The following are summaries of key developments in the investment management industry. Full articles covering these and other topics can be found using this link.

SEC’s Focus in 2015

On December 11, 2014, Mary Jo White, Chair of the U.S. Securities and Exchange Commission (SEC), gave a speech at The New York Times DealBook Opportunities for Tomorrow Conference that highlighted the SEC’s priorities for 2015 related to industry risks arising from the portfolio composition and operations of investment advisers and funds. These priorities include enhancing data reporting, enhancing controls on risks related to portfolio composition, and improving transition planning and stress testing.

In her concluding remarks, Chair White stated the SEC will look to investors and market participants to provide input to help implement SEC staff proposals as workable regulations for funds and investment advisers. Consequently, to ensure that any final regulations reflect a blend of best practices and investor safeguards, funds, investment advisers, and other industry participants are well-advised to become acquainted with the proposals and involved in the conversation with SEC staff as soon as practicable.

Zehrer v. Harbor Capital Advisors, Inc.: Advisers May Not Charge Excessive Fees

In Zehrer v. Harbor Capital Advisors, Inc., a shareholder of the Harbor International Fund alleged the fees paid to the fund’s investment manager and adviser were improper and excessive and constituted a breach of the adviser’s fiduciary duty under Investment Company Act Section 36(b). In response to a motion to dismiss, the U.S. District Court for the Northern District of Illinois found that the complaint adequately pleaded a plausible claim that the adviser breached its fiduciary duty by retaining fees that were disproportionate to the services rendered.

Although an allegation of excessive fees alone is normally not grounds for inferring that a breach of fiduciary duties has occurred, the court’s denial of the adviser’s motion to dismiss in Zehrer suggests that excessive fees may remain a viable theory for alleging that an adviser has breached its fiduciary duties to a fund, at least in the context of a motion to dismiss.

MSRB Adopts Municipal Advisory Supervision Rule, Proposes Amending Current MSRB Rules G-37, G-20, and G-3 to include Municipal Advisors, and Implements a New Fee for Municipal Advisors

During 2014, the Municipal Securities Rulemaking Board (MSRB) engaged in a variety of rulemaking activity: adopting its dedicated municipal advisor rule, requiring the implementation of a supervisory system for municipal advisors; continuing to propose rules and rule amendments to implement a regulatory structure for municipal advisors, which included restricting political contributions; adopting a professional qualification examination requirement; extending gift rules to municipal advisors; and expanding existing books and records requirements. The MSRB also implemented a new fee for municipal advisors.

In addition, the SEC approved the adoption of MSRB Rule G-44, which relates to the supervisory and compliance obligations of municipal advisors, in October 2014, and approved amendments to MSRB Rule G-8 and Rule G-9, which relate to bookkeeping and record keeping, and the preservation of those records. Also in October, the MSRB requested comment on draft amendments to Rule G-20 on gifts, gratuities, and noncash compensation given or permitted to be given by brokers, dealers, and municipal securities dealers.

Mutual Fund Insider Trading Case Remanded

In July 2013, the U.S. Court of Appeals for the Seventh Circuit examined for the first time, but left unresolved, the question of whether the misappropriation theory of insider trading may be used to impose Section 10(b) liability concerning the redemption of mutual fund shares. The SEC brought claims alleging insider trading and other securities law violations against Jilaine Bauer, the general counsel and chief compliance officer of Heartland Advisors, Inc. (Heartland), an investment adviser and broker-dealer in Milwaukee. The Seventh Circuit acknowledged that the action was one of a few instances in which the SEC had brought insider trading claims in connection with a mutual fund redemption, and remanded the case so the district court could rule on whether the misappropriation theory of insider trading applied.

Following remand from the Seventh Circuit, Ms. Bauer filed a motion for summary judgment related to the SEC’s misappropriation theory, which the district court granted, dismissing the remainder of the SEC’s insider trading case. The district court noted that the SEC never raised a misappropriation theory with the court, and consequently the court deemed that theory to be waived. Further, the court stated that it was unwilling to extend the misappropriation theory of insider trading to this case where “no precedent supports the extension of this theory” to Ms. Bauer, and the SEC had not developed a “sound application of the misappropriation theory” or explained to the court how someone in Ms. Bauer’s position can fairly be considered a corporate “outsider” given the investment adviser’s “deeply entwined role as sponsor and external manager of the fund.”

To learn more about these developments and other investment management news, please contact a member of the Ballard Spahr Investment Management Group or the attorney with whom you regularly work.



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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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