Registered Funds Alert

November 2016

Table of Contents
Update on SEC Asset Management
Rulemakings and Adoption of
Liquidity Risk Management andData Reporting Rules for
Registered Funds

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In October, the SEC adopted its final rules
regarding liquidity risk management andmodernized data reporting. Widespreadindustry comment led to some substantialchanges from their initial proposals.
Click here for more

Money Market Reforms Lay
Potential Trap for the Unwary
Corporate Treasurer

6

The implementation of money market
reforms may cause some corporate
treasurers to look for other ways to achievesafe yield on cash reserves. However, theymust exercise caution in considering otheroptions, as they may affect the company’s
inadvertent investment company status.
Click here for more

Adviser’s Connection to Bond
Scam Highlights the Limitationsof Section 15(c) Inquiries

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A recent fraud allegation involving theformer investment adviser to a registeredfund group highlights the importance offund boards performing diligence, andoffers lessons on what to do if information
provided by their investment adviser turns
out to be false or misleading.
Click here for more

Notable Transactions: Q3 201610

A list of notable transactions occurring in
the third quarter of 2016, including M&A
transactions and closed-end initial public
offerings. Click here for more

Simpson Thacher & Bartlett LLPThis latest edition of Simpson Thacher’s Registered Funds Alert discusses:
the SEC’s final rules regarding liquidity risk management and data reportingand notable changes since the rules were initially proposed; the potential
for recent money market reforms to affect how corporate treasurers handle
cash reserves and potential traps that could trigger 1940 Act registration
requirements; and a summary of what happened when a fund board
discovered that the funds’ adviser may have provided false or misleading
information during the Section 15(c) contract approval process.

Update on SEC AssetManagement Rulemakings
and Adoption of Liquidity
Risk Management andData Reporting Rules for
Registered Funds
On October 13, 2016, the Securities and Exchange
Commission (“SEC”) adopted final rules regarding
liquidity risk management and modernized datareporting for registered funds. We have summarized
the initially proposed versions of these rules andsome notable comments made by the industry inprior Alerts (available here, here and here). In thisAlert, we focus on changes that the SEC made in
response to industry comments, review potential
examination and enforcement implications anddiscuss whether other pending asset management
rulemakings will be adopted before the upcomingchange in presidential administrations.
Liquidity Risk Management
The liquidity risk management rule is aimed at
reducing the risk that open-end funds will be unable
to meet their redemption obligations. The final
rule follows the same basic structure as the 2015
proposal, but the SEC made substantial changes
in response to industry comments that recognize
the inherent challenges in making liquidity
determinations. Relative to the proposed rule,
the final rule better balances the SEC’s regulatory
goals with practical considerations, resulting ina more flexible and administrable rule. The rule,and its attendant reporting requirements, do not
apply to closed-end funds or business development
companies (“BDCs”).
Rule 22e-4 will require that each registered open-end
fund, including exchange-traded funds (“ETFs”) but
excluding money market funds, adopt and implementa written liquidity risk management program. These
programs must accomplish several specified goals,
although ETFs that redeem shareholders in-kind are
exempt from certain of these requirements:• Assessment, management, and periodic reviewof the fund’s liquidity risk.
• Classification of the liquidity of each of thefund’s portfolio investments into one of four
categories (does not apply to in-kind ETFs):

HIGHLYLIQUIDcan be converted to cash inthree business days or less

MODERATELYLIQUIDcan be converted to cash
in between three and sevencalendar days

LESS
LIQUIDcan be sold in seven calendar
days or less, but will be expected
to settle in more than seven daysILLIQUID

