approval of all retail communications. However, the new rule provides new exceptions for market letters, communications posted in an online interactive electronic forum and communications that do not make any financial or investment recommendation or otherwise promote a product or service. However, in all cases, the firm must supervise and review such communications in the same manner as required for supervising correspondence.

Filing Requirements. The FINRA rule revisions also address filing requirements.

- Pre-Use Filing. FINRA Rule 2210(c) requires the following types of communications to be filed at least 10 business days prior to first use and to be withheld from use until any specified changes have been made: retail communications concerning any registered investment company that include self-created rankings, retail communications concerning security futures and retail communications that include bond mutual fund volatility ratings.

- Concurrent With Use Filing Requirements. FINRA Rule 2210(c) also revises the types of communications that must be filed within 10 days of first use or publication. These include:

  • Retail communications concerning registered investment companies and public direct participation programs;
  • All retail communications concerning closed-end registered investment companies;
  • Templates for written reports produced by, or retail communications concerning, an investment analysis tool;
  • Retail communications concerning collateralized mortgage obligations; and
  • Retail communications generally concerning any security that is registered under the Securities Act and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency.

Content Standards. FINRA largely retained the old content standards, except for the following substantive changes.

- Predictions and Projections. The exception for "hypothetical illustration of mathematical principles" is extended to permit "projections of performance in reports produced by investment analysis tools" if they comply with FINRA Rule 2214. Also, price targets in debt and equity research reports are now permitted if there is a reasonable basis for the price target, the method of valuation is provided and the risks are explained.

- Disclosure of Firm Name. The provisions regarding the disclosure of a FINRA member's name have been extended to encompass correspondence.

- Tax Considerations. FINRA Rule 2210(d)(4)(c) increases the restrictions on comparative illustrations of the mathematical principles of tax-deferred versus taxable compounding.

- Testimonials. The rule revisions now require disclosure of any payments of more than $100 in value.

Public Appearances. Public appearances are no longer a separate category of communication. Public appearances are subject to the content standards, and firms must adopt written policies and procedures regarding the supervision of public appearances.

Sources: SEC Rel. No. 34-66681, March 29, 2012; FINRA Regulatory Notice 12-29, June 2012.

Please wait while we gather your results.


Get practical insights on COVID-19 legal issues for your business.

Visit Resource Center

Media Contact 

If you have a media request or need an attorney with particular knowledge for comment, please contact Kyle Mondy, Marketing & Communications Manager, at 414.287.9481 or


Subscribe today to receive firm newsletters and blogs, client updates, seminar announcements, and more according to your preferences and areas of interest.


For more information on this topic, or to learn how Godfrey & Kahn can help, contact our COVID-19 Response Team.

Disclaimer and Legal Notices

Copyright © 2020 Godfrey & Kahn, S.C.

Attorneys at Law - All rights reserved.


Client Login