Registered Funds Alert
This edition of the Simpson Thacher Registered Funds Alert discusses recent developmentsin the registered funds industry, including a new SEC proposal that would restrict the use ofderivatives by registered funds, a summary of industry comments on the recent SEC proposal
requiring open-end funds and ETFs to adopt liquidity management programs and the latest SEC
guidance update relating to mutual fund arrangements with financial intermediaries. In addition,
this Alert discusses the result of a three-way proxy battle for control of a publicly traded BDC and
OCIE’s 2016 examination priorities, including a discussion of their potential effect on registeredfunds and registered advisers. Finally, we report on notable transactions that occurred in the
fourth quarter of 2015, including M&A transactions and closed-end fund initial public offerings.
February 2016

SEC Derivatives Rule Proposal is Unworkable for Many Alternative Funds
In December 2015, the SEC proposed a new rule aimed at restricting the use of derivatives by registeredfunds. The proposed rule would require registered funds to adhere to one of two limits on derivatives
use—an exposure-based limit or a risk-based limit. The SEC also proposed new asset segregation and risk
management requirements. This Alert focuses on several aspects of the proposal that are noteworthy foralternative funds and topics that we expect will be addressed in industry comment letters. (click here forfull article)

Industry Advocates for Alternative Approach to Liquidity Management; Questions
Whether Swing Pricing is Feasible
As discussed in our last Alert, the SEC recently proposed a new rule that would require open-end funds andETFs (other than money market funds) to adopt liquidity management programs. Separately, the SEC also
proposed to permit such funds to implement “swing pricing,” which would allow a fund the option to adjust
the net asset value applicable to purchasing or redeeming shareholders to pass along expenses associated with
their trading activity. With the comment period closed, this Alert summarizes notable themes presented incomments from industry participants. (click here for full article)

SEC Staff Issues Distribution in Guise Guidance; Raises Questions Regarding
Responsibilities of Advisers and Boards
The staff of the SEC’s Division of Investment Management issued a guidance update in January 2016
addressing issues related to mutual fund arrangements with financial intermediaries. The guidance update
places heavy emphasis on the duties of advisers to provide, and mutual fund boards to review, adequate
information regarding payments made to financial intermediaries. The positions stated in the guidance
update raise questions of whether advisers and boards need to modify existing practices with respect to theapproval, renewal and oversight of Rule 12b-1 plans. (click here for full article)
Simpson Thacher & Bartlett LLP

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Three-Way Proxy Battle for Control of a BDC Ends in Apparent Stalemate
Over the past six months, a contentious three-way contest for control of a publicly traded businessdevelopment company has been unfolding through proxy materials, the press and in court. This Alertsummarizes the proxy contest, describing how parties used novel takeover strategies and discussing theunusually complex set of alternatives that were presented to shareholders. (click here for full article)

OCIE Announces 2016 Examination Priorities; Builds Upon Past Initiatives
In its Examination Priorities for 2016, the SEC’s Office of Compliance, Inspections and Examinationsorganized its priorities within the same three “thematic areas” as its 2015 Priorities. This Alert summarizes
the priorities related to registered funds and registered advisers. (click here for full article)

4th Quarter 2015 Notable Transactions
List of notable transactions occurring in the fourth quarter of 2015, including M&A transactions and closedend fund initial public offerings. (click here for full article)

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SEC Derivatives Rule
Proposal is Unworkable for
Many Alternative Funds
As we have discussed in previous Alerts, underpressure from the Financial Stability OversightCouncil (“FSOC”), the Securities and Exchange
Commission (“SEC”) is in the midst of proposing
a series of rules affecting the asset management
industry designed to minimize the alleged systemicrisk posed to the financial system by mutual funds.
The SEC had indicated that it plans to propose five
new rules (data reporting, liquidity management,
derivatives management, transition planning andthird-party examinations of advisers), and therecently proposed derivatives rule is the third ofthese.
In December 2015, the SEC proposed new Rule 18f-4
under the 1940 Act (“Proposing Release”) aimed at
restricting the use of derivatives by registered funds.
Rule 18f-4 would be an exemptive rule, providing
relief from the restrictions of Section 18 of the 1940
Act. Section 18 restricts the ability of registeredfunds to issue or sell senior securities.1
The Proposing Release is remarkable in several
respects. First, the Proposing Release states that if
Rule 18f-4 is adopted, the SEC will rescind all priorguidance regarding derivatives—including Investment
Company Act Release 10666 and all no-action lettersthat have provided the foundation for the frameworkof funds’ use of derivatives for over 35 years. Second,
the Proposing Release openly acknowledges that
Rule 18f-4, as proposed, would make it impossible forregistered managed futures funds, some leveraged
exchange-traded funds (“ETFs”) and certain othertypes of registered alternative funds to continue tooperate. To our knowledge, the SEC has never before
proposed a rule that was designed to force specifictypes of funds to deregister, effectively putting themout of business or moving them into regulatory
regimes other than the 1940 Act.
Rule 18f-4 would require registered funds to adhere
to one of two limits on derivatives use—an exposurebased limit or a risk-based limit. The Proposing
Release also sets forth new asset segregation andrisk management requirements. This Alert will not
explore all aspects of the proposed rule, instead
focusing on several aspects of the proposal that are
noteworthy for alternative funds. We expect that
the SEC will receive comment letters addressingthese points.
1. “Senior security” is defined in Section 18(g) as any bond, debenture, note,or similar obligation or instrument constituting a security and evidencing
indebtedness.