cannot be sold in less than sevencalendar days

• Determine and periodically review a highly
liquid investment minimum (does not apply to
in-kind ETFs).
◦◦Funds’ advisers will be required to determine
their minimum percentage of highly
liquid assets and implement policies andprocedures that will enable them to respondto a shortfall from this percentage.
• Limit the fund’s illiquid investments to
no more than 15% of the fund’s net assets(codifying long-standing SEC guidance).
◦◦Funds will be required to review illiquid
investments at least monthly. Breachesof the 15% limit must be reported to thefund’s board with an explanation and plan
for remediation within a reasonable time
period. If the breach is not resolved within
30 days, the board must determine whether
the breach remediation plan is in the bestinterest of shareholders and investors.
The fund’s board is required to review and approve
the fund’s liquidity risk management program when
it is created, but it can designate that the adviser run
the program. The board must receive and review
an annual written report on the program’s efficacy.
Additionally, in response to industry comments,
the final rule clarified that the board is only
responsible for general oversight of the program,and not specifically responsible for approving
material changes or setting the highly liquid
investment minimum.
Perhaps the most controversial component of the2015 proposal was the “bucketing” that would haveforced funds to classify each of the positions in theirportfolios into six different categories based on how
quickly they could be converted into cash (at a pricethat would not materially affect the position’s value).
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The overwhelming majority of commenters felt that
this was an implausibly burdensome and somewhat
unworkable system.
For instance, because the buckets were based solely
on how many days it would take to convert a position
into cash under the previously proposed system,
many commenters argued that it would have been
unclear and somewhat misleading when applied tocertain types of assets where there is often a delay
between the execution of an agreement to sell theassets and settlement. Bank loans, for instance, canbe sold relatively quickly, but settlement can takesignificantly longer. Under the previously proposedsystem, these assets could have been viewed as
effectively illiquid without regard to how quickly
an agreement to sell the assets could have beenreached, because the sole consideration was when
the cash would arrive. The new rule addressed thisshortcoming. The adopting release makes it clearthat the Less Liquid category in the final rule ismeant to include asset classes, such as bank loans,
where a delay between executing a sales agreement
and settlement is common, and provides that theyneed not be treated as illiquid assets. Nonetheless,by categorizing such assets as “Less Liquid” in the
final rule, many funds that are in fact highly liquid
will appear on these metrics as less liquid than funds
in similar asset categories. As a note of caution,
however, the adopting release includes guidance
that at a certain point the length of the settlement
delay may justify an asset being treated as an illiquid
asset. In this respect, the SEC cites as an example
low-quality loans that “may not settle for a numberof months.”
In addition to addressing some of the substantive
issues with the proposed rule identified bycommenters, the final rule also has salientchanges that reduce the practical hurdles with
implementation. Many commenters felt that thepreviously proposed classification requirement wasunduly burdensome because it required that eachposition be classified individually, which would
have potentially required evaluating liquidity on asecurity-by-security basis. The final rule allows fordeterminations to be made for entire asset classes,
unless a particular investment has characteristics
that differ from the fund’s other holdings in that
asset class, making determinations for individual
securities the exception rather than the rule. Thischange, like many of the other changes, seems tostem from a recognition that exact determinationsof a security’s liquidity are problematic because
liquidity is ephemeral, and requiring statements ofcertainty on liquidity leaves the misimpression thatliquidity determinations are a science, not an art.

In the same vein, the final rule revises theconsequences of a fund failing its high liquidity
minimum percentage test. Under the proposed rule,
the fund would be prohibited from purchasing any
securities other than highly liquid securities until
the ratio was restored. Under the final rule, however,funds may continue to buy non-highly liquid
securities pursuant to adopted shortfall policies andprocedures and report that occurrence to the fundboard at its next scheduled meeting.

“

The final rule allows for determinations to bemade for entire asset classes, unless a particularinvestment has characteristics that differ fromthe fund’s other holdings in that asset class,making determinations for individual securities
the exception rather than the rule. This change,
like many of the other changes, seems to stemfrom a recognition that exact determinations ofa security’s liquidity are problematic because
liquidity is ephemeral, and requiring statementsof certainty on liquidity leaves the misimpressionthat liquidity determinations are a science, notan art.

”Despite the positive changes to the liquidity
management rule, it is still a complex set of rules
and requirements that will require substantial
compliance resources. Even though the compliance
date is December 1, 2018 for fund groups with $1
billion or more in assets and June 1, 2019 for smallerfund groups, funds and other market participants
would be well advised to begin thinking about
implementation sooner rather than later.
Data Reporting
The final rule release for modernizing investmentcompany reporting largely adopts the disclosure
regime put forth in the proposing release, which
we summarized in a prior Alert. Generally, the SEC
adopted a new monthly reporting requirement on
new Form N-PORT, with the first and third fiscal
quarter reports including an exhibit of portfolio
holdings that will replace current Form N-Q filings,
and a new census filing on Form N-CEN that will
replace current Form N-SAR filings.1 Each of the newfilings will be required to be made electronically in
structured XML format, which will allow the SEC
and investors to compile and analyze reported data
more easily.
1. In line with current reporting requirements, BDCs are not subject tothese reporting requirements.

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In response to industry comments, the SEC madecertain changes to the proposed data reporting
requirements or clarified the requirements in the
final release. Some of the key changes include:• A fund may respond to certain items thatinvolve subjective judgment calls by using its
own methodology and conventions, or those of
its service provider, so long as the fund reports
similar information internally and to investors
in the same manner. Funds also now have theopportunity to explain their methodologies,
including any assumptions.
• If a fund invests 25% or more of its assets
in debt instruments, or derivatives thatprovide that level of notional exposure to
debt instruments or interest rates, it must
provide a portfolio-level calculation of durationand spread duration across the applicablematurities in its portfolio. This threshold
was initially proposed to be set at 20% offund assets. Additionally, the threshold isbased on the three-month average of a fund’s
assets as opposed to being calculated on thereporting date as initially proposed. The SEC
also streamlined the potential maturities
that a fund would need to calculate, retaining
three-month, one-year, five-year, ten-year
and thirty-year maturities while dropping
the requirement to calculate spread andspread duration for one-month, six-month,
two-year, three-year, seven-year, and twentyyear maturities.
• For derivatives that have underlying assetsthat are non-public indices or custom baskets
of assets, the SEC has modified its original
proposal regarding reporting of the underlying
components of such indices or baskets. A tiered
reporting structure has been adopted suchthat (i) if an investment in a non-public index
or custom basket makes up more than 1% but
less than 5% of a fund’s net assets, the fundmust report the top 50 components and (ii) if
an investment in a non-public index or basket
makes up more than 5% of a fund’s net assets,
all components must be reported. The SEC
initially proposed disclosure of all components
representing more than 1% of net assets.
• With respect to securities lending, the SEC has
replaced the proposed requirement to disclose
the terms governing compensation of asecurities lending agent, including any revenue
split, with a requirement to disclose actual fees
paid during the reporting period.

