United States: Review of SEC’s Semi-Annual Regulatory Agenda

(Financial Services Alert - Developments of Note)

1. Review of SEC’s Semi-Annual Regulatory Agenda

2. FinCEN and Federal Banking Agencies Issue Guidance on Sharing SARs with Head Offices and Controlling Companies

3. Recorded Version of Materials from Patriot Act Rules Web-Based Seminar Available on Goodwin Procter Website

In the last quarter of 2005, the SEC published its Semiannual Regulatory Agenda (the "Agenda") which, in compliance with the Regulatory Flexibility Act, identifies anticipated rulemaking activity that is likely to have a significant economic impact on a substantial number of small entities. Publication of the Agenda does not preclude the SEC from considering, or acting on, other matters. Nor is the SEC required to act on matters that appear in the Agenda, or, as events since the issuance of the Agenda have borne out, act on matters included in the Agenda in the indicated timeframes. Given the number of timing targets that have been missed to date (although some have been met), the dates provided in the Agenda are probably not a very reliable indicator of when the SEC will act on these initiatives. Delays are not uncommon for the SEC, but the continuing lack of a permanent Director of the Division of Investment Management has likely exacerbated the recent delays in investment management rulemaking. Nevertheless, the Agenda does give an indication of where SEC rulemaking priorities may lie. Described below are a number of rulemaking initiatives discussed in the Agenda that are likely to affect the investment management industry. The descriptions are divided into two categories - existing initiatives and new initiatives.

Investment Company Portfolio Transaction Costs. In December 2003, the SEC issued a concept release requesting comment on measures to improve disclosure of investment company portfolio transaction costs, including the payment of commissions and costs associated with soft dollars (as discussed in the December 30, 2003 Alert). The Division of Investment Management is considering whether to recommend that the SEC propose amendments to the disclosure requirements for investment company registration statements in this area. The Agenda indicates that final action on this initiative is expected to be taken in May 2006.

Confirmation of Transactions in Open-End Management Investment Company Shares, Variable Life and Annuity Contracts, 529 Plans and Unit Investment Trusts. The SEC proposed new rules and rule amendments under the Securities Exchange Act of 1934, as amended (the "1934 Act"), that would provide for additional confirmation and pre-transaction "point of sale" disclosure of distribution costs and conflicts of interest associated with transactions in mutual funds, variable life and annuity contracts, 529 Plan securities and unit investment trusts (as discussed in the February 3, 2004 Alert). The Agenda indicates final action on this initiative is expected to be taken in May 2006.

Security Holder Director Nominations. In October 2003, the SEC proposed amendments to the proxy rules and related rules and regulations regarding the inclusion of shareholder director nominations in issuer proxy materials (as discussed in the October 21, 2003 Alert). The Agenda indicates final action on this initiative is expected to be taken in June 2006.

Amendments to Rules Governing Pricing of Mutual Fund Shares. In December 2003, the SEC proposed amendments to Rule 22c-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), pursuant to which an order to purchase or redeem mutual fund shares would receive the current day’s price only if the fund, its designated transfer agent(s) or a registered securities clearing agency received the order by the time the fund calculates its net asset value (as discussed in the December 16, 2003 Alert). The Agenda indicates that final action on this initiative is expected to be taken in April 2006.

Fund of Funds and Cash Sweep Arrangements. In October 2003, the SEC proposed new rules that would generally codify certain commonly granted exemptive relief relating to (a) affiliated and unaffiliated fund of fund arrangements and (b) "cash sweep" arrangements for registered funds using registered and unregistered money market funds (as discussed in the October 7, 2003 Alert). The Agenda indicates that final action on this initiative was expected to be taken in November 2005.

Exemption from Shareholder Approval for Certain Sub-Advisory Contracts. The SEC proposed a rule under which a "manager of managers" fund would not need to seek shareholder approval when the fund’s principal investment adviser hires a new subadviser or replaces an existing subadviser, provided that certain conditions are met. The rule’s conditions generally track those required for the "manager of managers" exemptive relief currently granted by the SEC. (This development was discussed in the October 28, 2003 Alert). The Agenda indicates that final action on this initiative is expected to be taken in April 2006.