Exposure-Based Limit
The exposure-based limit would prevent a fundfrom having aggregate exposure to: (i) derivatives
transactions (based on notional amount); (ii)“financial commitment transactions” 2 (based on
obligation amount); and (iii) any senior security(based on total indebtedness), totaling more than
150% of its net asset value.
The Proposing Release states that the 150% limit is“designed to balance concerns about the limitationsof an exposure measurement based on notionalamounts with the benefits of using notionalamounts.” There are at least three issues withthe proposed limit: (i) it is not clear that notionalamounts are the best metric for measuring riskor leverage in a fund portfolio; (ii) if the limit isbased on notional amounts, 150% may not be theappropriate number; and (iii) the burdens of using
notional amounts might outweigh the benefits.
Is Notional Amount the Best Metric For Measuring
Derivatives Exposure?
By basing this limit on the notional amount ofderivatives exposure, the SEC has proposed a onesize-fits-all limit that would curb derivatives use
by registered funds. The SEC’s primary argument
for using notional amount is that a limit based on
notional amounts is the easiest way to administeran exposure limit. There is no doubt that the SEC
is correct that it is a simple, administrable test,
and for many funds will be easy to implement. But
administrative ease is not sufficient to justify rulemaking; instead it is one factor to consider whenweighing various alternatives.
Notional exposure does not in and of itself measure
the risk of a fund’s portfolio. This is true for a numberof reasons. First, two different derivatives with thesame notional exposure but different underlying
assets have very different risk profiles; for example,
an equity total return swap has a different risk profile
than an interest rate swap. The SEC acknowledges
this fact in the Proposing Release. Second, different
derivative instruments may provide uncorrelated
or inversely correlated returns to one another. A
strategy using long equity derivatives and shortequity derivatives may be designed to reduce risk,
but by taking the absolute value of notional exposurefor both, a fund using a notional exposure test will betreated as having greater risk than if it only held longor short positions.

2. The Proposing Release defines “financial commitment transaction” as
any reverse repurchase agreement, short sale borrowing, or any firm or
standby commitment agreement (or similar agreement). Any unfunded
capital commitment to a private fund would also be deemed to be a financial
commitment transaction.
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In addition to not accurately measuring the risk ofa fund’s portfolio, it is also not clear that a notional
exposure limit necessarily measures the leveragein a fund’s portfolio. Take, for example, an equity
total return swap. If there is a notional amount of$100, and the fund has no margin requirement,
then the fund has leverage of $100. If the fund wereto place $100 in a margin account, it would have noleverage; it would be the same as an investment in
the underlying security. Whether the SEC views the
purpose of Section 18 as a limit on risk or as a limit
on leverage, notional exposure is at best an imperfectproxy for either such purpose. We expect significant
industry comment that will, at a minimum, suggestthat the SEC consider a more nuanced view of how to
calculate a notional exposure limit.
Why is the Proposed Limit Set at 150%?
A significant portion of the Proposing Releaseattempts to justify the SEC’s choice of 150% as theappropriate limit for derivatives exposure. There isnot, however, any clear statutory basis that supportsthat particular number, as opposed to 167.3% (orany other number). The Proposing Release statesthat the SEC believes that using “an appropriate
exposure limit” is important, and that the SEC hasdetermined that 150% is appropriate. The statutorybases cited to support the 150% limit are (i) Sections
1(b)(7) and 1(b)(8) of the 1940 Act, which state thatthe national public interest and interest of investors
are harmed when excessive borrowing and theissuance of excessive amounts of senior securities
increase unduly the speculative character of funds’
junior securities and when funds operate without
adequate assets or reserves, and (ii) Section 18 of the1940 Act, which allows a fund to borrow amounts
equaling up to 50% of its net assets. Prior to the
Proposing Release, the SEC staff had taken the viewthat derivatives should not even be considered seniorsecurities if funds had adequate assets or reserves
to meet their obligations under the derivatives
contracts. The Proposing Release turns that on its
head, and states that not only do open derivatives
positions—even when covered by adequate reserves—
constitute senior securities, they are tantamount toborrowings regardless of the effect on leverage in afund’s portfolio and should be treated as such.
Do the Potential Burdens of Using Notional Amounts
Outweigh the Benefits?
The Proposing Release states that the benefits ofusing notional amounts are that they are easy todetermine and generally serve as a measure of afund’s exposure to underlying reference assets. This
would allow smaller, “plain vanilla” fund complexes
to adhere to the proposed rule. In addition to thelegal arguments, the SEC also goes to great lengths tojustify the 150% notional limit on a cost-benefit basis
through an extensive economic analysis.
The Proposing Release states that, based on its
economic analysis, approximately 32% of all
funds utilize derivatives and therefore would be
impacted by the proposed rule. The SEC estimatesthat approximately 4% of all funds (and 27% of
all alternative funds), 479 in total, would fail the
150% notional limit, and therefore seek to rely on
the risk-based limit instead. For reasons discussed
in more detail below, we do not believe that funds
that fail the exposure-based limit are likely to findany relief in the risk-based limit. Even if one wereto assume that the economic analysis is accurate, itwould still appear to be unprecedented for the SEC tojustify a rule by saying that only 27% of an industry
segment will be adversely affected. Presumably the
SEC believes that 27% is a low number, essentially
incidental to the broader regulatory goals of the
proposal. It is not patently obvious to us that 27%
is a low number, nor does the record demonstratethat alternatives to an exposure limit based on
notional amounts that might affect fewer funds wereconsidered carefully.
Furthermore, there would appear to be two
additional burdens that have not been addressed indetail, but should be, given that the proposed test
effectively puts some funds out of business. First,
what about the financial commitment made bysponsors of those funds in creating such products?
Has the cost of shutting down those funds, including
the lost investment in starting those funds, been
fully considered? What about the expectations of the“By pushing products outside the 1940 Act . . .
it is not inconceivable that future development,
investment and talent will migrate away from
U.S. registered fund products.