• The SEC has responded to industry requests
that certain reported information not become
public by agreeing to keep a small numberof items confidential. These include thefollowing, and any explanatory notes related tothese items:◦◦Position-level risk metrics (delta);◦◦Country of risk and economic exposure;◦◦Position-level liquidity classifications; and◦◦A fund’s highly liquid investment minimum.
When the new reporting requirements become
effective, funds will be required to file Form
N-PORT within thirty days of the end of eachcalendar month and Form N-CEN within 75 daysof the end of the fund’s fiscal year. With respectfor Form N-PORT filings, only those filings madeafter the month ending the first and third fiscal
quarters will be made public (which is why thoseparticular filings must include an exhibit reflecting
a schedule of investments akin to current Form
N-Q). Many commenters requested that the SEC
provide additional details regarding its cybersecurity
preparedness to safeguard the non-public
information that will be reported on Form N-PORT.
However, in the final release, the SEC only briefly
addressed this issue, stating that it has experience
maintaining confidential information and is working
on controls and systems to handle confidential
information submitted on Form N-PORT.
The compliance date for the new data reporting
requirements will be June 1, 2018 for a “group of
related investment companies” with net assets of$1 billion or more, and June 1, 2019 for smallerfund groups. The SEC plans to allow funds to file
test filings during a trial period in advance of thecompliance date. Notably, all information on Form
N-PORT filings made within six months of the June
1, 2018 compliance date will not be made public(other than the portfolio holdings exhibit required
to be filed for funds’ first and third fiscal quartersthat is similar to current Form N-Q filings). The SEC
believes that this six-month period will allow filers
and the SEC to make any technical adjustments
needed to fine-tune the filing process with respect
to new Form N-PORT. Additionally, with respect toreporting requirements arising out of the liquidity
risk management rule release, funds will have anadditional six months (December 1, 2018/2019
for large/small fund groups) before reportingthat information.

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Examination and Enforcement Implications
The new reporting requirements will result in the
SEC having significantly more, and more detailed,information about funds and their portfolios. The
SEC openly acknowledges that the new reporting
requirements will facilitate examination andenforcement efforts. For example, Form N-CEN
will include numerous “Yes” or “No” questions.
With respect to such questions, the SEC statedthat “staff of our Office of Compliance Inspections
and Examinations may rely on responses to flagquestions in Form N-CEN to indicate areas forfollow-up discussion or to request additional
information.” One area where this could put a fundon the SEC’s radar is with respect to NAV errors, as
open-end funds will need to check “Yes” or “No” in
response to the question of whether they made any
payments to shareholders or reprocessed shareholder
accounts as a result of a NAV error.
The volume of detailed information that the SEC will
have on each fund could open the door for significant
advances in the SEC’s ability to compile and analyze
information related to a single fund or identify
industry trends. Notably, it also will enable the SEC
to compare the practices of various funds that pursue
similar investment strategies. For example, part of
the SEC’s rationale for deciding that certain items to
be reported on Form N-PORT, such as position-levelrisk metrics or position-level liquidity classifications,will not be made public was that the public would
not be able to compare how different funds evaluate
the same investment. The SEC, however, will be able
to make these comparisons and included an explicit
statement in the instructions to Form N-PORT
that it may use such information in examinations,investigations and enforcement proceedings.
Electronic Delivery of Shareholder
Reports and a Potential Pocket Veto for the
Derivatives and Business Continuity Rules
While the SEC had proposed a rule that would
make electronic delivery of fund shareholder
reports the default option in the same release inwhich it proposed to modernize data reporting, theelectronic delivery rule has not yet been adopted. In
the days leading up to the release of the final rules
discussed above, it was reported that Commissioner
Piwowar had expressed his belief while speaking at
a conference that he did not expect the SEC to be
in a position to vote on final rules for two key asset
management rulemaking initiatives before a change
in presidential administrations—derivatives andbusiness continuity/transition planning.