Alternative Forms of Privacy Notices Under the Gramm-Leach-Bliley Act. On December 30, 2003, the OCC, OTS, FRB, FDIC, NCUA, FTC, CFTC and SEC, in an advance notice of proposed rulemaking, jointly requested public comment on whether they, in order to improve privacy notices, should issue regulations under the Gramm-Leach-Bliley Act of 1999 to allow or require financial institutions to provide alternative types of privacy notices that would be easier for consumers to understand (as discussed in the December 30, 2003 Alert). The Agenda indicates that a rulemaking proposal is expected to be issued in April 2006.

Amendments to Form ADV. In April 2000, the SEC proposed amendments to Parts 1 and II of Form ADV, the registration form for investment advisers under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and related rules (as discussed in the April 11, 2000 Alert). (In Part 1, an adviser provides information about itself and its personnel, primarily for use by the SEC, e.g., in setting examination priorities. In Part II, an adviser provides information that generally must be given to prospective and existing clients.) The amendments with respect to Part 1 of Form ADV, which included the implementation of electronic filing for Part 1, were subsequently adopted. The Division of Investment Management plans to recommend that the SEC seek comment and take final action with respect to proposed changes to Part II of Form ADV, which will likely include modifications to Part II’s information requirements and the implementation of electronic filing. The Agenda indicates that further action on this initiative was expected to be taken in November 2005, with final action anticipated in April 2006.

Political Contributions by Certain Investment Advisers. In August 1999, the SEC proposed new Rule 206(4)-5 under the Advisers Act, which would generally prohibit an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or any of its partners, executive officers or solicitors made a contribution to certain elected officials or candidates (as discussed in the August 10, 1999 Alert). The Agenda indicates that further action on this initiative is expected to be taken in September 2006.

Bank Broker-Dealer Registration Requirements under the Gramm-Leach-Bliley Act – Regulation B. In 2001, the SEC proposed rules designed to implement various provisions of the Gramm-Leach-Bliley Act of 1999 that identify the securities activities banks may conduct without registering as "brokers" or "dealers" under the 1934 Act. These specified exemptions would replace the blanket exemptions currently enjoyed by banks. Under criticism from a variety of quarters, final implementation of these rules in the form of new Regulation B has been delayed on more than one occasion, most recently until September 30, 2006 as the SEC continues to consider comments received on its rulemaking to date. (For more detail on this initiative, see the May 15, 2001, February 26, 2001, May 14, 2002, June 22, 2004 and September 13, 2005 Alerts.) The Agenda indicates that further action on this initiative is expected to be taken in February 2006.

Certain Thrift Institutions Deemed Not to be Investment Advisers. In May 2004, the SEC proposed Rule 202(a)(11)-2(a)(1) under the Advisers Act, which would effectively exempt FDIC-insured thrift institutions from most requirements under the Advisers Act, including those relating to registration, in circumstances where a thrift provides investment advice (1) as trustee, executor, administrator or guardian to trusts, estates, guardianships or other accounts created or maintained for a fiduciary purpose, provided the institution does not hold itself out as providing investment advisory services and (2) to its collective trust funds that rely on Section 3(c)(11) of the Investment Company Act of 1940, as amended (the "1940" Act) (as discussed in the May 4, 2004 Alert). The proposed exception would be narrower than the exception from Advisers Act registration enjoyed by banks. The Agenda indicates that further action was expected to be taken on this initiative in December 2005.

Investment Company Disclosure Reform. The Division of Investment Management is considering recommending that the SEC propose comprehensive reforms to mutual fund disclosure requirements on Form N-1A, the registration form for open-end investment companies, including streamlining the delivery of mutual fund information through increased use of the Internet and other electronic means of delivery. (In action taken last year, the SEC specifically excluded registered investment companies and business development companies from a number of securities offering reforms including the "access equals delivery" provisions of new Rule 172 under the Securities Act of 1933, as amended ( the "1933 Act"). In general terms, Rule 172 provides that the 1933 Act’s prospectus delivery requirements in connection with the sale of a security are satisfied as long as a final prospectus meeting the 1933 Act’s requirements has been filed with the SEC. The SEC’s stated reasons for this deferral were that investment companies and business development companies are subject to a separate framework governing communications with investors and that it preferred to consider any changes to investment company prospectus delivery requirements in the context of a broader consideration of that framework. The disclosure reform initiative in the Agenda appears to represent that reconsideration and seems likely to include an "access equals delivery" proposal for mutual funds as one of its components.) The Agenda indicates that a rulemaking proposal is expected to be issued in September 2006.