”

investors in those funds, who presumably soughtparticular strategies and who also might reasonably
have expected to benefit from the protections of the1940 Act? Second, has the burden on future productdevelopment and the impact on the U.S. advisorybusiness been fully contemplated? By pushingproducts outside the 1940 Act and potentially to themore favorable regulatory regime in Europe (not aphrase one hears very often), it is not inconceivablethat future development, investment and talent will
migrate away from U.S. registered fund products.
Again, it is not clear that the record demonstrates
that the SEC considered alternatives that would nothave these effects on U.S. sponsors and investors.
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Risk-Based Limit
The proposed risk-based limit would allow a fundto have aggregate exposure of up to 300% of its net
assets, so long as the fund’s derivatives positions
reduce the fund’s overall “value-at-risk” (“VaR”).
Generally speaking, VaR is a method of estimating
potential loss. In order to rely on the risk-based
limit, the VaR of a fund’s entire portfolio (including
derivatives) must be less than the VaR of the fund’s
non-derivatives holdings. This effectively reserves
the risk-based limit for funds that use derivatives
almost exclusively for hedging purposes to reducerisk, and is therefore unlikely to be available toalternative funds. Furthermore, the limit as proposed
is designed to apply only to funds that have securities
positions that are hedged by derivatives to reducerisk. There are many funds designed to hedge risk
vis-à-vis broad market measures but that do not havesubstantial securities holdings, as they primarily use
derivatives, backed by cash and cash equivalents, toachieve that hedged exposure. Because the proposed
limit requires that derivatives reduce the VaR of
a fund compared to the VaR of the securities heldby the fund, many funds that pursue objectives of
reducing risk compared to equity markets will beprecluded from using the risk-based limit.

Asset Segregation Requirements
In order to rely on Rule 18f-4 to engage in derivatives
and financial commitment transactions, funds mustcomply with new asset segregation requirements inaddition to the portfolio limitations discussed above.
The proposed rule requires that funds segregate“qualifying coverage assets,” which involves
different requirements for derivatives and financial
commitment transactions.

As proposed, the rule only allows cash and cash
equivalents to count toward a fund’s qualifying
coverage assets (compared to existing SEC staff
guidance that permits the use of any liquid
securities). If a fund is obligated to deliver aparticular asset pursuant to a derivative or financial
commitment transaction, a fund can also countthat asset toward its qualifying coverage assets. The
proposed asset coverage requirements, by focusing
on mark-to-market measures of exposure, are inmany ways more realistic than current requirements,
although current requirements are not necessarily
clear or uniformly applied. The requirement for arisk-based buffer is also unlikely to draw significant
comment other than with respect to a board’s rolein evaluating the buffer, and it is helpful that thelevel of required buffers was not prescribed in therule and treated in a “one-size-fits-all” manner.
We expect comment, however, on the limitationof assets that can be used for segregation to cash
and cash equivalents, which could lead to dragson performance. In many regulatory regimes,
including for other U.S. securities law purposes,“haircuts” are used to give credit towards collateralrequirements for different types of instruments(e.g., cash is treated as 100 cents on the dollar but
equities are treated as 50 cents on the dollar), and we
expect that commenters will at a minimum suggest
similar adjustments to the current proposal. We
also note that the treatment of unfunded capitalcommitments under the asset segregation limits may
have significant effects on certain types of products.
For example, funds of private equity funds may
choose to avoid primary commitments to underlying
funds to avoid having to maintain the entire
capital commitment in cash, if the rule is adopted
as proposed.

With respect to derivatives transactions, funds
would need to maintain assets on a daily basis witha value equal to the mark-to-market value on thatday, plus an additional “risk-based coverage amount”
that reflects an estimate of any additional amountthe fund might owe if it were to exit the transaction
under stressed conditions. Funds could not “net”
derivatives positions unless such positions are
subject to a netting agreement, but would be allowed
to consider margin that had been posted as counting
toward its qualifying coverage amount.
With respect to financial commitment transactions,funds would need to maintain qualifying coverageassets equal to the amount of the obligations
under such transactions, whether conditional or
unconditional. The mark-to-market approach
would not be available with respect to financial
commitment transactions.

5Derivatives Risk Management Program
Requirements
If a fund has more than 50% notional exposure
to derivatives transactions, or engages in any“complex derivatives transactions,” 3 it would
be required to adopt a tailored derivatives risk
management program. A fund would be required toadopt certain policies and procedures reasonably
designed to assess and manage the fund’s derivatives
transactions, and to ensure appropriate asset
segregation. Additionally, a “derivatives risk
manager” must be designated to administer the
program. The SEC estimates that approximately 52%
of alternative funds would be required to implementa derivatives risk management program.
The requirement for a derivatives risk manager ischaracteristic of recent SEC rulemaking initiatives,
reflecting a trend towards what has been called“prudential oversight.” One could imagine several
approaches to potential rulemaking in this area.
The SEC could craft intricate rules that prescribeand proscribe certain behaviors, such as the money
market fund rule. An alternative would be topermit funds some flexibility, but to place burdens
on fund boards to serve as checks on conflictsof interest that may arise, such as the SEC’s rulewith respect to affiliated brokerage. Still anotherapproach would be prudential oversight, tasking
individuals with overseeing risk and reporting onsuch risk, including to the regulator. In proposing
Rule 18f-4, the SEC has decided to employ all three
approaches simultaneously.
Significant Industry Response Expected
The new proposed rule would have far-reachingeffects on the fund industry. If adopted as proposed,
the management of many products, especiallyalternative funds, would be affected. Some funds
would need to become commodity pools or private
funds or move offshore and certain types ofstrategies may migrate to non-1940 Act products
such as structured notes. As noted, we expect that
the SEC will receive a significant amount of comment
from the industry and other interested parties
on proposed Rule 18f-4, including from Simpson
Thacher. We will be monitoring comments and otherdevelopments regarding this rule proposal carefully,
and intend to address them further in future Alerts.