The delay of the electronic delivery rule did not sit
well with Commissioner Piwowar. In his statement
at the open meeting related to the adoption of theliquidity risk management and reporting rules,
Commissioner Piwowar said he would “agree todelay” non-essential items and rulemakings if the
SEC did not finalize a rule regarding electronicdelivery of fund shareholder reports. While heagreed to vote on a consolidated audit trail release,
final rules for capital and margin requirements forsecurity-based swap dealers and two other releases
that are actively being considered, Commissioner
Piwowar did not expressly name derivatives andbusiness continuity/transition planning as those
two releases. While purely an exercise in reading tea
leaves at this point, Commissioner Piwowar would
have the power to effect a form of “pocket veto” giventhat the SEC currently has only three commissioners.
SEC rules state that three commissioners are
required for quorum to conduct business (i.e.,
to vote on rules). By simply declining to attend ameeting, any current commissioner could prevent a
vote on any pending rulemaking. This power gives
Commissioner Piwowar some leverage to force
adoption of the electronic delivery rule in exchange
for the derivatives and/or business continuity/transition planning rules. While the results of thepresidential election could independently derail thederivatives rule, it is possible to view Commissioner
Piwowar’s displeasure with the failure to adopt
the electronic delivery rule, combined with his
public statements that some rules are unlikely to be
finalized before Inauguration Day, as a suggestionthat he would use his ability to prevent the SEC fromachieving quorum to vote on other pending rules.
On November 1, 2016, however, the SEC’s Divisionof Economic and Risk Analysis published amemorandum outlining its economic analysis
of certain potential risk-adjusted schedules todetermine a fund’s derivatives exposure andqualifying coverage assets under the proposed rule’s
requirements. The release of this memorandum
could be an indication that the Chair still intends
to call for a vote on a final derivatives rule prior to
the end of her term. The memorandum is a direct
response to numerous comments suggesting theSEC consider adding some method of accounting forthe variance in risk among different asset classes
in the final rule. The economic analysis containedin the memorandum appears to generally support
the incorporation of risk adjustments and haircuts,
which would be a positive development for funds
that utilize derivatives. In the SEC press releaseaccompanying the release of the memorandum, theSEC stated it would accept comments on the new
economic analysis, but did not provide a deadline.
5Money Market Reforms Lay Potential Trap for the Unwary
Corporate Treasurer
The SEC’s 2014 money market fund reforms went into effect on October 14, 2016. These reforms createdthree categories of money market funds. The categories of money market funds, and certain key features, aresummarized in the table below.
Retail Prime
Funds

Government Funds

Institutional Prime
Funds

Net asset
value (“NAV”)
calculation

Stable $1 NAV

Stable $1 NAV

Floating NAV

Potential
restrictions onshareholder
redemptions

May impose liquidity
fees and redemption
gates in times of market
stressGenerally will not impose liquidity
fees or redemption gates

May impose liquidity fees andredemption gates in times of market
stressInvestor base

Limited to individual
investors (or accounts
whose beneficiaries areindividual investors)

Available to all investors

Available to all investors

Implications
for operatingcompanies

Not an investment
option for operatingcompanies

Potential yield limited byrequirement to invest 99.5% ofassets in cash, US government
securities and repurchaseagreements collateralized solely by
US government securities or cash

Can chase yield to a greater extent
than government funds, but floating
NAV creates potential for loss ofprincipal

Money market funds have historically been a key
tool for operating companies to manage theircorporate treasuries, as they can offer yield with astable $1 NAV. Now that the reforms are in effect,
however, prime money market funds cannot offera stable $1 NAV to corporate entities. As a result,in the weeks leading up to the October 14, 2016
effective date, it was widely reported that prime
money market funds were rapidly transitioning theirportfolios to government assets in order to qualify as
government funds. Setting aside any broader effecton the financial markets, this shift to lower-yielding
government assets has caused some corporate
treasurers to look for other ways to achieve safe
but meaningful yield on cash reserves. By moving
corporate cash from money market funds to othertypes of investments, however, corporate treasurers
may accidentally walk into a 1940 Act minefield.
Traditional operating companies must always
be mindful of the 1940 Act’s definition of an“investment company.” Generally speaking, if morethan 40% of a company’s total assets (excluding cash
items and government securities) are “investment
securities,” the company could be deemed to be an

inadvertent investment company and might need toregister with the SEC. For purposes of this 40% test,
cash items and government securities are neutral,
investment securities are commonly referred to as“bad assets” and all other assets are “good assets.”
Because money market funds are registeredinvestment companies, they would be treated as
investment securities for purposes of evaluating
a company’s investment company status but for ano-action letter the SEC issued in 2000 that allows
money market funds that seek to maintain a stable $1
NAV to be treated as “cash items” instead. In its FAQs
related to money market reform, the SEC clarified
that this no-action relief extends to institutional
prime money market funds that will have a floating
NAV as a result of the reforms. Accordingly, money
market fund shares are neutral in the 40% test,
instead of being bad assets.
Other forms of “safe” investments, such as ultra shortterm bond funds, could be bad assets. In addition,a private fund that relies on an exemption from the1940 Act, such as Section 3(c)(7), may commit tofollowing the investment limitations imposed on
6money market funds under Rule 2a-7 under the1940 Act. Such a fund is simply a privately offeredmoney market fund. The SEC’s 2000 no-action letter,
however, does not extend “cash item” treatment tosuch a private fund (although the SEC acknowledgedthat such funds were interchangeable with 1940
Act-registered funds in a rule relaxing some of the
pyramiding limitations under Section 12(d) in 2006),
and therefore it would be a bad asset unless the SEC
issues additional guidance.
Until now, corporate treasurers have been able topark cash reserves in money market fund shareswith a stable $1 NAV and achieve some yield (albeit
negligible over the past few years) without any
impact on the company’s 40% test. As yields on
government money market funds, which are now the
only stable $1 NAV option for operating companies,
have declined, treasurers may be considering otheroptions and should be mindful of the impact those
options could have on the company’s inadvertent
investment company status.