Amendments to Investment Company Registration Statements to Protect Certain Private Information. The Division of Investment Management is considering recommending that the SEC propose modifications to disclosure requirements in the registration and certified financial report forms for open-end and closed-end funds and certain variable insurance products (Forms N-1A, N-2, N-3 and N-CSR) designed to safeguard the privacy interests of (i) investors for whom certain identifying information is disclosed by virtue of their status as principal holders of a class of certain investment company securities and (ii) portfolio managers for whom quantitative information about certain personal accounts is disclosed. The Agenda indicates that a rulemaking proposal was expected to have been issued in November 2005.

Definition of Securities "Held of Record" Under the 1934 Act. The Division of Corporation Finance is considering recommending that the SEC propose revisions to the definition of securities "held of record" as defined in the 1934 Act that would cause the definition to include the beneficial owners of securities registered in the name of a broker, dealer, bank or similar nominee. (Whether an issuer is exempt from registration under the 1934 Act can depend on how many holders of record it has. As the proposal implies, currently issuers are generally not required to "look through" nominee holders of their securities for this purpose.) The Agenda indicates a rulemaking proposal is expected to be issued in May 2006.

Electronic Filing of Form D. The Division of Corporation Finance is considering recommending that the SEC propose rule amendments that would provide for the electronic filing of Form D under the 1933 Act. (Form D is filed in connection with certain offerings of unregistered securities.) The Agenda indicates that a rulemaking proposal was expected to have been issued in November 2005.

Definition of "Issued Ratably" with Respect to Investment Company Rights and Warrants. Section 18(d) of the 1940 Act prohibits a registered fund from issuing any warrant or right to subscribe to or purchase the fund’s securities, unless the warrant or right expires not later than 120 days after its issuance and is issued exclusively and ratably to a class or classes of the fund’s security holders. The Division of Investment Management is considering recommending that the SEC propose a new rule designed to clarify that rights to acquire additional shares are not "issued ratably" to a fund’s shareholders when, by their terms, the rights do not entitle each owner to exercise them and obtain additional shares. The Agenda indicates that a rulemaking proposal was expected to have been issued in November 2005.

Books and Records to be Maintained by Investment Advisers. The Division of Investment Management is considering recommending that the SEC propose amendments to the books and recordkeeping requirements for investment advisers pursuant to Rule 204-2 under the Advisers Act. (Given the various concerns voiced regarding the SEC’s requests for e-mail correspondence in the course of its inspection and examination activity over the last two years, it is likely that this initiative will address adviser e-mail retention requirements.) The Agenda indicates a rulemaking proposal was expected to have been issued in December 2005.

FinCEN together with the FRB, FDIC, OCC and OTS (the "Agencies") jointly issued guidance (the "Guidance") to notify depository institutions that under the Bank Secrecy Act and its implementing regulations: (1) a U.S. branch or agency of a foreign bank may disclose a suspicious activity report ("SAR") to its head office located outside of the U.S.; and (2) a bank or savings association may disclose a SAR to its controlling companies whether domestic or foreign. The Guidance states that the Agencies have never previously taken a definitive position on this issue, but that for a controlling company or head office to meet its oversight and enterprise-wide risk management responsibilities, they legitimately need access to this information. The Guidance further states that under a depository institution’s anti-money laundering program, written confidentiality agreements or arrangements must be in place "specifying that the head office or controlling company must protect the confidentiality of the [SAR] through appropriate internal controls." The Agencies note that they expect to issue future guidance on whether FIs may share SARs with U.S. and foreign affiliates other than controlling companies.

On January 18, 2006, Goodwin Procter hosted a web-based seminar titled "New Patriot Act Rules Regarding Special Due Diligence For Foreign Accounts". The speakers discussed the types of accounts and relationships the new rules cover; what the rules require covered U.S. institutions to do; and when the rules become effective. For those who missed it, a recorded version of the presentation, as well as downloadable version of the PowerPoint presentation are available on the firm’s website, www.goodwinprocter.comOn . We also received a number of good questions about the new rules during the seminar; we plan to print the non-confidential questions and our responses in a future issue of the Alert. com

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