3. The Proposing Release defines a “complex derivatives transaction” asany derivatives transaction for which the amount payable by either party
upon settlement date, maturity or exercise: (i) is dependent on the value ofthe underlying reference asset at multiple points in time during the term of
the transaction; or (ii) is a non-linear function of the value of the underlying
reference asset, other than due to optionality arising from a single strikeprice.

Industry Advocates For
Alternative Approach to
Liquidity Management;
Questions Whether Swing
Pricing Is Feasible
As discussed in our last Alert, the SEC recently
proposed new Rule 22e-4, which would require
open-end funds and ETFs (other than money market
funds) to adopt liquidity management programs.
Separately, the SEC also proposed revisions to Rule
22c-1 to permit open-end funds (other than money
market funds and ETFs) to implement “swing
pricing,” which would allow a fund the option toadjust the net asset value applicable to purchasingor redeeming shareholders to pass along expenses
associated with their trading activity. The SEC
received more than 75 comment letters on the
proposed rules, including a letter from Simpson
Thacher. This Alert summarizes notable themespresented in comments from industry participants.
General Comments
Many industry commenters expressed support for
the SEC as the appropriate regulator to address
this issue (as opposed to the FSOC or anothermember of FSOC). The Investment Company
Institute (“ICI”) and a number of other commentersstressed that open-end funds have successfully andconsistently managed liquidity for over 75 years.
While commenters acknowledged that there havebeen a few exceptions to the industry’s otherwise
sterling reputation in this regard, there has been
no indication that open-end fund liquidity poses
systemic risks to the U.S. financial system, evenduring periods of significant market stress.
A major theme of comment letters was that the
proposed liquidity requirements were overly rigid,
expensive and prescriptive. The historical abilityof funds to meet liquidity needs caused the ICI andothers to question the SEC’s basis for proposing
such prescriptive requirements. Several commenters
expressing views on behalf of independent board
members echoed this sentiment, and noted thatsuch an approach fails to recognize that investors
know that liquidity considerations can impact thevalue of their investment. A letter from the chairof the independent trustees of the Fidelity Fixed
Income and Asset Allocation Funds noted that thegoal of liquidity management should be to ensure
daily liquidity—not to eliminate liquidity risk. An
editorial in the Wall Street Journal recently made asimilar point.
6As an alternative, commenters urged the SEC toconsider a more risk-oriented, principles-based
approach akin to the compliance rule (Rule 38a-1).
They argued that this approach, which would require
funds to adopt written liquidity management policies
and procedures, would allow funds to develop more
flexible programs designed to address individual
fund needs (subject to board oversight).
While commenters did not appear to oppose
universally the reporting of position-level liquidity
assessments to the SEC, they generally pushed backagainst the idea of disclosing such information to the
public. Many commenters emphasized that liquidity
determinations are inherently subjective, suggestingthat there should be a safe harbor from liability
for reasonable determinations and expressing
concern that liquidity determinations lack thedegree of confidence that usually attaches to datathat is reported (and certified) in regulatory filings.
As another argument against public disclosure,some commenters pointed out that liquidity
information could be deemed to be proprietary orcompetitively sensitive.
Liquidity Categories
One of the SEC’s main proposals would require
funds to assess whether each portfolio position (orpart of a position) would fall into one of six liquidity
categories, based primarily on the expected numberof days it would take to convert that position into
cash at a price that does not materially impact
its value. With respect to the SEC’s proposed
liquidity categories, commenters suggested avariety of alternative approaches (e.g., the ICI
suggested three categories, the Asset Management
Group of the Securities Industry and Financial
Markets Association (“SIFMA AMG”) suggested
four categories and JPMorgan Asset Management(“JPMorgan”) suggested five categories). Critiques of
the SEC’s proposed categories were often based on
the notion that the SEC’s categories and methodology
assume a level of precision and certainty in liquidity
determinations that is not realistically possible—
especially with respect to determining whether
selling a position would materially impact its
value. Echoing this sentiment, commenters such as
Wells Fargo Asset Management emphasized thatliquidity determinations are not an exact science,
and JPMorgan asked the SEC to consider listing
liquidity factors as guidance in the adopting release,as opposed to the text of the new rule, because
the proposed factors may not apply to all funds/
instruments. Several commenters suggested thatliquidity categories should be based on relativeliquidity, as opposed to absolute liquidity, to reflect
more accurately how funds generally treat different

types of assets. The ICI and Invesco also pointed toanother potentially flawed assumption underpinning
the SEC’s proposals—that portfolio managers willsell their most liquid assets first in order to meet
redemptions. They noted that portfolio managers
often take a different approach, such as selling a
representative slice of a fund’s overall portfolio inorder to maintain the fund’s existing investment
allocations. The ICI and OppenheimerFunds also
expressed the view that fund advisers are unlikely
to replace their existing methodologies with the
new classifications, meaning the SEC’s categories
would become merely “a prescriptive regulatory
requirement that exists alongside industry
best practices.”
Notably, several commenters, including the Mutual
Fund Directors Forum, voiced concern that certain
aspects of the SEC’s proposal might increase systemicrisk. For example, the proposing release expects thatfunds will look to vendors to aid in determining theliquidity of individual positions, but that practice
could create systemic risk by concentrating judgment
in a small number of vendors. Commenters such as T.
Rowe Price also raised questions about whether the
proposed regime might create a perverse illusion thatallows funds that push the envelope, by assigning amore-liquid category to portfolio positions, to appear
to be more liquid (and therefore less risky) thanfunds that choose to be more conservative in theirliquidity determinations.
Three-Day Liquid Asset Minimum
A second key aspect of the SEC’s proposal was thatfunds be required to maintain a minimum amountof “three-day liquid assets,” with such amount to beapproved by the fund’s board. This would require
funds to maintain a minimum amount of assets
in the two most-liquid categories proposed by the
SEC. If a fund fell below the minimum, it would beprohibited from investing in assets that fall withinlower-liquidity categories until the fund’s portfolio
resumes compliance with the minimum.
Commenters expressed significant opposition to
the SEC imposing such a minimum, often citing
it as a “one-size-fits-all” approach representing
regulatory overreach by the SEC.4 They expressed
concern that the minimum requirement could unduly
restrict portfolio management operations for funds,
forcing them to deviate from their stated investment
strategies. For example, the Independent Directors
Council noted that a fund that seeks to maintainweightings in certain sectors, countries, securities or
4. The regulatory authority for the SEC to adopt the three-day minimum was
not directly challenged by any commenter, although three comment letters(ICI, SIFMA AMG and Invesco) cited to our prior Alert questioning the
SEC’s authority to adopt a three-day minimum.
7

