Registered Funds Alert

February 2017

Table of Contents
The Impact of the Trump
2
Administration on Regulation ofRegistered Funds and Their Sponsors
by the SEC
After the unexpected results of the election, acloser look at potential policy initiatives andproposed legislation may yield some insight
into what the industry can expect withrespect to SEC rulemaking, examinations
and enforcement. Click here for more
Surprising Decision Compels
6
Mutual Fund Directors to Produce
Attorney-Client Communications in
Discovery, Despite Claims of Privilege
A recent ruling in a Section 36(b) case foundan exception to attorney-client privilege
between the board and its counsel. The
implications are unclear, but the decision has
already been cited in at least one other case.
Click here for more

Introducing the Investment
Company Risk Assessment Tool:
SEC Use of Big Data

8

When new reporting requirements become
effective, the SEC will have much more
information about investment advisers,
funds and their portfolios. The SEC hasdeveloped a tool to analyze this data,
although it has not been widely publicized.
Click here for more

Recent SEC Actions Indicate
10Increased Focus on Valuation Issues
Valuation issues clearly have become a focusof the SEC’s examination and enforcement
efforts. Recent actions by the SEC offer somelessons for boards and advisers.
Click here for more

Notable Transactions: Q4 2016

the potential impact of the election on funds and their sponsors; a newdata analytics tool that the SEC has developed to take advantage of

13

A list of notable transactions that occurredin the fourth quarter of 2016, including M&A
transactions and closed-end fund initialpublic offerings. Click here for more
Simpson Thacher & Bartlett LLPThis latest edition of Simpson Thacher’s Registered Funds Alert discusses:

industry data; a decision in a Section 36(b) case that could undermine
attorney-client privilege for boards and their counsel; and potential
lessons from recent SEC actions related to valuation issues.

The Impact of the Trump
Administration on Regulationof Registered Funds andTheir Sponsors by the SEC
Inauguration Day 2017 would have marked a change
in presidential administrations regardless of theoutcome of the election, but it is safe to say thatfew predicted that the election would result in a
victory by Donald Trump and Republican control
of both houses of Congress. Thus, even though the
Securities and Exchange Commission (“SEC”) is anindependent federal agency with representation fromboth parties, we would expect there to be significant
changes to the regulatory and policy priorities of
the SEC. Precisely what those changes will be hardto predict, especially because President Trump has
not shown himself to be tied to the Republican Party
position on all issues, and the Republican Party has
not indicated that it will accede to the President’s
policy positions in every instance. This Alert
nonetheless attempts to address what may lay ahead
for registered funds and their sponsors.
Policy Initiatives of the New Administration and
Nominee for SEC Chair
The SEC’s statutory mission is to: protect investors;
maintain fair, orderly and efficient markets; andfacilitate capital formation. It goes without sayingthat President Trump’s policy priorities fall largelyin the third category—facilitating capital formation.
Indeed, in the statement nominating a new SEC
Chair, the transition team noted that “[w]e need toundo many regulations which have stifled investment
in American businesses, and restore oversight of
the financial industry in a way that does not harm
American workers.”
It does not automatically follow, however, thatemphasis on the third category of the SEC’s mission
means that the former two will be ignored, In thesame statement, the transition team also noted that“[r]obust accountability will be a hallmark” of theSEC. Ideologically, the view that markets should belightly regulated but bad actors should be identified
and punished—to maintain faith in markets—is
one widely held by right of center economists andpolicymakers.
To accomplish these twin goals, President Trump has
nominated Jay Clayton, a partner at a large NY-based
corporate law firm, to succeed Mary Jo White aschair of the SEC. Mr. Clayton’s legal practice has
focused on securities law, including mergers andacquisitions, capital markets offerings and regulatory
and enforcement matters. His nomination hasreceived a mixed reaction from Capitol Hill, as hehas no government experience or prosecutorial
background (although both factors were likely
seen as assets, not liabilities, from the perspectiveof the President). While some media reports havefocused on the fact that Mr. Clayton is likely to havesignificant conflicts and will need to recuse himself
from matters involving any of his former Wall Street
clients or his wife’s employer (a large investmentbank), his conflicts do not appear to be any greaterthan those faced by Chair White, who previously
represented Wall Street clients herself and who
also had to recuse herself from matters involving
clients of her husband’s law firm. There has been
little debate, however, regarding the quality of Mr.
Clayton’s intellectual, legal and securities bona fides.
Other than the statements from the transitionteam that suggest some indication of his priorities,
little is known about Mr. Clayton’s personal policy
views. Mr. Clayton has not made any significant
statements regarding policy initiatives, although
he did co-author an opinion piece in 2015
acknowledging the seriousness of cybersecurity
threats and advocating for greater collaboration
between government and the private sector, both
domestically and internationally. His familiarity
with cyber-security challenges will likely be helpful
in this ever-evolving area. It is also likely to provide
comfort to the dozens of industry representatives,
including Simpson Thacher, who raised concerns
about the expansion of information to be submitted
to the SEC without standards for the appropriate
safeguarding of that information by the SEC. But
outside of that familiarity, there is not much that canbe gleaned from his public record. We also note thathis professional history has not involved significant
representation of registered funds or their sponsors.
As of the date of this Alert, Mr. Clayton’s
confirmation hearing has not been scheduled,although there have been reports that it could takeplace in early February. While it is possible thatit could take several months for Mr. Clayton to be
confirmed as SEC chair (Chair White’s confirmation
took nearly four months), there do not appear to be
any impediments to a swift confirmation.
Neither a new presidential administration nor
a new SEC Chair necessarily augurs a change of
key personnel at the SEC Division of Investment
Management, since none of the positions, including
Division Director, are political appointees. Given
that Mr. Clayton, once confirmed, will need to findreplacements for departing heads of the Divisionsof Corporate Finance, Enforcement and Economic2and Risk Analysis, and the office of Compliance
Inspections and Examinations, we would not
expect any imminent changes in key personnel at
Investment Management. Division Director David
Grim, who has been at the SEC through several SEC
chairs, expressed his belief at the ICI’s December
2016 Securities Law Developments Conference that
more things will stay the same than change undera new chair. The SEC is a large agency, with nearly
4,000 employees, and changing its direction is more
like steering a freighter than a speed boat. Mr. Grim
noted that the SEC Staff often spends a significant
amount of time getting new appointees up to speed
after an administration change, which may delay
certain rulemaking and other initiatives.
Congressional Legislation
When the Financial CHOICE Act of 2016 (“CHOICEAct”) was initially proposed by Congressman Jeb
Hensarling in September 2016, many viewed thelegislation as unlikely to be adopted. However,
the results of the election—with Republicans set
to control both houses of Congress and the WhiteHouse—drastically improved the prospects for the
CHOICE Act, or similar financial reform legislation.
In fact, proposals similar to those found in the
CHOICE Act have already appeared in separate
bills, such as a recent bill that passed the Houseof Representatives that would require additional
cost-benefit analysis for SEC rule proposals related
to anticipated costs a rule would impose on thefinancial industry.
The CHOICE Act is a sweeping piece of financial
reform legislation that would, among a myriad ofother reforms, repeal portions of the Dodd-Frank
Wall Street Reform and Consumer Protection
Act (“Dodd-Frank Act”), remove the power of
the Financial Stability Oversight Council (FSOC)“

