The Financial Regulatory Authority (“FINRA”) recently issued a comprehensive report on compliance issues noted in its examination program (the “Report”). The Report is intended to assist broker-dealers in identifying and addressing potential weaknesses in their compliance procedures, and discusses 19 different topics. Each section includes a summary of the relevant regulatory requirements, a series of suggested questions that broker-dealers should consider regarding compliance with those requirements, recent FINRA examination findings and suggested “effective practices” to enhance compliance. Several sections include useful links to additional FINRA and SEC resources.

FINRA suggests that broker-dealers can use the Report (i) as a tool for reviewing the adequacy of their current compliance procedures, (ii) to identify gaps in their procedures that need to be addressed, (iii) to flag additional risks that they should monitor, and (iv) as a training and informational source for keeping personnel informed and focused on compliance requirements.

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On October 7, 2020, the Securities and Exchange Commission (SEC) adopted a new fund of funds rule. New Rule 12d1-4 is designed to streamline and enhance the existing regulatory framework under which registered funds of funds have been offered. The new rule’s adoption is a recognition that fund of funds arrangements provide an efficient means of achieving portfolio diversity and asset allocation and, among other things, simplify recordkeeping and investment monitoring. In the words of the SEC, the new rule will “provide investors with the benefits of fund of funds arrangements, and . . . provide funds with investment flexibility to meet their investment objectives efficiently.”

New Rule 12d1-4 will be effective 60 days after publication of the adopting release in the Federal Register.

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The staff of the SEC’s Division of Investment Management (the “Division”) issued a new statement (the “Staff Statement”) on May 27, 2020, addressing the intersection between state control share acquisition statutes and the voting requirements contained in section 18(i) of the Investment Company Act of 1940 (the “1940 Act”). The Staff Statement effectively replaces a previous no-action position which addressed how the Maryland Control Share Acquisition Act should be interpreted in light of the requirements of section 18(i) of the 1940 Act.

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On April 21, 2020, the U.S. Securities and Exchange Commission (“SEC”) proposed new Rule 2a-5 under the Investment Company Act of 1940 to address valuation practices of registered investment companies. According to the SEC, the Proposed Rule is necessary due to major technological and regulatory changes since the last time the SEC proposed comprehensive valuation rules, a half-century ago.

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Despite the disruptive effect of COVID-19, the SEC does not intend to extend the effective dates for compliance with Reg. BI and Form CRS. In addition, the SEC’s Office of Compliance Inspections and Examinations recently announced its intention to begin examinations of registrants’ implementation of these new regulations. Such examinations are expected to occur during the first year after the effective dates. The Financial Industry Regulatory Authority (FINRA) also announced its intent to follow a similar approach with respect to examinations of broker-dealers, focusing on whether firms are making a good faith effort to establish and implement policies and procedures reasonably designed to ensure that a broker-dealer complies with Reg. BI and Form CRS.

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On March 30, 2020, the Securities and Exchange Commission (SEC) issued a no-action letter stating that the staff of the SEC’s Division of Trading and Markets would not recommend enforcement actions against broker-dealers that treat unsecured receivables related to bank sweep accounts as an allowable asset that is not deducted from net worth under Rule 15c3-1 (the “Net Capital Rule”). This change should make it easier for broker-dealers to offer cash sweep programs to their customers while continuing to adhere to the requirements of the Net Capital Rule.

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On March 25, 2020, the SEC issued exemptive orders replacing prior orders granting temporary relief from certain provisions of the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (the “1940 Act”). The SEC said that it has been monitoring developments related to the effect that COVID-19 and related remote work environments have had on the asset management industry. The new orders therefore generally extend previously granted relief by two months and eliminate certain conditions of the prior orders.

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