Adviser’s Connection to
Bond Scam Highlights
the Limitations of Section
15(c) Inquiries
A key question in the recent AXA excessive fee trial(discussed in our prior Alert) was whether the funds’board should have hired independent consultants
or obtained additional independent information to
verify information provided by the funds’ adviser
during the contract renewal process under Section
15(c) of the 1940 Act. While the judge’s decision in
the AXA case did not find that the board received
inaccurate or misleading information, and noted theboard had appropriately consulted with consultants
and other information providers, some uncertainty
remains for boards regarding what boards should
do when they think the adviser may have lied toor misled the board. A recent example (albeit anextreme one) may provide some insight.
Burnham Funds
On September 29, 2016, shareholders of what werepreviously known as the Burnham Funds (the“Funds”) approved a new advisory contract with a
new investment adviser, bringing a formal end to
the Funds’ separation from their former adviser,
Burnham Asset Management (“Burnham”). The
separation has been underway since May 11, 2016,

when Federal Bureau of Investigation (“FBI”) agents
arrested a group of individuals and charged themwith orchestrating an audacious and complex fraud
scheme. The SEC simultaneously filed civil charges
against the same individuals. The alleged fraud
involved the individuals obtaining control overmultiple registered investment advisers and brokerdealers in order to funnel over $43 million dollars
towards the purchase of sham bonds. Though theFunds were not directly the victims of the alleged
fraud, four of the seven facing charges were affiliatedwith Burnham, including one member of theadviser’s board.
Within a week of the FBI and SEC leveling theiraccusations publicly, the Funds’ board of trustees
determined not to renew Burnham’s advisory
contract, which was set to expire shortly thereafter,and established an interim advisory agreement witha new investment adviser while the Funds soughtshareholder approval of new advisory agreements.
Interestingly, it appears that the Funds’ independent
trustees suspected a potential link between theadviser and the alleged mastermind of the fraud two
years before the accusations came out, which raises
questions, particularly in light of the recent AXA
case, about when a board should verify information
provided by an adviser in connection with annual
Section 15(c) process.
The ScamAs the SEC describes events in its civil complaint, thealleged mastermind behind the sham bond scheme
was Jason Galanis, son of the infamous John Galanis
who received a 27-year prison sentence in 1988 formultiple counts of racketeering, tax fraud, securities
fraud, bank fraud and bribery. Jason himself hadearned notoriety in his own right in 2007 when heagreed to a five-year ban from serving as an officer
or director of a publicly traded company as part of asettlement with the SEC stemming from the agency’s
charges that he filed false accounting information for
a company in which he owned a significant stake.
The fraud that prompted the Funds’ board to decline
renewing Burnham’s advisory contract began
in March of 2014 with Jason Galanis allegedly
enlisting the help of his father to meet with the
Wakpamni Lake Community Corporation (“WLCC”),
a corporation affiliated with the Oglala Sioux
Nation, at a Native American economic development
conference in Las Vegas. The elder Galanis, claiming
to be a representative of Burnham Securities (abroker-dealer affiliated with Burnham), convinced
WLCC to become the issuer of limited recoursebonds that he claimed Burnham had already7