While the CHOICE Act is a long way frombecoming law, if enacted, it would have significant
effects on the SEC and its rulemaking process …

”

to designate non-bank financial institutions as
systemically important, repeal the Volcker Rule andreform the Consumer Financial Protection Bureau.
While the CHOICE Act is a long way from becoming
law, if enacted, it would have significant effects on
the SEC and its rulemaking process, as discussed
further below. In addition, certain provisions
would provide highly desired relief to certain funds
and sponsors. For example, the CHOICE Act, as
proposed, includes several amendments to theInvestment Company Act of 1940 Act (“1940 Act”)
that would allow business development companies(“BDCs”) greater ability to invest in certain types of
unregistered vehicles and lower the asset coverage
requirements for BDCs if certain conditions are
met and to the Investment Advisers Act of 1940(“Advisers Act”) that would provide an exemption
from registration for certain private equity fundadvisers. It is possible that additional amendments
could be added during the legislative process.
SEC Rulemaking
As we have discussed in prior Alerts, in December
2014, Chair White announced a multi-part asset
management rulemaking initiative. To date, theSEC has adopted new data reporting requirements
for registered funds and advisers and liquidity risk
management rules for registered funds. Additionally,
the SEC has proposed rules for registered funds
related to electronic delivery of shareholder reports
and use of derivatives, plus a rule that would requireregistered advisers to develop and maintain writtenbusiness continuity and transition plans. Based onwhen each rule was proposed, the rules relating
to electronic delivery of shareholder reports andderivatives use would appear to be closer to adoption
than the rule that would require business continuity
and transition plans for registered advisers, and Mr.
Grim confirmed this perception in remarks during
December’s ICI conference. Additional rules thatreportedly are being formulated by the SEC, buthave not yet been proposed, include stress testing
requirements, a rule that would require investment
advisers to undergo an annual examination
by a third party as a way to supplement SEC
examinations, and a rule to promote diversity in theboard room that could apply to fund boards.
While there have been no definitive statementsfrom the incoming administration regarding theultimate fate of pending SEC rulemaking initiatives,
the White House issued a memorandum shortly
after the President was inaugurated that directed
all regulatory agencies to freeze all pending
rulemakings until the incoming administration has
an opportunity to fully review all pending rules
and to delay for at least 60 days the implementationof rules that have been finalized but not yet
implemented. SEC Commissioner Michael Piwowar,
the sole Republican commissioner who was named
interim chair as Mary Jo White left her post after theinauguration, has stated that due to the SEC’s limited
resources he does not intend to “move forward withsomething that is going to be repealed or changed
anyway.” While he has not specifically cited any asset
management rulemakings as fitting that description,
he has indicated that Dodd-Frank rulemakings3