other asset types could be restricted in its ability to
pursue that strategy any time it fell below the threeday liquid asset minimum.
Several commenters also argued that the proposed
minimum could create an effect akin to cash dragon fund performance, and that the board approvalrequirement would limit the flexibility of portfolio
managers to adapt to rapidly changing market
conditions and fund flows. Alternative suggestions
included setting a liquidity range or a liquidity
target, without the prohibition on investing in lessliquid assets if a fund falls below its range/target, or
allowing the fund’s board to delegate its authority
to approve a change in the liquidity minimum to acommittee of the adviser’s employees.
Closed-End Funds and ETFs
Our comment letter focused on supporting one
aspect of the proposed liquidity management
rules—that closed-end funds should be excluded
from the requirements. As closed-end funds do
not issue redeemable securities, they do not needto meet continuous redemptions from the public.
Additionally, when Congress enacted the 1940 Act,and Section 22(e)’s requirement to pay redemptions
within seven days, the closed-end fund structure had
existed for almost 50 years and it was acknowledgedthat closed-end funds offer investors a vehicle thatis designed to make longer-term investments thanopen-end funds. The SEC acknowledged that it hashistorically recognized that the liquidity needs ofclosed-end funds are different from open-end funds,
and we offered support for that position. Comment
letters from Invesco and State Street Global Advisors
urged the SEC to carve ETFs out of the liquidity
management requirements, noting that they typicallyredeem in-kind and, in the case of index funds, may
have difficulty maintaining a minimum amount ofliquid assets while seeking to track an index.

prior to the deadline for finalizing a fund’s net asset
value. U.S. funds generally publish their net asset
value prior to receipt of flow information fromintermediaries. Commenters generally requested
that the SEC consider these operational impediments
and provide more nuanced guidance in any
adopting release.

SEC Staff Issues Distribution
in Guise Guidance; Raises
Questions Regarding
Responsibilities of Advisers
and Boards
Following a much publicized industry-wide “sweepexam” in early 2014 focused on mutual fundarrangements with financial intermediaries (asdiscussed in our prior Alert), the staff of the SEC’s
Division of Investment Management (“Staff”) issued
a guidance update in January 2016 addressing
issues uncovered by the Staff during the sweep
exam (“Guidance Update”). The Guidance Update
updates and provides additional gloss on earlier
Staff guidance in this area, promulgated primarily
through the so-called “supermarket” letters from thelate 1990s.5

Swing Pricing
Commenters expressed a variety of opinions
regarding whether swing pricing should be permitted
and what types of costs should be passed on totransacting shareholders. A common thread incomments on all sides of these issues, however, wasthat there are significant operational differences
between the United States and jurisdictions thatcurrently utilize swing pricing, and it would benearly impossible for U.S. funds to implement
swing pricing without significant systemic changes.
For example, the ICI and several commenters whocurrently manage European UCITS funds pointed
out that European funds have several hours after themarket closes to receive and process flow informationfrom intermediaries (such as omnibus accounts)

At issue in the sweep exam, a subsequent
enforcement action and the Guidance Update
are mutual fund arrangements with financial
intermediaries that allow fund shareholders to invest
indirectly through an omnibus platform (insteadof directly with the fund). “Direct” shareholders
of a fund receive certain services from the fund’stransfer agent, such as account statements and tax
documentation.

5. See, e.g., Investment Company Institute, SEC No-Action Letter (Oct. 30,
1998).
8

“Indirect” fund shareholders typically receive
such services from their intermediary (“sub-TA
services”). In addition to providing sub-TA services
to indirect fund shareholders, many intermediaries
also offer marketing/distribution support (such as“shelf space,” preferred lists or direct marketing ofparticular funds) for the funds on their platform.
While a fund is permitted to pay for sub-TA services,
Section 12 and Rule 12b-1 under the 1940 Act
prohibit a fund from “financing any activity which
is primarily intended to result in the sale of shares”
of the fund, other than through payments madepursuant to a 12b-1 plan (emphasis added). A Rule12b-1 plan is a written plan, approved by a fund’sboard of directors, stipulating that fund assets, up
to a certain amount (typically up to 25 basis points
for so-called Class A shares), may be used to pay
for marketing or distribution of fund shares. To theextent that a financial intermediary charges fees formarketing/distribution that exceed a fund’s Rule12b-1 plan, the fund’s adviser must pay the excess
out of its legitimate advisory profits. In intermediaryarrangements involving the bundling of sub-TA
services and marketing/distribution services, afund’s adviser is tasked, with board approval, withappropriately allocating payments among eachcategory of services. If no part of the bundled fees is
paid primarily to compensate the intermediary formarketing/distribution, then allocation typically is
not required.

“

The Staff positions stated in the Guidance
Update raise questions of whether advisers andboards need to revisit existing practices . . .