developed. In reality, at that time the Galanises were
not yet formally affiliated with Burnham.
Soon after they had a willing issuer, the FBI allegesthat the Galanises and their co-conspirators moved
to seize control over Burnham. Thankfully for theFunds’ investors, it appears it was just Burnham
Securities, the broker-dealer affiliate of Burnham,that the conspirators wanted to control to facilitate
the fraud. The SEC complaint details how the FBI
believes the Galanises enlisted Devon Archer, arespected Yale graduate and former adviser toJohn Kerry, to be the front man for the Burnhamacquisition. Archer and other co-conspirators thendirected their newly owned broker-dealer to serveas the placement agent for the sham tribal bonds, as
the elder Galanis had already convinced WLCC theywould. Concurrently to the takeover of Burnham,
the Galanises are said to have used similar methodsof disguised ownership to acquire control of twoother investment advisers and to install anotherco-conspirator as CEO. The co-conspirators thenused the funds of clients advised by the two advisers
to purchase over $43 million of the tribal bonds forwhich Burnham Securities served as placement agent
without disclosing the conflict of interest and despite
the fact that the bonds fell outside of the investment
parameters of many clients.
The Galanises had allegedly already convinced
WLCC that the proceeds from the sale of the bondwould be placed with an investment manager thatwould invest the proceeds to generate annuity
payments sufficient to pay the interest on thetribal bonds and provide additional funds to the
WLCC to be used for tribal economic development
purposes, so the WLCC was not expecting a large
payout from the issuance. The FBI alleges thatrather than reinvesting the money, the conspirators
misappropriated the funds from the first issuancefor personal uses such as purchases from
Valentino and Yves Saint Laurent, to expand their“corporate empire,” and even to pay John Galanis’
defense attorneys for charges that arose out of aseparate scheme.
But things began to fall apart for the alleged
schemers shortly thereafter. In September of 2015,
fraud charges were brought against Jason andJohn Galanis and several other co-conspirators
in connection with a separate scheme involving
the collapse of a formerly NYSE-listed financial
institution. In December 2015, the SEC filed
suit against one of the advisers controlled by the
co-conspirators, alleging that the investment adviser
had placed client funds in the illiquid tribal bonds
without disclosing the conflict of interest among theadviser’s owners. And then in May 2016, the sevenconspirators were charged in the tribal bond scheme.
Soon thereafter, Jason Galanis’ bail was revoked
after he sent threatening text messages to a former
friend he thought was cooperating with the FBI. In
July, Jason and John Galanis each pled guilty tosecurities fraud related to the collapse of the NYSElisted financial institution. In October, the shares of
yet another company collapsed after revelations that
the Galanises had seized control of it too.
The Involvement and Response of the Funds’
Board
When the Galanises and their co-conspirators moved
to seize control of Burnham Securities in 2014,
they also acquired Burnham, the Funds’ adviser,
which brought the Funds’ board into play. Undera provision of the Funds’ advisory contract that isrequired under Section 15 of the 1940 Act, a changeof control of Burnham would result in the automatic
termination of the existing advisory contract. As
with any change of control transaction, the Funds’board and Burnham had to go through a contract
approval process to vet the new owners of the adviser
and understand the impact the change of control
could have on the Funds.
In their 2014 proxy materials seeking shareholder
approval of new advisory agreements in connection
with the change of control, the Funds’ board
reported to their shareholders that “[t]hroughout
the [contract review] process, the Trustees had
numerous opportunities to ask questions of andrequest additional materials from the Adviser and[Archer]. . . . The Independent Trustees also met
separately with Devon Archer and with managementof the Adviser on three different occasions.” Theproxy statement also noted that the board had
considered the reputation of the acquiring party(Archer) and representations that the investment andother personnel at Burnham would remain in place
after the change of control.

8As described above, the SEC alleges that the
Galanises purposefully used Archer as a front man
to disguise their involvement with the acquisition of
Burnham. Interestingly, the recent FBI allegations
reveal that the Funds’ independent trustees had
their suspicions about a link between Devon Archer
and Jason Galanis, even in 2014. According to the
SEC complaint, the Funds’ independent trustees“sought ‘iron clad assurance(s)’ from Archer . . .
that Jason Galanis would ‘not be involved with any
Burnham entities’ or have an ‘interest of any kind,direct or indirect, in any of the Burnham entitiesor their successors, that he will not source deals to
the Burnham entities and that the Burnham entities
will not invest with or in, directly or indirectly, any
business or enterprise in which Mr. Galanis has any
association, affiliation or investment . . . .’” The SEC
complaint goes on to state that Archer provided therequested assurances in a letter to the independent
trustees in September of 2014. The proxy materials
did not discuss any potential link between Archer
and Galanis to shareholders, and the SEC complaint
does not provide any further detail about what might
have prompted the Funds’ independent trustees to
ask Archer for such assurances.
Less than two years later, Archer and the Galanises
had been arrested and Burnham’s involvement in the
alleged tribal bonds scheme was made public. The
Funds’ board moved quickly to replace Burnham.
They reportedly had delivered a Section 15(c) packet
to the replacement adviser within just two daysof the tribal bond arrests, and had determined
not to renew Burnham as adviser within a week.
According to the eventual proxy to approve the newinvestment adviser, “no assets of the Funds werecompromised [in the tribal bond scheme]. However,
the allegations raised serious concerns for the
Board and raised questions about whether certain
representations made by Burnham and its affiliatedpersons as a condition to the Board’s prior approvalsof the Current Advisory Agreement had been
complied with.”
Analyzing a Close Call
This case represents a worst-case example of thedangers inherent in relying on assurances frominterested parties when performing due diligenceas part of the Section 15(c) process. While we do nothave full information on what transpired between
the parties, the proxy materials and complaintstrongly suggest that something in the Funds’ board’s
diligence hinted at a connection between Archer andGalanis, given that they reportedly asked Archer
to confirm that Galanis would not be involved inanything having to do with Burnham. To the creditof the Funds’ board, it did not simply gloss overwhatever hinted at the potential connection; rather
it sought assurances from Archer that whatever linkthey had uncovered was not true. Archer provided
those assurances, but the SEC complaint alleges that
he was lying to the Funds’ board and that he wasworking in concert with Galanis the entire time.
Because we are only privy to publicly available
information, we do not know what further steps,
if any, the Funds’ board took to gain comfort that
Galanis was not involved before or after requesting a
letter from Archer. If we hypothetically suppose thatthe board wished to take further action, however,it does provide a potentially instructive thought
experiment to ask, what more could they have done?
In the AXA case, the plaintiffs pointedly questioned
whether the board received information from any
parties unaffiliated with the adviser, or ever hireda third party to verify information provided by theadviser. The decision in that case implies that aboard’s diligence does not hinge on whether it factchecks information provided by the adviser, so longas it has no reason to believe it false or misleading. In
our hypothetical here, however, it is not clear, evenwith the benefit of 20/20 hindsight, that the board
could reasonably have done any additional diligencethat would have changed the outcome. While theboard apparently had enough reason to request
clarification about the makeup of Burnham’s newownership group, it is difficult to argue that this is
the type of situation in which an external consultant
should be hired to verify the information provided
by the adviser because it appears it would havebeen next to impossible, short of hiring a private
investigator, for the board to unearth the alleged
fraud in this instance. If the board so distrusted
information and representations provided by anadviser that it thought it might need to hire a private
investigator, it is unlikely the board would havevoted to approve or renew an advisory contract in thefirst place.
While the Burnham Funds appear to have escaped
without significant financial harm, if FBI and
SEC allegations are correct, the clients of the twoother investment advisers were not so lucky. As
boards already know, they should consider utilizing
consultants, outside counsel and other resources tothe extent they deem necessary to verify information
provided by advisers if they have reason to question
such information. If a material misrepresentation
or fraud does materialize, boards can look to the
Burnham situation as an example of how to respondquickly and ensure there is no disruption in the
management of the funds overseen by the board.
9