fall into that category, which includes the stresstesting rule and arguably the transition-planningand derivatives rules. We also would not expect aboard diversity rule to be a priority of the incoming
administration. Commissioner Piwowar’s position
that certain rules should not be adopted will carryeven more weight given Chair White’s departure, as
he and Kara Stein are the only two Commissioners
remaining and any new rule will require that theyboth agree to its adoption.
With respect to the electronic delivery rule, which
is widely seen as pro-industry but has been subject
to significant resistance from the paper industry,
Commissioner Piwowar has been a strong advocate.
Given strong support from Republicans, one
would normally expect a version of the rule to be
adopted either under Commissioner Piwowar’s
interim chairmanship or shortly after there is afull complement of Commissioners. However, thepaper industry employs many American workers
in communities that voted for Donald Trump. Thatrule may be an area where President Trump’s views
depart from Republican orthodoxy.
With respect to the derivatives rule, while there
are many who would prefer all rule-making be
shelved, there are significant industry voices who
would prefer some level of certainty with respect
to derivatives rules, as opposed to being subject
to the vagaries of the disclosure review process
to work through technical issues. Commissioner
Piwowar supported the proposal of a derivatives
rule that focused on asset segregation and did nothave a limitation on notional derivatives exposure(as contained in the proposed rule issued last year).
It would not be surprising to see a re-proposal,
or potentially even an adoption, of a derivatives
rule that limited undue risk solely through anasset segregation approach. These two examples
exemplify the complexity of predicting rule-making
developments—in some cases Republicans andPresident Trump will have different priorities, insome cases different industry participants will havedifferent priorities. It is extremely unlikely thatrule-making will cease simply because the prevailing
sentiment is to lessen the regulatory burden on
industry participants.
There may also be influences from Capitol Hill
that have direct bearing on the SEC. The CHOICE
Act includes several provisions that could slow
down the SEC rulemaking process (and may
impact other financial regulators as well). Oneof these provisions would establish a minimum
comment period of 90 days for public commenton any proposed rulemakings. Currently, the SEC
typically allows between 30 and 60 days for publiccomment. The SEC would also be required to submit
any agreements on international or multi-national
securities standards to a public notice and comment
process. Additionally, all new “major” SEC rules(for example, those with a $100 million annual
anticipated impact on the U.S. economy) would
need to be presented to Congress, and both housesof Congress would need to issue a joint resolution
approving the rule before final implementation. If
Congress does not issue the required joint resolution,a rule simply would not go into effect. Congress
would also have a mechanism to disapprove of nonmajor rules. Furthermore, the CHOICE Act would
provide a specific private right of action for anyone
adversely impacted by a final rule to bring a court
challenge within one year from the publication of the
final rule in the Federal Register. The CHOICE Act
also requires the SEC to do a five-year retrospective
analysis of the impact of new rules (and a review ofcurrent rules).
SEC Interpretive Guidance and Exemptive Relief
There are several reasons to believe that the SEC
may increase its issuance of interpretive guidanceand exemptive relief as a result of the current
political climate. If the new administration takes
the approach of reducing regulatory burdens, one
way of accomplishing that goal is to utilize the SEC’s
interpretive and exemptive authority. We anticipate
that funds and their advisers will approach the SEC
Staff for novel relief with less hesitation, as the newadministration could present an opportunity to seek
clarity with respect to certain gray areas of the 1940
Act and Advisers Act (and their respective rules).
Additionally, if the CHOICE Act or similar legislation
is passed and contains a requirement for a joint
resolution of Congress approving any new rule, as
noted above, it is possible (or even probable) that the
SEC and its Staff would turn to their interpretiveand exemptive authority to enact regulatory reformand bypass political logjams that could gum up therulemaking process.
SEC Examinations and Enforcement
The SEC’s Office of Compliance Inspections andExaminations (“OCIE”) officially announced its 2017
examination priorities on January 12, 2017. Notably,
the examination priorities release explicitly states,
for the first time, that OCIE’s objectives are to be“data-driven and risk-based” and it has incorporated
data analytics into examination initiatives “toidentify industry practices and/or registrants thatappear to have elevated risk profiles.” Additional
discussion of the SEC’s increasing use of data
analytics can be found later in this Alert, but it isclear that data analysis is now driving examinations.
4The examination priorities do not include many
specific initiatives targeting registered funds andtheir advisers, other than cybersecurity policies
and controls. The lack of discussion around funds
and advisers belies what the SEC has emphasizedin other contexts. For instance, in its 2017 Budget
Justification to Congress (which is now unlikely
to be approved), the SEC requested funding tohire 127 additional examiners for OCIE, of which
102 would have focused primarily on conducting
additional examinations of investment advisers
and investment companies. Some insight regarding
OCIE’s asset management priorities was provided
by representatives from OCIE and the Division of
Enforcement (“Enforcement”) at the December ICI
Conference. The asset management priorities thatthey cited included valuation, affiliated transactions(including cross-trades and principal transactions)and the advisory contract renewal process forregistered funds under Section 15(c) of the 1940 Act.
The President has not made any detailed statements
regarding enforcement goals for the SEC under
his administration, other than generally noting
accountability for Wall Street as a focus. Some
SEC observers have commented that the transitionin administrations could result in lower financial
penalties associated with SEC enforcement actions,citing a statement published by the SEC in 2006
when Paul Atkins was a commissioner. Mr. Atkins
is a key member of the President’s transition team,and likely was very involved in the selection of Mr.
Clayton as the nominee for SEC chair. The 2006 SEC
statement raised concerns that financial penalties
against companies posed a risk of shifting the burdenof wrongdoing to its shareholders, and stated that the“likelihood a corporate penalty will unfairly injure
investors, the corporation, or third parties weighsagainst its use as a sanction.” Additional support fora possible reduction in corporate-level enforcement
penalties can be found in the fact that the CHOICE
Act includes a requirement for SEC economists toanalyze the potential impact of a financial penalty
on a company’s shareholders in connection with an
enforcement action.
While this potential shift in the SEC’s approachto enforcement penalties would be welcomed byoperating companies, it does not appear that funds
and advisers would benefit to the same degree. When
the SEC brings an enforcement action for a violation
involving an operating company, the penalties
are usually borne by the company directly, and its
shareholders indirectly. In the fund context, however,the SEC typically brings an enforcement action
against the fund’s sponsor or adviser, sparing thefund and its investors. Thus, even if the SEC begins
to reduce enforcement penalties against operatingcompanies, it is unclear whether advisers can expect
similar treatment (except to the extent the advisers
themselves are public companies).
Many industry observers have speculated that a
Republican-controlled government and SEC maylead to fewer enforcement actions. For evidence, they
point to a provision of the CHOICE Act that proposes
to raise the SEC’s burden of proof in administrative
proceedings from a “preponderance of the evidence”
standard to a “clear and convincing evidence”
standard. This change would mean that the SEC
must prove that it is substantially more likely than
not that an allegation is true, as opposed to it being
only more likely than not. In practice, it remains
to be seen whether there is a material distinction
between these standards that will impact the SEC’s
enforcement decisions, but legislation that proposes
to raise the SEC’s burden of proof certainly indicatesa desire to reduce enforcement actions, or a desire toencourage more litigation of such actions.

As discussed in more detail later in this Alert, withthe finalization of new data reporting requirements
for registered funds and advisers, OCIE andEnforcement appear poised to have access tosignificantly more information that can be analyzed
to unearth “red flags” for further inquiry. SEC Staff
members have stated that registrants can expect
to be contacted when such a red flag arises, buthave tried to emphasize that such red flags may berelated to filing errors or other mistakes and will not
trigger immediate opening of investigations withouta registrant having the opportunity to explain orcorrect any issues.
The SEC’s efforts at data analysis may be hindered,however, as the CHOICE Act proposes to abolish the
SEC’s reserve fund housed within the U.S. Treasury.
The Dodd-Frank Act established the reserve fund,which allows the SEC to deposit up to $50 million
in registration fees per year and hold a balance ofup to $100 million. The SEC has discretion in how
it uses the reserve fund, but requires reporting toCongress regarding any disbursements. The SEC
has used the reserve fund primarily to upgrade andmodernize its technology systems, including its
5

data analytics capabilities. Abolishing the reserve
fund could hinder the SEC’s ability to analyze data,and could increase the risk of cybersecurity attacks
targeting the confidential information that the SEC
collects from registrants. The elimination of thereserve fund is somewhat at odds with the CHOICE
Act’s proposed requirements for the SEC to develop
comprehensive risk control mechanisms to safeguard
confidential data held by the agency, as it eliminates
a potential source of funding for the SEC to enhance
its cybersecurity preparedness.
***
It is difficult to predict with certainty how theregulatory landscape will change for registeredfunds and their sponsors during the tenure of the
new administration. With weeks or months to go,
in all likelihood, before a new chair is confirmed,
and with two commissioners of opposing politicalparties currently in place, one should not expect any
significant developments for some time.