”The Guidance Update places heavy emphasis on theduties of advisers to provide, and mutual fund boards
to review, adequate information regarding payments
made to financial intermediaries. The Staff positions
stated in the Guidance Update raise questions ofwhether advisers and boards need to revisit existing
practices with respect to the approval, renewal andoversight of Rule 12b-1 plans.
The Guidance Update states that mutual fund boards
need to implement a process that is reasonably
designed to evaluate whether a portion of any fees
paid for sub-TA services is being used for marketing/
distribution. In discussing that process, the Staffreiterated several factors outlined in the supermarket
letters and also included certain additional factors
beyond the existing guidance. The latter category
includes, among other things:• How sub-TA fee levels may impact other payment
flows (such as 12b-1 fees and revenue sharing
payments made by the adviser to intermediaries);• Intermediaries’ use of fees received from a fundfor sub-TA services;• Specific sub-TA services provided to the fund byeach intermediary;• Whether any sub-TA services provided could havedirect or indirect distribution benefits;• Payments received by each intermediary for
sub-TA services and other payment flows made tosupport marketing/distribution for the fund;• The extent to which payments for sub-TA services
may reduce or otherwise impact (i) the expenseburden on the fund’s adviser (or its affiliates) and(ii) the level of fees paid under the fund’s Rule12b-1 plan;• Which employees of the adviser or intermediaries
negotiate the fees to be paid for sub-TA services,
whether the primary job of such employees is to
distribute the fund and the process for approvalof fees for sub-TA services; and• A comparison of fees paid for sub-TA services
among all intermediaries and, if applicable, acomparison of the sub-TA services provided.

Further, the Guidance Update discusses
how intermediaries should provide sufficient
information to fund boards to enable them toevaluate whether any fund assets are being used
for marketing/distribution outside of a Rule 12b-1
plan. These references suggest that a board (andindependent board counsel) may wish to consider
sending information request letters directly tointermediaries, or request that advisers obtain thisinformation in writing in order to support the board’s
determinations on these issues.
The Guidance Update also states that many mutual
funds do not appear to have policies and proceduresthat specifically address compliance with Section 12
and Rule 12b-1. The Staff notes that such policies
and procedures should be in place regardless ofwhether a fund has adopted a Rule 12b-1 plan, as theprohibitions in the statute and the rule would still
apply to the fund.
The Guidance Update is notable for several reasons.
First, the guidance applies (as does existing guidance
prior to the update) only to the purchasers ofservices, and not the providers (i.e., the financial
intermediaries). Without a concomitant obligation
9

on the part of financial intermediaries to provide
information that is requested, funds and their boards
may remain in the awkward position of having
to make judgments with incomplete information.
Second, the Staff seems to imply that open-end funds
have an effective ban on use of fund assets to pay for
distribution even incidentally, essentially reading thewords emphasized above (“primarily intended” fordistribution) out of the statute. One could imagine
intermediary arrangements that are clearly notprimarily intended to further distribution that may
nonetheless have some distribution component.
The Guidance Update does not seem to accountfor that possibility. Finally, the Staff criticizes acommon allocation method in the industry—paying
intermediaries out of Rule 12b-1 fees first, then subaccounting (out of fund assets) and then revenue
share—as rife with conflicts of interest. Many
industry participants use the current allocation
method, and it is well-settled that Rule 12b-1 fees
may be used for purposes that are not solely related
to distribution. The “tiered payment structure”

called into question by the Staff is in most cases,
in our experience, reasonable and defensible, since
Rule 12b-1 plans and payments out of the adviser’s
legitimate advisory profits both cover payments that
could be said to be primarily intended to result inthe sale of fund shares. Where a distribution plan
has been adopted and disclosed, to suggest that a
presumption that such plan will be used to actually
make distribution payments is invalid is to call into
question Rule 12b-1 plans altogether. While the SEC
may choose to, and has indeed chosen to in several
notable efforts in the past, cast doubt on the current
distribution framework used in the industry, we
would have thought that the appropriate method for
doing so would be to revise its existing rule, insteadof questioning well-settled practices in a guidance
update not subject to notice and comment.

Three-Way Proxy Battle forControl of a BDC Ends inApparent Stalemate
Over the past six months, a contentious three-way
contest for control of a publicly traded businessdevelopment company has been unfolding throughproxy materials, the press and in court. The situation
is noteworthy not only for the salacious accusations
and colorful language that has been bandied about by
the parties, of which there have been plenty, but also
because of the novel strategies they have employed
and the unusually complex set of alternatives thathave been presented to shareholders as a result.
The conflict began in August 2015, when the board of
TICC Capital Corp. (“BDC”), announced that BDC’s
Adviser, TICC Management LLC (“TICC Adviser”),
had entered into an agreement to sell itself to Benefit
Street Partners L.L.C. (“BSP”) for an undisclosed
price. As the proposed transaction would haveresulted in a change of control of the TICC Adviser,
which in turn would automatically terminate the
BDC’s current advisory agreement, the sale wasconditioned on the BDC’s shareholders approving
a new advisory agreement to allow BSP to manage
the BDC’s investments after the sale. Towards that
end, the BDC’s board formed a special committeethat negotiated, presented and endorsed a proposedadvisory agreement with BSP, stating that the deal
would be in the best interest of BDC shareholders.
Such changes of control are common in the industry,
and the vast majority of such transactions areapproved by shareholders with little fanfare. In thiscase, however, the proposed BSP agreement was notwell received by certain investors.
In particular, the BDC’s largest shareholder, Raging
Capital Management LLC (“Raging Capital”), publicly
disclosed a letter it penned to the BDC’s board
requesting that the board acknowledge “serious
shareholder concerns” by engaging an independent
investment bank to evaluate all of the options for
the BDC’s future, stating that such a review would
ensure the board was not “rubber stamping” a deal
that would disproportionately benefit existing TICC
management (and specifically the three principals of
TICC Adviser) at the expense of BDC shareholders.
Within a week of the BSP agreement being publicly
announced, NexPoint Advisors, L.P. (“NexPoint”)
approached the BDC’s board with an alternate
proposal to manage the BDC that expressly
maintained the BDC’s investment strategy while
offering a lower fee than the proposed agreementwith BSP. The BDC’s board rejected NexPoint’s
10

