Financial Services Alert - September 11, 2012

Securities registration fee rates for mutual funds registered under the Investment Company Act of 1940 (the “1940 Act”) will be increasing more than 19%, effective October 1, 2012.  The Dodd-Frank Act created new annual collection targets for the SEC’s fiscal year 2012 and thereafter (the statutory target for fiscal year 2013 is $455 million).  It also changed the date by which the SEC must announce a new fiscal year’s fee rate (August 31) and the date on which the new rate takes effect (October 1).  Because mutual fund registration fees are calculated based on the rate that is in effect on the date of their annual fee filing, funds may be able to achieve significant cost savings by filing before 5:30 p.m. ET on Friday, September 28, 2012.

Securities Registration Fees for Investment Companies. Section 6(b) of the Securities Act of 1933 (the “1933 Act”) requires the SEC to collect fees from issuers registering their securities offerings.  Normal operating companies are generally permitted to register only a fixed number of shares and pay fees at the time of registration.  In contrast, mutual funds may register an indefinite number of securities because they offer shares on a continuous basis.

Section 24(f)(2) of the 1940 Act permits mutual funds to pay their registration fees once annually based on the net sales price of the securities sold during the previous fiscal year (i.e., net of redemptions).  Pursuant to Rule 24f-2 under the 1940 Act, a mutual fund is required to file a Form 24F-2 accompanied by the registration fee within 90 days after its fiscal year end. The fee rate in effect at the time of filing Form 24F-2 applies to all securities sold during the fiscal year.

Under changes made by the Dodd-Frank Act, the annual rate changes for fees paid under Section 6(b) of the 1933 Act must take effect on the first day of the SEC’s next fiscal year, which is October 1.  Accordingly, under SEC filing rules, Form 24F-2 filings submitted to the SEC before 5:30 p.m. ET on Friday, September 28, 2012 will be subject to the current fee rate of $114.60 per million dollars.  Filings submitted after that time will be subject to the new fee rate of $136.40 per million dollars.

Accelerating Form 24F-2 Filings. In light of the more than 19% increase in the fee rate, a mutual fund that by virtue of the timing of its fiscal year-end is in a position to pay its registration fees should consider making its Form 24F-2 filing in advance of the effectiveness of the new fee rate.

Additional information on the fee rate increase is available on the SEC website at http://www.sec.gov/news/press/2012/2012-174.htm.

The FRB issued an order (the “Order”) approving the application of Old National Bancorp (“ONB”), Evansville, Indiana to acquire Indiana Community Bancorp (“ICB”), and thereby indirectly acquire ICB’s subsidiary bank, Indiana Bank and Trust Company (“IBTC”), both of Columbus, Indiana.  ONB and ICB have banking subsidiaries that compete directly in three banking markets, but, the FRB states in the Order that it is only in one of those markets, the Seymour, Indiana banking market (the “Seymour Market”), that anti-competitive concerns are raised.  The FRB states in the Order that upon consummation of ONB’s acquisition of ICB, ONB would become the largest insured depository organization in the Seymour Market with a market share of 29.5%.  Moreover, ONB would have a share of deposits in the Seymour Market that would exceed the Department of Justice’s competitive guidelines (the “DOJ Guidelines”) because, as a result of the transaction, ONB would increase its share of deposits as measured by the Herfindahl-Hirschman Index (“HHI”) by 203 points (which is above the 200 point limit in the DOJ Guidelines).  In the Order, however, the FRB noted that after consummation of the transaction, eight other commercial banking competitors would remain in the Seymour Market and the second largest competitor would control 27.6% of deposits, only approximately 2% less than ONB.

Most significantly, the FRB found that there was an active community credit union, Centra Credit Union (“Centra”), in the Seymour Market and the FRB determined that, although credit unions’ deposit shares are usually not counted in FRB competitive analyses of banking markets, Centra’s deposit share should be considered in the competitive analysis of the Seymour Market.  The FRB stated that Centra has broad membership criteria that includes most residents in the Seymour Market and that its range of activities is broad and the FRB concluded that Centra exerts a competitive influence in the Seymour Market.  After adding Centra’s deposits to the Seymour Market, ONB’s market share would be reduced to 28.8% and its HHI share of deposits in the Seymour Market would increase by only 173 points as a result of the transaction, which is less than the 200 point limit in the DOJ Guidelines.

The FRB accordingly concluded that “competitive” considerations are consistent with approval and the FRB approved ONB’s acquisition of ICB.  The Order is the first FRB decision since 2007 in which the FRB considered a credit union’s deposits in its competitive analysis of a bank holding company’s acquisition transaction.

In another interesting finding made by the FRB in the Order, the FRB noted that ONB’s lead bank subsidiary, a national bank, Old National Bank (“ONBK”) was subject to a Consent Order, dated June 4, 2012, with the OCC related to deficiencies in ONBK’s Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance.  In approving the Order the FRB said, however, that, since 2011 “ONBK has devoted significant time and resources toward improving its BSA/AML program and has made substantial progress towards fully addressing program weaknesses.”

The staff of the SEC’s Division of Investment Management (the “Staff”) granted no-action relief to allow an investment adviser to comply with the Rule 206(4)-2 (the “Custody Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) by treating a state-created 529 plan trust that is a college savings plan  (a “529 Plan”) for which the adviser serves as program manager, as a “pooled investment vehicle” for purposes of the Rule.  An adviser serving as program manager does not need to comply with the independent verification requirements that would otherwise apply under the Custody Rule with respect to a 529 Plan if various conditions detailed in the relief are met, including that (a) the 529 Plan’s audited annual financial statements are (i) provided to the state agency or instrumentality responsible for oversight of the 529 Plan within 120 days of the end of the 529 Plan’s fiscal year and (ii) made available to all existing 529 Plan accountholders via the 529 Plan’s website; and (b) 529 Plan accountholders receive written notification of the availability of the financial statements no later than the delivery of the account holders’ next regularly scheduled quarterly account statements. 

The SEC issued a study (the “Study”) prepared by the staff of its Office of Investor Education and Advocacy (the “Staff”) designed to fulfill a mandate under the Dodd-Frank Act that it identify:

1. the existing level of financial literacy among retail investors;
2. methods to improve disclosures to investors with respect to financial intermediaries, investment products, and investment services;
3. the most relevant information for retail investors to make informed financial decisions regarding financial intermediaries and investment products or services typically sold to retail investors, including mutual funds;
4. methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products, including mutual funds;
5. the most effective existing private and public efforts to educate investors; and
6. in consultation with the Financial Literacy and Education Commission (“FLEC”), a strategy to increase the financial literacy of investors.

In preparing the Study, the Staff relied on a number of sources. It contracted with the Library of Congress to conduct a quantitative study on financial literacy of U.S. retail investors; the results showed that by and large, American investors lack basic financial literacy. The Staff also relied on responses to the Commission’s request for public comment, and on public opinion research conducted by a third party consultant on the usability and effectiveness of the following types of disclosures:

• Form ADV Part 2A provided to advisory clients
• Trade confirmations and account statements
• Mutual fund summary prospectus
• Point-of-sale disclosures for financial intermediaries

The Study’s findings include (i) methods to improve the timing, content, and format of disclosures; (ii) information for investors to consider when either selecting a financial intermediary or purchasing an investment product; and (iii) methods to improve the transparency of disclosures regarding expenses and conflicts of interest. The Study also outlines a collaborative strategy for the Staff and FLEC participants to develop targeted programs to improve financial literacy.