The Securities and Exchange Commission has long enforced consistency between the name and strategy of a regulated investment company.
The original “Names Rule,” Rule 35d-1 of the Investment Company Act of 1940, was issued in 2001 and was intended to help ensure a fund’s name does not misrepresent the fund’s investments and risks to investors. It generally requires that if a fund’s name suggests a focus in a particular investment type, industry or geographic region, the fund must adopt a policy to invest at least 80% of its assets accordingly. Similarly, if the fund’s name suggests that its distributions are tax-exempt, for example, the investment policy must adhere to this claim.
Welcome to Industry Insights, BBD’s new video series that offers our clients and industry friends a brief look into important and timely developments in the investment management industry.Read More
As investors continue to search for new ways to drive alpha, lower costs and increase accessibility, there has been increased discussion across the investment management industry about converting separately managed accounts (“SMA”s) into exchange traded funds (“ETF”s).Read More
Should an ETF investing in foreign securities utilize fair value adjustment factors? Before answering this question, we should address why investment companies use fair value adjustment factors. Funds that invest in international securities could be subject to market timers looking to take advantage of the arbitrage that may occur between the time a foreign stock exchange closes and the time the U.S. stock exchange closes. The market timer buys into the fund and then sells out of the fund the next day, driving up costs and diluting the share value for long-term investors.Read More
Given that mutual funds and ETFs are both types of regulated investment companies with audits subject to the requirements of the Public Company Accounting Oversight Board, there are certainly many similarities in the audit process for both. However, there are some key differences to note, particularly in the areas of:Read More
On August 5, 2020, the Securities and Exchange Commission issued a rule proposal to modernize the disclosure framework specific to mutual funds and exchange-traded funds (collectively referred to herein as “funds”). The general premise of the proposed rule is that different presentations are useful to different audiences relating to a fund’s reporting of operations and offerings. More specifically, while the traditional methods of providing full financial statements and a prospectus to shareholders may be useful to investment professionals and institutional investors, the average investor finds this information clumsy and confusing and would rather have more limited and graphical information focused on items such as the performance and expenses of the fund. In fact, it would not surprise most in the industry to find out that most retail investors are not engaging in a detailed review of the financial statements or offering documents.Read More
Exchange traded funds (“ETFs”) have risen in popularity among asset managers and investors in recent years for several reasons, not the least of which is the tax efficient nature of the vehicles. Despite this benefit, many active managers have been reluctant to enter the ETF space. Of primary concern to active managers is the requirement for ETFs to publish their portfolios, or “baskets,” daily. This transparency effectively allows others a look under the hood, which could lead to front running, which is the practice where traders buy ahead of large orders from ETFs and short sell ahead of large sell orders. This could result in ETFs paying more to purchase securities in the market and receiving less to sell securities. Another potential negative result of this transparency is the possibility of another provider effectively cloning an existing transparent ETF and offering it with a lower expense ratio.Read More
Are registered funds recording taxable spin-off transactions correctly?Read More
One of the many appealing aspects of the ETF vehicle is that it is generally designed to be tax efficient. The primary mechanism for achieving tax efficiency is the ability to redeem appreciated securities in-kind. Any gains realized on securities redeemed in-kind are not taxable and therefore do not need to be distributed to underlying shareholders. The ability to utilize custom baskets further enhances an ETF’s tax efficiency by redeeming a sampling of appreciated securities in redemption transactions, while selling depreciated securities to harvest losses. A seasoned ETF is unlikely to ever have to pay a capital gain distribution.Read More
The Coronavirus pandemic (“COVID-19”) is causing significant financial and operating hardships across all industries. Any companies that are currently preparing GAAP financial statements, including investment companies, should consider whether or not the impact of COVID-19 represents a significant event as defined in FASB Accounting Standards Codification (“FASB ASC”) 855, Subsequent Events.Read More