private proposal quickly. Less than a week after
their offer was rejected, NexPoint published its
alternative proposal publicly and alleged that the
BDC board’s rejection of the offer was not precededby serious negotiation or consideration, andamounted to dereliction of the Board’s duties owed
to shareholders.
On September 3, 2015, two weeks after NexPoint
publicly disclosed its rejected alternate offer
and made the related accusations, the BDC’s
board formally announced that it had rejected
NexPoint’s proposal because, in the board’s view,
the arrangement with BSP was comparatively
advantageous due to BSP’s superior resources inorigination and portfolio management. Notably, theboard also announced a revised BSP agreement thatfeatured a reduction in the annual base management
fee from 2.00% to 1.50% of gross assets.
On September 10, a third player, TPG Specialty
Lending (“TSLX”), a business development company,
offered to acquire the entire BDC in a stock-for-stocktransaction, valued at a premium based on thencurrent share prices. After its initial offer to the
BDC’s board was also rejected, TSLX made a publicstock-for-stock offer to the BDC’s shareholders andsimilarly alleged that its private overtures to the
BDC’s board were met only with cursory responses
and nominal requests for information before the
BDC’s board decided to end negotiations. TSLX’s
public bid for control proposed that TSLX would
remove the TICC Adviser if successful. The BDC’s
board brushed aside the accusations that it did
not review the proposal on its merits, arguing thatit rejected TSLX’s offer because the share pricepremium was illusory, given it would be non-cash
consideration in the form of TSLX shares whose
value could change, and that TSLX’s offer actually

represented a discount to the BDC’s then mostrecently reported net asset value.
After rejecting the NexPoint and TSLX offers, theBDC’s board attempted to move forward with the
BSP agreement by filing a proxy statement calling fora special meeting to approve the proposed advisory
agreement. In response, TSLX filed competing proxysolicitation materials in an attempt to buy the BDC
in opposition to management’s proposal. Meanwhile,
NexPoint filed a third set of proxy materials
nominating a competing slate of six director
candidates to give shareholders a direct route toapprove its alternate proposal without NexPoint
having to negotiate with the BDC’s existing board.
NexPoint’s strategy of attempting to seize controlof the BDC’s board at the special meeting to vote on
the BSP advisory contract was met with resistance.
In early October, the BDC’s board took the position
that NexPoint’s proposed slate of nominees would not
be considered a valid item of business at the special
meeting and refused to add NexPoint’s nominees tothe ballot, prompting NexPoint to initiate litigation.
NexPoint initially received a temporary restraining
order requiring the BDC’s board to allow NexPoint’s
directors to appear on the ballot, but in late October,a federal district court judge sided with the BDC’s
board and held that NexPoint’s nominees wereinvalid because any expansion or restructuring of
the board to be voted on at the special meeting wasconditioned on the advisory contract with BSP firstreceiving approval.
The district court judge was, however, persuadedthat the BDC’s board made material omissions andmisleading statements in its communications toshareholders, including finding that the BDC’s board
failed to disclose the extent to which certain key
individuals would benefit from the proposed BSP

11transaction. The judge also noted that the BDC’s
board misled investors by implying that the law firm
it had retained as special counsel and the investmentbank it had retained had advised the board when it
rejected NexPoint’s proposals, when they were in fact
only retained to advise the BDC’s board after it had
rejected the offer.
Following the district court’s first decision to allow
the shareholder vote to take place without NexPoint’s
slate of directors, the BDC’s board attempted tomake the required disclosures and revisions to its
proxy materials, but did so concurrently with anannouncement that it had reached an agreementwith the BDC’s largest shareholder, Raging Capital,
to secure Raging Capital’s support for the BSP
agreement. Under that agreement, Raging Capital
agreed to vote all of its shares in favor of approving
the BSP advisory contract in exchange for Raging
Capital receiving the right to appoint an independent
director to the BDC’s Board and BSP agreeing tofurther discount its base annual management fees by
0.25%, resulting in a base fee of 1.25%, for the firsttwo years of the new contract’s term (a decrease fromthe 2.00% fee contemplated in the original agreement
the BDC’s board reached with BSP in August). TSLX
increased its bid price by approximately 3.00% in
response to this development.
NexPoint continued to press on in the courts withsome success. NexPoint successfully argued that the
BDC board’s revised disclosures were still inadequate
and, in the end, the judge penned the disclosure
himself. The language of the final disclosure wasunsparing, and included specific mention that the
BDC’s board had failed, twice, to adequately disclosethat certain key individuals stood to gain up to $10
million in a cash distribution and that they would
own 24.9% of the new adviser. The district court
judge did not, however, reverse his decision thatthe shareholder meeting could proceed without
NexPoint’s slate of directors. NexPoint then turnedto the Second Circuit Court of Appeals for relief, but,on December 9, 2015, the appellate court refused
to delay the repeatedly rescheduled shareholder
meeting any further. Though its decision did notreach the merits as to whether NexPoint’s directors
would have been valid or invalid, the appellate court
noted that it viewed efforts to continue to block
the proxy vote from occurring as a bigger threat toshareholder democracy than the alleged misconductof the BDC’s board in keeping the NexPoint directors
off of the ballot.

to further appease critics of the BSP agreement,
the BDC conducted a share buyback program andrepurchased more than $20 million worth of sharesin the weeks leading up to the vote. The BDC’s board
began using the argument that a “no” vote would
not result in a positive change for the BDC, because
failure to approve the BSP advisory agreement would
result in the BDC implementing a new investment
strategy without the resources of BSP.

“

. . .in the end, the judge penned the disclosure
himself . . . and included specific mention thatthe BDC’s board had failed, twice, to adequately
disclose that certain key individuals stood to gain
up to $10 million . . . and that they would own
24.9% of the new adviser.