Surprising Decision Compels
Mutual Fund Directors
to Produce AttorneyClient Communications in
Discovery, Despite Claimsof Privilege
A recent ruling requiring that a mutual fund’s
independent trustees produce e-mails with board
counsel despite an attempt to invoke attorneyclient privilege is making waves in the mutualfund industry.
Attorney-client privilege is a long-standing andwell-established doctrine that protects certain
communications between clients and their attorneys
from disclosure. Its necessity and purpose—to
encourage full and frank communication between
attorneys and their clients—is rarely questioned,
and few people thought it would become an issue inthe context of excessive fee litigation under Section
36(b) of the 1940 Act. It came as a surprise to almost
all observers when the federal judge presiding over
Kenny v. Pacific Investment Management Company
LLC 1 issued an order doing just that in November.
The plaintiffs in Kenny are suing the adviser over thefees the adviser charged its flagship fund, and sought
access to hundreds of e-mails and other documents
1. Kenny v. Pacific Investment Management Company LLC et al, No.
2:2014cv01987 - Document 140 (W.D. Wash. 2016).

involving the fund’s independent trustees in relation
to that suit. The independent trustees compliedwith many of the discovery requests on their own,
delivering over 2,300 pages of documents, including
some communications between independent trustees
and board counsel, but also held back or redacted
an additional 200 documents, arguing that those
documents were protected from disclosure byattorney-client privilege because they contained
confidential legal advice regarding board meetings,
director retirements, board governance andcontract approvals.
Generally speaking, parties to federal litigation may
obtain discovery of any relevant information, andrelevant information is construed to mean anythingthat is reasonably calculated to lead to the discoveryof admissible evidence. It is a wide umbrella to be
sure, but privilege usually constrains its reach. If
requested discovery is resisted, the requesting party
may move for an order compelling such discovery.
In Kenny, the plaintiffs moved for such an order
to compel the discovery materials the independent
trustees withheld as attorney-client privilegedmaterial. But rather than contest whether thewithheld documents were in fact privileged, as
usually happens in these contexts, the plaintiffs
focused the court’s attention on a centuries-old, butrarely invoked, aspect of the attorney-client privilege
doctrine in the context of fiduciary litigation.
In those jurisdictions where it is recognized, theso-called “fiduciary exception” precludes a fiduciaryfrom asserting the attorney-client privilege against
beneficiaries who seek disclosure of fiduciaryattorney communications. Essentially, applicationof the fiduciary exception compels disclosure tobeneficiaries where the fiduciary sought legal
advice in exercising the fiduciary’s duties andresponsibilities to those beneficiaries on the theory
that the fiduciary’s duty to administer the trust solely
for the benefit of the beneficiaries takes priority over
the attorney-client privilege.
The fiduciary exception to the attorney-client
privilege was imported to the United States throughEnglish common law, where courts concluded that
communications between a fiduciary and his or her
attorney must be disclosed to a trust beneficiary,
essentially holding that because communications
between an attorney and a fiduciary ultimately
benefit the beneficiary, such communications cannot
be withheld from the beneficiary.
The Supreme Court of the United States reviewed
the fiduciary exception to attorney-client privilege in2011 in the context of the general trust relationshipbetween the United States and Native American
6

tribes, renewing interest in the previously obscuredoctrine.2 It did so based on an evaluation of two
criteria: (1) whether the trustee obtained legal advice
as a “mere representative” of the beneficiary, making
the beneficiary the “real client;” and (2) whether thefiduciary duty to furnish trust-related information
to the beneficiaries, rooted in the trustee’s fiduciary
duty to disclose all information related to trust
management, outweighs the interest in the attorneyclient privilege. Under that line of cases, only where
the trustee shows that he or she obtained legal
advice for his or her own personal protection or
independent personal purpose will the attorneyclient privilege survive.
The plaintiff in Kenny argued that because the fundis organized as a series of a Massachusetts businesstrust, the fiduciary nature of the independent
trustees under federal law would make the Supreme
Court precedent applicable. Specifically, the plaintiffs
argued that the communications at issue involved the
independent trustees in their role as fiduciaries andrelated to administration of the fund, and therefore
were explicitly not for the trustees’ personal benefit.
To bolster this argument, the plaintiffs highlighted
the Fund’s administration agreement which statesthat the trust pays “the fees and expenses of legal
counsel retained for [the Trust’s] benefit.”Counsel for the independent trustees disagreed.
Citing 45 years of Section 36(b) lawsuits, they argued
that the fiduciary exception has never been extended
to the mutual fund context. They went on to argue
that the independence of the trustees would beundermined if their ability to freely communicate
with independent legal counsel under the attorneyclient privilege were chilled, so much so that it
would “destabilize the mutual fund industry to thedetriment of all shareholders.”
Ultimately, the court concluded that the independent
trustees failed to meet their burden of showing
why the discovery request should be denied andthe plaintiff’s motion to compel discovery was
granted. The order rested on the assertion that theindependent trustees are supposed to be independent
from the fund’s adviser, not the shareholders; andthat the fund in question is undisputedly organized
as a trust. The presiding judge determined thatthose facts were analogous enough to Supreme Court
precedent to warrant application to the mutualfund context. As of this date, the adviser and the
independent trustees have not appealed the order.
Although the Kenny decision is less than a few
months old, it has already been cited by plaintiffs
in other ongoing 36(b) cases as hopeful precedent,

although judges in other districts are not bound by
the Kenny decision.
To the extent that plaintiffs raise the fiduciary
exception in attempting to compel discovery ofprivileged trustee-counsel communications in other
Section 36(b) cases, there are several potential ways
in which board counsel in other jurisdictions might
try to distinguish the Kenny order. Although the
majority of mutual funds are organized as seriesof a trust, according to the Investment Company
Institute’s 2016 Investment Company Fact Book,
more than 15% are organized as corporations. Had
this particular fund been organized as a corporation,
it would have undercut one of the central pillars of
the plaintiff’s argument. That the court found thatindependent trustees lose attorney-client privilege
simply because a fund happens to be organized asa series of a trust seems remarkably arbitrary. A
necessary corollary of the court’s conclusion hereis that any and all written communication between
independent trustees and outside counsel will beavailable for inspection in Section 36(b) litigation,
unless the communication is clearly a matter ofadvice regarding personal protection for the trustee.
As a litany of cases have already concluded, it isessentially a maxim that legal advice can only besafely and readily rendered and relied on when
free from the consequences or the apprehension of
disclosure. Requiring blanket disclosure as a rule
could quickly serve to ensure tough questions do not
get asked or answered, or at least not on the written
record.
Moreover, it is not clear how exactly the court
concluded that the board’s outside counsel was
actually serving the fund’s beneficiaries as its “realclient,” as opposed to the independent trustees
they were responding to and communicating with.
Undoubtedly, many communications between
independent trustees and their outside counsel
focus on navigating the multiple legal and regulatory
obligations that the independent trustees are
obligated to satisfy; duties that can create liability for
those independent trustees if improperly performed
and are materially separate and distinct from theconcerns and obligations of a mere beneficiary of
the fund. Further, it would place the board’s counsel
in the precarious position of allegedly representing
the interests of all of the beneficiaries of the fundwithout having any way to identify, disclaim or
mitigate a situation where that counsel has intereststhat conflict with those of a beneficiary.
It is uncertain whether other courts will decide tofollow the reasoning of this ruling, but the issue
will undoubtedly be put before other tribunals
soon. Boards and their counsel would be wise to

2. United States v. Jicarilla Apache Nation, 564 U.S. 162 (2011).
7

“Boards and their counsel would be wise
to consider whether certain topics should be
discussed over the phone instead of via e-mail.