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Legg Mason, Inc., a global asset
management firm with approximately$718 billion AUM

Financial Guard LLC, a leading online
investment adviser

Acquisition of an 82%
majority interest(terms not disclosed)

Minella Capital Management LLC,a private equity firm established in
2007

W.E. Donoghue & Co., a registered investment
adviser specializing in tactical strategies withover $1.6 billion AUM

Acquisition of a majority
interest(terms not disclosed)

Boston Advisors LLC, a boutiqueinvestment management firm withapproximately $4.5 billion AUM

Weyland Capital Management, aninvestment advisory firm with approximately$175 million AUM

Acquisition(terms not disclosed)

People’s Securities, Inc., asubsidiary of People's United Bank,
N.A., a commercial and retail bank,with approximately $40 billion in
assetsGerstein Fisher, an independent boutiqueinvestment management firm that integrates
academic research into quantitative portfolio
structuring and investment solutions

Acquisition(terms not disclosed)

Victory Capital, the global asset
management division of Wells Fargo& Company, with approximately $51
billion AUM

Analytic Investors, LLC, an investment firmwith approximately $15 billion AUM

Acquisition(terms not disclosed)

Tiedemann Wealth Management,a New York-based wealth adviser withapproximately $9 billion AUM

Presidio Capital Advisors, a San Franciscobased wealth adviser and subsidiary of The
Presidio Group with approximately $4 billion
AUM

Acquisition(terms not disclosed)

Pathstone Federal Street, a multifamily office with approximately $7
billion AUM

Convergent Wealth Advisors, a multi-family
office with approximately $3 billion AUM

Acquisition(terms not disclosed)

F.A.B. Partners, a Jersey-based
investment platform backed by a selectgroup of sophisticated, global and longterm oriented investors

CIFC LLC, a private debt manager specializing
in secured U.S. corporate loan strategies

Acquisition for
approximately $333 million
in cashAllianceBernstein L.P., a global
investment firm with approximately$492 billion AUM

RASL, which is jointly owned by Ramius LLC(the investment division of Cowen Group, Inc.)and the two principals of RASL

Acquisition(terms not disclosed)

10

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

United Capital Financial
Advisers, LLC, a financial life
management firm

Westport Resources, a registered investment
adviser specializing in wealth management
for a select group of individuals, families,
municipalities and not-for-profit organizations
across the Northeast

Acquisition(terms not disclosed)

WSFS Financial Corporation, amulti-billion dollar financial services
company

Powdermill Financial Solutions LLC, amulti-family officeAcquisition of assets(terms not disclosed)

Pavilion Financial Corporation,
an employee-owned, investment
services firm

Jeffrey Slocum & Associates, Inc., an
investment adviser with approximately $125
billion AUM

Acquisition(terms not disclosed)

GMP Capital Inc., an independent
diversified financial services firm
headquartered in Toronto, CanadaFirstEnergy Capital Corp., a provider offinancial advisory and investment services
to a broad range of corporate clients andsophisticated investors in the global energy sector

Acquisition for total
consideration of $98.6
millionAmerican Beacon Advisors, Inc.,a provider of investment advisory
services to institutional and retailmarkets

Crest Investment Partners, LLC, an
independent registered investment advisory
firm providing quantitative, fundamentallydriven investment solutions to institutional andindividual clients

Acquisition(terms not disclosed)

RMB Capital, an independent
financial services firm with more than
$5.2 billion AUM

Greenwood Investment Management, Inc.

