On August 5, the SEC proposed modifying the disclosure framework for mutual funds and exchange-traded funds (funds) registered on Form N-1A. The proposed modifications, which derive from the SEC’s investor experience initiative, would create a new layered disclosure regime that attempts to simplify disclosure and scale down the level of detail currently furnished to shareholders. The principal elements of the proposal follow.
- Shareholder Reports. Under the proposal, after a fund delivers prospectuses to shareholders following an initial investment in the fund, in lieu of the current detailed annual and semi-annual reports, the fund would deliver paper or electronic versions of a “concise and visually engaging annual and semi-annual report.” The proposal would require that such reports highlight information the SEC deems to be particularly important for retail shareholders, such as fund expenses, performance, illustrations of holdings and material fund changes.
- Updating Required Disclosure. The proposal would eliminate the requirement that funds deliver annual prospectus updates to shareholders. Instead, funds would use the reports described above to keep shareholders informed of updates and material changes over the prior year. The current versions of fund prospectuses would be made available online and delivered free of charge upon request. Timely notifications of material fund changes would still be required.
- Current Annual and Semi-Annual Reports. As explained above, the proposed annual and semi-annual reports would highlight only certain information deemed important by the SEC. The proposal would still require that other information that funds currently include in annual and semi-annual reports be made available online and delivered free of charge upon request.
- Fund Fees and Risks Disclosure. The proposal amends the content of fund prospectuses as they relate to fees and risks. Generally, the proposal would simplify the presentation of fees and improve risk disclosure by making it clearer and more specifically tailored to a fund.
- Rule 30e-3. The proposal would amend the scope of Rule 30e-3 to exclude open-end funds from relying on the Rule to satisfy shareholder report transmission requirements by making such reports available online and notifying shareholders of the reports’ availability online. This change is consistent with the stated goal of providing only certain tailored information to shareholders.
The proposed modifications would amend the SEC’s advertising rules that are generally applicable to all investment companies, including mutual funds, exchange-traded funds, registered closed-end funds and business development companies. The proposal would require consistency between fees and expenses identified in advertisements and those identified in the fee table presentation in the fund’s prospectus. Additionally, the proposal would require that the fees and expenses in advertisements be reasonably current and would address presentations that could potentially be materially misleading.
The public may comment on the proposed amendments until 60 days after publication in the Federal Register.
Although the PPP closed at midnight on August 8 after Congress and the Trump Administration failed to reach a deal on an additional stimulus package, the SBA has actively been updating PPP lenders and borrowers on the loan forgiveness process. First, on Monday August 10, the SBA’s loan forgiveness platform began accepting loan forgiveness applications. As detailed in an SBA July 23 procedural notice, all PPP Lender Authorizing Officials currently registered in the E-Tran system should have received a welcome email from PPPForgivenessRequests@SBA.gov with instructions on accessing the loan forgiveness platform. Authorizing Officials who have not received a welcome email should contact SBA’s PPP lender hotline at 833-572-0502 for more information.
On the same day, the SBA released a 43 page Forgiveness Platform User Guide that provides instructions for lenders on how to create their accounts, submit their decisions and monitor the SBA's actions. Forgiveness decisions can only be submitted for loans that have been fully disbursed. Lenders can designate their decisions as "approved in full," "approved in part," "denied," or "denied without prejudice due to SBA review." Once the lender's decision has been submitted, the SBA will have 90 days to remit the appropriate forgiveness amount to the lender plus interest accrued through the date of payment.
On August 11, the SBA published several new items of additional guidance for PPP lenders and borrowers. In particular, the SBA:
- Added three new frequently asked questions (FAQs) to its general PPP FAQs clarifying that the payment of fees to an agent or other third party is immaterial to the SBA’s loan guarantee and to its payment of feeds to lenders. These FAQs also clarify that vision and dental benefits are considered payments required for the provision of group health care benefits and therefore do not count toward the cash compensation cap of $100,000 for PPP payroll costs;
- Added three new FAQs to its FAQs on PPP Loan Forgiveness addressing how lenders should handle forgiveness applications for PPP borrowers who also received Economic Injury Disaster Loans; and
- Released an interim final rule discussing when and how a PPP borrower may appeal certain SBA loan review decisions.
On August 4, the OCC issued an interim final rule (Rule) regarding withdrawals from certain collective investment funds (CIFs). CIFs are pooled asset vehicles managed by national banks or federal savings associations (together, banks) as fiduciaries. Admissions and withdrawals are based on the value of the CIF’s assets. A bank administering a CIF invested primarily in real estate or other assets that are not readily marketable may require a prior notice period of up to one year for withdrawals. The OCC previously interpreted this notice provision as requiring the bank to withdraw an account within the prior notice period or, if permissible under the CIF’s written plan, within one year after prior notice was required. In light of COVID-19, the Rule codifies this standard withdrawal period and creates an exception permitting an extension of up to one additional year with OCC approval with opportunities for further extensions, provided that certain conditions are satisfied. The Rule becomes effective upon publication in the Federal Register.