”consider whether certain topics should be discussed
over the phone instead of via e-mail. Importantly,
although the court ruled the documents were subject
to discovery, the order states that the documentsthat were ordered to be produced are subject to aprotective order to prevent the public disclosure of
their contents.

Introducing the Investment
Company Risk Assessment
Tool: SEC Use of Big Data
As summarized in a prior Alert, new reporting
requirements will provide the SEC with moredetailed and aggregate information about investment
advisers, funds and their portfolios. This data will
also be required to be filed in a XML, a structured
data format that allows for sophisticated data
analysis. The SEC has openly acknowledged that
information from the new reporting requirements
will be used to support not just rulemaking, butalso examination and enforcement efforts. Whilethe new reporting requirements will not takeeffect until 2018, the SEC is already developing thetools to analyze the massive amounts of new data
it will receive. One of these tools, which has notbeen widely publicized but is worthy of note, is theInvestment Company Risk Assessment (the “Risk
Assessment Tool”).

activities. While the majority of DERA staff isfocused on the preparation of economic analysis andresearch in connection with the SEC’s rulemaking
and policy development function, DERA increasingly
facilitates the SEC’s ongoing disclosure filingreview, inspections by OCIE and investigations by
Enforcement. The Risk Assessment Tool is designed
to be a part of those efforts. As noted in the SEC’s
Agency Financial Report (Fiscal Year 2016) (“2016
Financial Report”), “[t]he Investment Company Risk
Assessment was operationalized in FY 2016, andcreates a system of risk rankings based on detecting
anomalous investment company characteristics,
allowing Enforcement and OCIE to dig deeper anddetermine if specific, violative conduct might beoccurring at a fund … .” The Risk Assessment Toolis also noted among the SEC’s accomplishments
regarding efforts to identify potential misconduct
with advance analytics tools. Limited information isavailable about the Risk Assessment Tool, including
the entire extent to which it is operational or if final
metrics or factors have been determined.

The Risk Assessment Tool was developed by the
Office of Risk Assessment (“ORS”) within the
Division of Economic and Risk Analysis (“DERA”)
and is a tool designed to help the SEC put “bigdata” to use. To put the term “big data” in context,
Scott W. Bauguess, Interim Director and Chief
Economist of DERA, has characterized it as “anydata that approaches our computational limitations
on analyzing it.” One example of big data is trading
data, as a single day’s worth of aggregate market
trading data would take much longer than one day
to analyze, although Mr. Bauguess’s characterizationmeans that the concept of big data will change overtime as computing power evolves.

In evaluating the potential impact of the Risk
Assessment Tool, it is useful to examine two similar
programs developed by ORS, the Corporate Issuer
Risk Assessment tool (“Corporate Assessment
Tool”) and the Broker-Dealer Risk Assessment tool(“Broker-Dealer Assessment Tool”). The Corporate
Assessment Tool provides a comprehensive overview
of the financial reporting environment and assists
Enforcement in detecting aberrant patterns infinancial statements that may warrant additional
inquiry. The Corporate Assessment Tool grew outof an initiative focused on estimates of earnings
quality and indications of inappropriate managerial
discretion in the use of accruals. As explained by
Mr. Bauguess in a speech, the Corporate Assessment
includes “modeling measures of earnings quality
as part of more than two hundred thirty (230)
custom metrics provided to SEC staff. These include
measures of earnings smoothing, auditor activity,
tax treatments, key financial ratios, and indicatorsof managerial actions.” The Corporate Assessment
Tool enables Enforcement to compare an issuer to
its peers in order to detect abnormal results andfinancial reporting anomalies. The Broker-Dealer
Assessment Tool was developed in conjunction withOCIE and helps identify outlier behavior that allows
OCIE to prioritize inspections for inappropriate
risk or fraudulent activity. As discussed in a speechby Mark Flannery, then-current Director and Chief
Economist of DERA:

DERA integrates sophisticated analysis of economic,
financial and legal disciplines with data analytics
and quantitative methodologies, and ORS aims tocentralize DERA’s ongoing work in risk assessment“The process works as follows. BDs are firstclassified by their type of dealing activity—for
instance whether or not they carry customer
securities on their books (i.e., a “carrying
8

broker”). This allows staff to analyze how afirm’s behavior compares to its peers. We thenlook for predictors of potentially anomalous orconcerning behavior, which include potential
risks related to, for example, its operations,financing, workforce, or firm structure … Ascore card rates how each firm’s activity in eachof these areas compares to its peer firms, andresults from these score cards are used to help
prioritize the sequence of BD inspections as well
as areas for examiners to focus on.”Similar to the Corporate Assessment Tool, theBroker-Dealer Assessment Tool identifies outlier
activities or certain changes over time at a brokerdealer relative to its peers.
As noted above, the Risk Assessment Tool createsa system of risk rankings based on detecting
anomalous investment company characteristics
and is available to both Enforcement and OCIE. A
presentation delivered by DERA staff on February
19, 2016 at the SEC Speaks conference, including
Messrs. Flannery and Bauguess, provided some ofthe possible metrics for the Risk Assessment Tool.
In producing a “Risk Ranking,” the Risk Assessment
Tool will focuses on four sets of characteristics, as
shown in the diagram below.
In looking at these characteristics, including the“Analysis of Fund Characteristics” subcategories,
DERA may look to academic studies that model
potential misconduct (e.g., dividend juicing or returngaps) in a way that can be recreated by DERA andapplied to available data.
While the DERA presentation did not elaborate
on any additional factors for investment company

characteristics or activities, or give additional details
on how they could be weighed, it is apparent thatthe information provided by the new reporting
requirements could feed into several of these factors.
For instance, under Form N-PORT investmentcompanies will need to provide fund flow data foreach of the preceding three months as part of newliquidity risk information, as well as monthly returnand security lending data, which all tie directly tofactors identified above. In addition, Form N-PORT
will require that each portfolio investment havean identifier number/code. As discussed later inthis Alert, valuation has become an examinationand enforcement priority and keying individual
investments with an identification number would
allow the SEC to compare valuations of the same
security across various funds and look for outliers.
Although the DERA presentation cited above did notelaborate on “cluster analysis/uniqueness,” DERA
has provided some insight on this topic in its white
paper titled “Mutual Funds Apart from the Crowd.”
In the white paper, DERA regarded uniquenessas employing innovative and unique investment
strategies. It then measured fund uniqueness basedon a cluster analysis of fund returns, and examined
how this measure related to other factors. As thewhite paper describes:“[A]ll strategies are based on the same set ofavailable investment vehicles such as stocks,
bonds, derivatives, etc. Therefore, strategies
overlap to some degree either due to similar
security selection or due to similar methodsof changing the selection over time, or both.
The degree of overlap in strategies differ acrossfunds. Some overlap more, and therefore, exhibit