Acquisition(terms not disclosed)

Aston Hill Financial Inc., anasset management company which
advises retail mutual funds, closed end
funds, hedge funds and segregatedinstitutional funds

Front Street Capital, an investment manager
which offers a diverse range of investments,
including growth, income and tax-minded
portfolios offered as mutual funds, hedge funds,
and flow-through limited partnerships

Merger(terms not disclosed)

Segal Rogerscasey, the SECregistered investment consulting wingof The Segal Group

The Marco Consulting Group, a consulting
firm that specializes in multiemployer benefit
plans

Acquisition of assets(terms not disclosed)11Closed-End Fund
Initial Public Offerings
Nuveen High Income November 2021 Target Term Fund(NYSE: JHB)
Amount Raised(Inception Date):$500 million(August 26, 2016)

Investment
Objective/Policies:

The Fund’s investment objectives are to provide a high level of current income and to return$9.85 per share (the original net asset value (“NAV”) per common share before deducting
offering costs of $0.02 per share) to holders of common shares on or about November 1,
2021 (the “Termination Date”). The Fund will attempt to strike a balance between the two
objectives, seeking to provide as high a level of current income as is consistent with the Fund’s
overall credit performance, the declining average maturity of its portfolio strategy and its
objective of returning the original NAV on or about the Termination Date.

Managers:

Nuveen Fund Advisors and Nuveen Asset Management

Book-runners:

Book-runners: Morgan Stanley, UBS Investment Bank, Wells Fargo Securities and Nuveen
Securities

RiverNorth/DoubleLine Strategic Opportunity Fund, Inc.
(NYSE: OPP)
Amount Raised(Inception Date):$210 million(September 30, 2016)

Investment
Objective/Policies:

The Fund’s investment objective is current income and overall total return. The Fundseeks to achieve its investment objective by allocating its managed assets among the two
principal investment strategies: the Tactical Closed-End Fund Income Strategy and theOpportunistic Income Strategy. The Tactical Closed-End Fund Income Strategy will seek to(i) generate returns through investments in closed-end funds, exchange-traded funds andbusiness development companies that invest primarily in income-producing securities, and(ii) derive value from the discount and premium spreads associated with closed-end funds.
The Opportunistic Income Strategy will seek to generate attractive risk-adjusted returns
through investments in fixed income instruments and other investments, including agency
and non-agency residential mortgage-backed and other asset-backed securities, corporate
bonds, municipal bonds, and real estate investment trusts. At least 50% of the Managed Assets
allocated to this strategy will be invested in mortgage-backed securities.

Contingent Conversion
Feature:The Fund’s Charter provides that, during calendar year 2021, the Fund will call a shareholder
meeting for the purpose of voting to determine whether the Fund should convert to an
open-end management investment company. If approved by shareholders, the Fund willseek to convert to an open-end management investment company within 12 months of suchapproval. If not approved by shareholders, the Fund will continue operating as a closed-end
management investment company.

Managers:

RiverNorth Capital Management and DoubleLine Capital

Book-runners:

Wells Fargo Securities, BofA Merrill Lynch and UBS Investment Bank

12

Simpson Thacher’s dynamic, long-standing Registered Funds Practice encompasses all
aspects of the investment management business. Our practice is multidisciplinary—it brings
together such other areas as securities, mergers and acquisitions, banking, tax and ERISA.

Rajib Chanda • +1-202-636-5543 • rajib.chanda@stblaw.com
Rajib Chanda is a Partner in the Washington, D.C. and New York offices of Simpson Thacher & Bartlett LLP.
Rajib’s practice focuses on all aspects of issues facing registered investment advisers and sponsors of registeredfunds. Rajib has particular experience working with alternative asset managers seeking to access retail investor
channels through mutual funds, business development companies, closed-end funds, exchange-traded funds
and permanent capital vehicles. He also works extensively with more traditional registered fund sponsors andworks closely with the firm’s asset management M&A group on transactions involving registered advisers andfunds. In addition, Rajib provides counsel to boards of registered funds, and has substantial experience advising
companies on issues relating to social media and cybersecurity.

Sarah E. Cogan • +1-212-455-3575 • scogan@stblaw.com
Sarah Cogan is a Partner in the New York office of Simpson Thacher & Bartlett LLP and Head of the Firm’s
Registered Funds Practice. Sarah’s practice encompasses all aspects of the registered funds industry and she
represents closed-end investment companies, open-end mutual funds, investment advisers and independent
directors of investment companies. She has a particular expertise in advising underwriters and sponsors inofferings by closed-end funds and business development companies. In addition, Sarah advises fund clients on
corporate and securities law, including investment management, regulatory, compliance and M&A matters.

The contents of this publication are for informational purposes only. Neither this publication nor the
lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of
an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection
with the use of this publication. Please contact your relationship partner if we can be of assistanceregarding these important developments. The names and office locations of all of our partners, as wellas our recent memoranda, can be obtained from our website, www.simpsonthacher.com.

13

SimpsonThacherWorldwide

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14