On August 7, the Federal Reserve announced details of its proposed FedNow℠ Service, the new round-the-clock, real-time payment and settlement service with clearing functionality to support instant payments in the United States. As discussed in the August 7, 2019 edition of the Roundup, the FedNow Service would conduct real-time, payment-by-payment, final settlement of interbank obligations through debits and credits to banks’ balances in their master accounts at Federal Reserve banks. The service would incorporate clearing functionality, allowing banks, in the process of settling each payment, to exchange information needed to make debits and credits to the accounts of their customers. The service’s functionality would support banks’ (or their agents’) provision of end-to-end faster payments to their customers. The features and functionality of the FedNow℠ Service included in the announcement are based on input received from the public in response to the 2019 request for comment.
The Federal Reserve will take a phased approach to service implementation. The first release of the FedNow Service will provide core clearing and settlement features that will support market needs and help banks manage the transition to a 24x7x365 service. Based on ongoing stakeholder engagement, additional features and service enhancements will be introduced over time. The target launch date for the service remains 2023 or 2024, with a more specific time frame to be announced after additional work is completed.
On August 10, the Federal Reserve announced the implementation of individual large bank capital requirements for all banks with more than $100 billion in total assets (Large Banks). The individual capital requirements were in part determined by stress test results and will become effective on October 1. The announcement included a table showing the total common equity tier 1 capital requirements for each Large Bank, which is comprised of several components, including minimum capital requirements, which are the same for each firm and are 4.5%; the stress capital buffer, which is determined from the stress test results, and is at least 2.5%; and, if applicable, a capital surcharge for global systemically important banks, which is at least 1.0%.
On August 11, the Federal Reserve announced revised pricing for its Municipal Liquidity Facility. The revised pricing reduces the interest rate spread on tax-exempt notes for each credit rating category by 50 basis points and reduces the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes.
On August 7, the Alternative Reference Rates Committee (ARRC) released a “SOFR Starter Kit,” a set of factsheets to inform the public about the transition away from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR), the ARRC’s recommended alternative reference rate. The SOFR Starter Kit includes three factsheets discussing the background on the impetus for the transition and the ARRC’s work to select a preferred rate, key facts and figures about SOFR and next steps market participants can take to ease the transition away from LIBOR. These factsheets follow the conclusion of the ARRC’s SOFR Summer Series, a collection of recorded webcasts of educational panel discussions with representatives across various ARRC member institutions for industry professionals, media and the general public.
Enforcement & Litigation
Great-West 36(b) Decision
On August 7, after a full trial on the merits, the federal district court in Denver, Colorado issued a decision in favor of the defendant investment adviser. The plaintiffs in the action, Obeslo v. Great-West Capital Management, had alleged that the investment adviser had violated Section 36(b) of the Investment Company Act by charging excessive fees for certain mutual funds it managed. The plaintiffs had premised their complaint in large part on the manager-of-managers theory of liability, pointing to the allegation that the adviser delegated day-to-day management of the fund portfolios to subadvisers who were paid less than the investment adviser. The court found that the plaintiffs had not proved their allegations that the fees were excessive and had not proved the existence of damages. This decision resolves the last of the complaints filed under the manager-of-manager theory. Of the 29 cases filed under Section 36(b) since the Supreme Court decided Jones v. Harris in 2010, only one other case remains pending in a trial court. That case, brought against T. Rowe Price, was brought under the subadvisory fee comparison theory, premised on the allegation that T. Rowe Price charges less to manage funds when it acts as a subadviser to third-party funds than when it manages its own funds. Of those 29 cases since Jones v. Harris, six went to trial, all resulting in wins for the defendant advisers. Seven others were decided in favor of the defendant advisers before trial. The remaining cases were either settled or dismissed voluntarily by the plaintiffs. It has been over two years since the last Section 36(b) complaint was filed.
In light of the recent global pandemic, Goodwin’s interdisciplinary team of lawyers presents various types of financings and investment structures applicable in current market conditions in a new webinar series, “What’s Next? A Path Forward in Uncertain Times.” This multi-part series explores the financing transactions and topics that are most relevant for companies and investors at a time where valuations are uncertain and companies across industries need capital. Visit the website to learn more, register for upcoming webinars and access previous events.