9a more similar stream of returns. Others overlap
less and, therefore, have a more unique returnstreams, which are less substitutable.”In the white paper, DERA defined cluster analysis
as a machine learning technique that divides data
into groups (clusters) that are meaningful anduseful. For example, in the white paper a key cluster/group was fund returns, but one can envision othercategories that could be relevant to investmentcompanies, including expenses, duration, sector
allocation, etc. By using cluster analysis to measurefund uniqueness, the Risk Assessment Tool could
potentially flag fund outliers across many categories.
Moreover, as discussed above both Form N-PORTand Form N-CEN will provide the SEC with atremendous amount of new data that could be used
for future cluster analysis.
Although the DERA presentation noted above did
not provide any additional factors regarding “textanalytics on disclosure,” the presentation separately
elaborated on DERA’s text analytics initiative, whichaims to identify “themes” in unstructured narrative
disclosure. In examining a document, the Risk
Assessment Tool could apply statistical methods tolook at the distribution of root words in relation to
those in other documents. Also, the Risk Assessment
Tool could potentially be used to identify topics
in disclosure, and then look for similar themes inother documents. In addition, DERA has begun
performing sentiment analysis to assess tonality
in filings, which can potentially identify negative
tones or tones of obfuscation. As explained by Mr.
Bauguess in a speech, once topics and tones areincorporated they can be mapped:“into known measures of risk—such as
examination results or past enforcement
actions—using machine learning algorithms.
Once trained, the final model can be applied to
new documents as they are filed by registrants,
with levels of risk assigned on the basis ofhistorical findings across all filers. This process
can be applied to different types of disclosures,or to unique categories of registrants, and theresults then used to help inform us on how toprioritize where investigative and examination
staff should look.”Tools with text analytics, like the Risk Assessment
Tool, could be trained to learn disclosures associatedwith misconduct and then identify similar disclosurein other documents. Given the focus on narrative
disclosure and that compliance with Form N-PORTand Form N-CEN will begin in 2018, the text
analytics of the Risk Assessment Tool will likely
be focused on existing reporting requirements, i.e.
annual and semi-annual reports on Form N-CSR.

The SEC could look to prior enforcement actions
involving disclosure issues and use them as areference point, helping the Risk Assessment Tool indeveloping its text analytics function and flagging
similar disclosure by other registrants.
The Risk Assessment Tool could become a very
powerful tool available to the SEC, similar to the
Corporate Assessment Tool and Broker-Dealer
Assessment Tool. Increasing sophistication of the
Risk Assessment Tool could potentially, over time,decrease the need for intensive on-site examinations.
It could offset, from the perspective of effectivenessof oversight, any future budgetary cuts in personnel
at the SEC. Further, it could obviate the need forthird-party exams, as many have called for. Thoseare lofty goals, but the Risk Assessment Tool seems
designed to achieve such goals (whether it succeeds
is of course an open question). Although there
is currently very limited information regarding
the Risk Assessment Tool, we intend to follow its
development closely and will report any updates infuture Alerts.

Recent SEC Actions
Indicate Increased Focus on
Valuation Issues
Valuation, particularly the fair valuation ofunmarketable securities, is a key topic for advisers toconsider in managing registered funds. Advisers andfund boards must diligently monitor the valuationof a fund’s investments to ensure the integrity of
the fund’s net asset value (“NAV”) and confirm
that proper procedures are in place and are being
followed. This Alert discusses several recent SEC
actions that bear on fund valuation and raise issues
for consideration by advisers and fund boards.
These actions seem to confirm statements fromthe SEC Staff that valuation is an examination andenforcement priority.
Recent Enforcement Action Related to Fair Valuation
Error and Attempted Remediation
In October 2016, an adviser agreed to settle SEC
allegations, without admitting or denying the SEC’s
findings, that it improperly valued a large illiquidbond holding using the same fair valuation fora period of more than three years. According to
the SEC settlement order, the adviser, under theoversight of the funds’ boards of directors, primarily
based the fair value of the bond on a third-party
analytical tool. The SEC alleged that the adviser
failed to take into account certain indicia of value,
10including the value at which the funds’ traded thebonds, the values at which other holders marked
the bonds and other market data. The adviser also
allegedly failed to back-test, despite engaging in
back-testing for other portfolio investments.
The SEC alleged that, eventually, the adviser
discovered a flaw in the third-party analytical
tool used to value the bond that had led to an
overstatement of NAV of certain funds and related
performance figures. The adviser also received
inflated fees based on the overstated NAVs.
After discovering the error, the adviser madepayments to reimburse the affected funds
and shareholders, but the SEC found that the
reimbursement was miscalculated and inconsistent
with the funds’ NAV error correction procedures. In
particular, the SEC alleged that the adviser did not
calculate the damages to the funds and shareholders
with the specificity required by the NAV error
correction procedures because it lacked necessary
information about underlying shareholder activity
in the sub-accounts of intermediaries. Insteadof precisely measuring underlying shareholder
activity, the adviser used the net subscription andredemption amounts of the intermediary. As a result,shareholders that acted through an intermediarywere treated differently from direct shareholders.
The SEC also found that, when the adviser did
disclose the error to shareholders, the disclosure
was inadequate because the adviser did not disclosethat the remediation diverged from the NAV error
correction procedures or the potential disparity intreatment between shareholders who acted throughan intermediary and direct shareholders.
Lessons for Advisers and Boards
Use of fair valuation is a serious undertaking,particularly when a material portion of a fund’s
assets are represented by fair valued assets. Fairvaluation can be accomplished by different means,
but should always be determined pursuant toprocedures adopted by, and overseen by, a fund’sboard. When third parties (such as the third party
that provided the analytical tool in this matter) areused to help determine fair valuation, the adviser
should undertake thorough due diligence of suchthird parties and their valuation techniques.
Advisers should monitor whether market
information becomes available that would better
indicate the value of an investment than a currentlyused fair valuation methodology. Indeed, the statuteprovides that fair valuation should only be used whenmarket quotations are not available, indicating a
legislative preference for the use of market activity

where feasible. Thus, fair valuation methodologies
should monitor for market quotes and could include
back-testing (testing the accuracy of a fair valuationby comparing an investment’s carrying value at thetime it was sold to the actual price at which it wassold), as cited in the SEC’s order. If fund directors
are aware that such market information exists
and is not used, they should inquire of advisers
why such market information is not better than acurrently-employed fair valuation methodology.
Where ambiguity exists, to the extent possible,
advisers should seek other sources of valuation,
which might include how other funds value the sameor similar holdings, as cited in the SEC’s order. All
determinations should be made in accordance withthe fund’s valuation procedures.
Funds should have a NAV error correction policy andshould follow the policy closely when errors arise,
avoiding shortcuts such as the allegation in this casethat the adviser used net flows to reimburse omnibus
account shareholders instead of seeking moredetailed information from intermediaries.
Recent Enforcement Action Related to
Valuation of Odd LotsIn December 2016, an adviser agreed to settle
allegations, without admitting or denying any of the
SEC’s findings, that it did not properly disclose theeffect that investing in “odd lot” investments might
have on an exchange-traded fund’s performanceand failed to accurately value certain fund holdings.
The SEC order describes a scenario where the fundin question purchased odd lot positions (small
positions, typically under $1 million) in mortgagebacked securities that traded at discounts to roundlots (larger, institutional-sized positions) in the same
security. The SEC alleged that, despite the fact thatthese odd lot positions were purchased at a discount,the fund used a third-party valuation vendor’s
institutional round lot marks in assigning values tothe odd lot positions. This resulted in an immediate
increase in the value of each odd lot position, and thefund’s NAV, which resulted in inflated performance.
Notably, the fund disclosed significantly better
performance than one of the adviser’s mutual funds
that employed a similar overall investment strategy.
The SEC alleged that the adviser was aware of the
impact its odd lot holdings were having on thefund’s performance and found that the adviser
negligently produced misleading disclosures thatfailed to include this as a reason for the fund’s
positive performance. These disclosures took theform of monthly commentaries that discussed
factors that contributed to the fund’s performanceand shareholder reports that are required to11include such a discussion. The SEC characterizedthese issues as arising from inadequate disclosure
policies and procedures, as the personnel preparing
the disclosures may not have been adequately
educated about the impact on valuation of the odd
lot investment holdings and were not required toconsider the effect of the holdings in describing
factors that impacted the fund’s performance.
Additionally, the SEC cited the definition of value
in Section 2(a)(41)(B) of the 1940 Act and found
fault with the fund’s valuation of odd lot positions atround lot prices in circumstances in which the fundcould not reasonably expect to sell its position at theround lot value. While pricing an odd lot at a round
lot value is not always wrong, according to the SEC
such a valuation must be substantiated with evidence
that the position could be sold at a round lot price.
The SEC generally found that while procedures werein place to value securities at the price that would
be expected to be obtained in the market and forelevating pricing issues, the policies and procedures
did not specifically account for odd lot pricing anddid not provide guidance regarding when a person
should elevate a pricing issue to the appropriate
overseeing bodies.
Lessons for Advisers and Boards
As use of less traditional investment strategies
increases, it is important for advisers (especiallylarger advisers) to ensure that various departments
have sufficient understanding of how such strategies
can impact each other’s responsibilities. Thosewith compliance and disclosure responsibilities
should ensure that investment personnel are awareof the importance of fund valuation procedures
and their role in ensuring that fund securities areproperly valued. Investment personnel should
ensure that compliance and disclosure personnel
are educated about ways in which a particularinvestment holding could impact a fund’s portfolio,
including the fund’s day-to-day operations andperformance. Additionally, proper valuation
procedures should include not only appropriate
triggers for unusual pricing variances, which the SEC
order acknowledged were in place in this case, butalso clear instructions for elevating pricing issues
to the appropriate personnel within the adviser andultimately to a fund’s board.
Valuation of Large Private Companies
While no enforcement action has been announced,
the Wall Street Journal has reported that the SEC
may be focused on the valuation of mutual funds’
holdings in large private companies. These privatecompanies have multi-billion dollar valuations, butthere is no liquid market for their shares and they
release limited information on their businesses(and may selectively release different information
to different investors). As a result, the valuations at
which different mutual funds carry their investmentsin the same private company can vary greatly.
The SEC is reportedly concerned about the wide
variance in mutual funds’ fair valuation techniques
for the same security and the variance that mutual
funds’ valuations have from a private company’svaluations in subsequent private offerings. Most
funds’ valuation policies provide for multiple fairvaluation techniques that can be used to value
an illiquid security. Even if the same valuation
technique is used and funds are relying on the same
information from the private company, there are still
subjective determinations that must be made. For
example, one fair valuation technique would be tomultiply the private company’s EBITDA by a market
multiple, which requires identifying benchmark
companies and determining what multiple isappropriate based on the relationship between thosebenchmark companies’ market capitalizations and
EBITDA figures. Different parties could arrive at
significantly different determinations of what theappropriate multiple is, which can result in wide
range of valuations for the same issuer.
In addition, the SEC may take issue with mutual
funds using the market multiples of public companies
as a proxy for multiples for private companies
because public companies, which are typically moremature and are subject to more detailed reporting
obligations, are inherently different than privatecompanies. Public companies are more likely to have
weathered the ups and downs of growth cycles andmarket vagaries under the watchful eye of investors.
Therefore, the market’s valuation of these companies
factors in extensive public information about thesecompanies, including the knowledge of past, present
or future struggles. On the other hand, earlier-stage
private companies—many of which have not yet beenburdened with the expectation of profitability—haveoften not faced as many market tests. Still, publicpeers offer a useful reference point for determining
private company valuations because comparisons
to other private companies do not give insight into
liquid market valuations.
It is unclear what, if any, action the SEC will take toaddress variances in private company valuations.
While the focus appears to be on investments inlarge private companies, the SEC may broaden that
focus to fair valuation generally. If the SEC thinks amore uniform system of fair valuation is feasible, it
is possible that guidance or rulemaking about fairvaluation of private companies may be forthcoming.
12

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Janus Capital Group Inc., a global
asset manager with approximately$195 billion AUM

Henderson Group plc, a global investment
management firm with approximately £95 billion
AUM

All stock merger (Hendersonshareholders will own
approximately 57% ofJanus Henderson, with theremaining 43% owned byJanus shareholders)Affiliated Managers Group, Inc.,a global asset management company
with approximately $700 billion AUM

Winton Group Ltd., a London-based global
investment manager with approximately $30
billion AUM and Partner Fund Management, L.P,
a San Francisco-based hedge fund sponsor withapproximately $4.3 billion AUM

Acquisition of Interest(terms not disclosed)

361 Capital, a boutique asset
manager with approximately $2
billion AUM

BRC Investment Management, LLC, a global
equity asset manager with approximately $879
million AUM

Acquisition(terms not disclosed)

Investcorp, an alternative multiasset class investment manager withapproximately $11 billion AUM

Debt management business of 3i Group PLC withapproximately $12 billion AUM

Acquisition(Subject to regulatory
approval: expected to close in
the first half of 2017)

Eaton Vance Corp., an asset
manager with approximately $343.0
billion AUM

Calvert Investment Management, Inc.,(indirect subsidiary of Ameritas Holding Company)a manager of mutual funds with approximately$12.3 billion AUM

Acquisition(terms not disclosed)

Rosemont Investment Partners,
LLC, a private equity firm withapproximately $142 million AUM

Boston Common Asset Management,
LLC, a Boston-based investment manager withapproximately $2.1 billion AUM

Acquisition(minority stakeholder
position)

iM Square, a global investment anddevelopment platform

Dolan McEniry Capital Management, a
Chicago based asset management firm withapproximately $5.8 billion AUM

Acquisition (minority
stakeholder position)

Teton Advisors Inc., a New Yorkbased multi-strategy investment
adviser with approximately $1.5
billion AUM

Keeley Asset Management Corp., a Chicagobased privately owned asset management firm withapproximately $2.5 billion AUM

Acquisition(terms not disclosed)

Allianz Global Investors,
a New York-based privately
owned investment manager withapproximately $610 billion AUM

Sound Harbor Partners, a New York-based
investment firm and private credit manager withapproximately $1.14 billion AUM

Acquisition(terms not disclosed)13

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Federated Investors, Inc., an
investment manager with $364.3 AUM

Horizon Advisers, an unincorporated divisionof Whitney Bank which is a wholly owned
subsidiary of Hancock Holding Company

Acquisition andreorganization of theportfolios of three Hancock
Horizon funds

Victory Capital, multi-boutique asset
manager based in Cleveland, Ohio withapproximately $51.4 billion AUM

Cerebellum Capital, San Francisco-based
machine-learning investment manager withapproximately $104 million AUM

Acquisition (parent of Victory
Capital, Victory Capital
Holdings, Inc. acquired aminority stake in Cerebellum
Capital)

Stepstone Group LP, a global private
markets firm with approximately $28
billion AUM

Swiss Capital Alternative Investments AG,
an international alternative asset manager withapproximately $6.5 billion AUM

Acquisition(terms not disclosed)

Mercer Advisors Inc., a national
registered investment advisor basedin Santa Barbara, California withapproximately $9.2 billion AUM

Pegasus Advisors, LLC, a registeredinvestment advisor firm based in Dallas, TX withapproximately $50 million AUM

Merger(terms not disclosed)

Virtus Investment Partners, Inc.,a multi-manager asset managementcompany

RidgeWorth Investments, a global
investment management firm withapproximately $40.2 billion AUM

Acquisition (the transaction
values RidgeWorth at $472
million and Virtus will alsoacquire certain investments attheir fair value as of closing,for total consideration of
approximately $513 million)

Amundi, a Paris-based global asset
management firm with approximately$1.26 trillion AUM

Pioneer Investments, an international asset
manager with approximately €222 billion AUM

Acquisition (Amundi will
acquire Pioneer Investments
for a cash considerationof €3,545 million, andAmundi and Pioneer’s parent
UniCredit will form a longterm strategic partnership)

Man Group plc, a Boston-based
quantitative asset manager withapproximately $78.1 billion AUM

Aalto Invest Holding AG, a real asset focusedinvestment manager with approximately $1.7
billion AUM

Acquisition (Man Groupwould acquire Aalto’s entire
issued share capital)

14

Closed-End Fund
Initial Public Offerings
Invesco High Income 2023 Target Term Fund (NYSE: IHIT)
Amount Raised(Inception Date):$216 million(November 22, 2016)

Investment
Objective/Policies:

The Fund’s investment objectives are to provide a high level of current income and to return $9.835
per share (the original NAV per common share before deducting offering costs of $0.02 per share) toholders of common shares on or about December 1, 2023 (the “Termination Date”). The Fund seeks toachieve its investment objectives by primarily investing in securities collateralized by loans secured byreal properties. Under normal market conditions, the Fund expects to invest at least 80% of its managed
assets in real estate debt securities, including commercial mortgage-backed securities. The Fund will
invest no more than 30% of its managed assets in securities rated below investment grade at the time ofinvestment (below investment grade securities, commonly referred to as “junk bonds”).
The Fund intends to pay most, but likely not all, of its net income to shareholders in monthly income
dividends. The Fund also intends to distribute its net realized capital gains, if any, once per year.
However, in seeking to achieve its investment objectives, the Fund currently intends to set aside andretain in its net assets (and therefore its NAV) a portion of its net investment income, and possibly all
or a portion of its gains. This will reduce the amounts otherwise available for distribution prior to theliquidation of the Fund, and the Fund may incur taxes on such retained amount. Such retained income
or gains, net of any taxes, would constitute a portion of the liquidating distribution returned to investors
on or about the Termination Date. The Fund will continue to pay at least the percentage of its net
investment income and any gains necessary to maintain its status as a regulated investment company
for U.S. federal income tax purposes.

Managers:

Invesco Advisers, Inc.

Book-runners:

Book-runners: Morgan Stanley, BofA Merrill Lynch and Wells Fargo Securities

First Trust Senior Floating Rate 2022 Target Term Fund (NYSE: FIV)
Amount Raised(Inception Date):$325 million(December 21, 2016)

Investment
Objective/Policies:

The Fund’s investment objectives are to seek a high level of current income and to return $9.85 percommon share of beneficial interest (“Common Share”) of the Fund (the original NAV per Common
Share before deducting offering costs of $0.02 per Common Share to holders of Common Shares(“Common Shareholders”) on or about February 1, 2022 (the “Termination Date”). Under normal
market conditions, the Fund will seek to achieve its investment objectives by investing at least 80% of its
managed assets in senior, secured floating rate loans of any maturity. The Fund intends to pay most, but
likely not all, of its net income to Common Shareholders in monthly income dividends. The Fund also
intends to distribute its net realized capital gains, if any, once per year. However, in seeking to achieve
its investment objectives, the Fund may set aside and retain in its net assets (and therefore its NAV) a
portion of its net investment income and possibly all or a portion of its gains.

Managers:

First Trust Advisors L.P.

Book-runners:

Morgan Stanley, BofA Merrill Lynch, UBS Investment Bank and Wells Fargo Securities

15

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.

16

SimpsonThacherWorldwide

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