”

The BDC’s board’s actions were not enough toconvince shareholders, however, and the BSP
agreement was rejected by shareholders. Despite
soliciting votes since August, the BSP agreement
reportedly only received the support of 36% ofoutstanding shares. Both NexPoint and TSLX werequick to praise the result and did not mince theirwords. “We believe TICC’s stockholders recognized
the repeated, in our view, egregious misconduct of
the Board in attempting to implement a windfall
insider transaction through deception and specious
assessment of our superior management proposals,”said a NexPoint representative. TSLX’s management
stated that, “TICC stockholders are demanding realchange in the management and governance of TICC.
If the TICC Board of Directors is unwilling to fulfill
its fiduciary duty and move swiftly to engage with us. . . . TICC stockholders have other viable avenues forchange, including taking direct action to terminate
the existing investment advisory agreement . . . .”In sum, the months of competition between BSP,
NexPoint and TSLX thus far has resulted in the TICC
Adviser retaining control of the BDC’s activities. Both
NexPoint and TSLX have expressed their continued
interest in the BDC, while BSP’s statement expressed
only disappointment in the result of the shareholder
vote. It is not immediately clear what the future holds
for TICC and whether the situation is sui generis or
is a bellwether for increased activism in the businessdevelopment company universe.

Free from the threat of further injunctions on thatfront, the BDC’s board pushed forward with its
plan for a special shareholder meeting, setting adate of December 22, 2015 for the vote. In an effort
12

OCIE Announces 2016
Examination Priorities;
Builds Upon Past Initiatives• OCIE will continue to examine advisers that offer
retail investors a variety of fee arrangements,
with emphasis on whether account type
recommendations are in the best interestof the retail investor at the inception of thearrangement and thereafter.

In its Examination Priorities for 2016, the SEC’s
Office of Compliance, Inspections and Examinations(“OCIE”) organized its priorities within the same
three “thematic areas” as its 2015 Priorities.
As discussed in a prior Alert, these three thematic
areas are: (i) matters involving retail investors;(ii) assessment of market-wide risks; and (iii) using
data to identify and examine registrants engaged inillegal activity, such as excessive trading.

• OCIE will also continue focusing on
cybersecurity compliance and controls in its
examinations of advisers, and will expand
its examination efforts to include testing
and assessments of firms’ implementation ofprocedures and controls.

Below is a summary of OCIE’s priorities as they
relate to registered funds and registered advisers:• In connection with its multi-year examination
initiative launched in June 2015, ReTIRE,
OCIE will focus on registered advisers andbroker-dealers that offer services or products
to investors with retirement accounts.
Specifically, OCIE will look at the suitabilityof recommendations made to such investors,
conflicts of interest, supervision and compliance
controls and marketing and disclosure practices.
• With respect to ETFs, OCIE will examine forcompliance with granted exemptive relief andother regulatory requirements and will review
ETFs’ unit creation and redemption processes.
OCIE will focus on, among other things, sales
strategies, trading practices and disclosuresinvolving ETFs, with specific emphasis on nicheand leveraged/inverse ETFs.

• Noting the recent hikes in interest rates andother changes in the fixed-income markets,
OCIE will prioritize examinations of advisers tofunds that have exposure to potentially illiquid
fixed-income securities. Such examinations will
include, among other things, a review of controls
over market risk management, valuations,liquidity managements and trading activity.
• OCIE will continue its “Never-Before-Examined
Registered Investment Company Initiative,”
which is intended to conduct focused, riskbased examinations of advisers and investmentcompanies that have never been examined.
As many of OCIE’s priorities echo its 2015 (andearlier) priorities, we expect OCIE to dig deeper onthese topics during 2016 examinations. For example,
OCIE began a second round of cybersecurity
sweep examinations in late 2015. We are awarethat many of the firms that were examined in thefirst cybersecurity sweep have reported that OCIE
is asking for much more nuanced and in-depth
information from affiliates who are being examinedin the second sweep.

13

4th Quarter 2015 Notable Transactions
M&A Transactions:• London Stock Exchange Group plc announced that it approved the proposed sale of Frank Russell
Company’s asset management business, Russell Investments, to TA Associates. The gross proceeds
earned from the transaction by the London Stock Exchange Group plc will equal $1.15 billion, with
$1 billion payable in cash upon completion, and the remaining $150 million paid in four equal cash
installments starting on December 31, 2017.
• Segall Bryant & Hamill, an investment management firm with $9.7 billion in assets undermanagement, announced its acquisition of Trees Investment Counsel, LLC, which provides
investment counseling and management services for affluent investors, families and trusts and estates.
SBH’s Private Wealth Management team currently manages over $3 billion in assets.
• Edelman Financial Services LLC announced that it entered into a definitive agreement to beacquired by certain affiliates of Hellman & Friedman LLC, a private equity firm that has raisedover $35 billion of capital since its founding in 1984. Edelman provides financial planning, investment
management, 401(k) plan services to individuals, families and businesses and currently manages over $15
billion in assets.
• NorthStar Asset Management Group Inc., a global asset management firm focused on managing
real estate and other investment platforms both in the United States and internationally, announced
that it entered into a definitive agreement to acquire an approximately 85% interest in The Townsend
Group, which provides investment management and advisory services to approximately $180 billionof assets, with a focus on real estate. Subject to the terms and conditions of the purchase agreement,
NorthStar will acquire the interest in Townsend for approximately $380 million.
• WisdomTree Investments, Inc. announced it entered into an agreement to acquire GreenHaven
Commodity Services, LLC, which is the managing owner of the GreenHaven Continuous Commodity
Index Fund, and GreenHaven Coal Services, LLC, the sponsor of the GreenHaven Coal Fund. Wisdom
Tree is an exchange-traded fund and exchange-traded product sponsor and asset manager headquarteredin New York. It will acquire GH Commodity and GH Coal for $11.75 million in cash consideration.
• MB Financial Bank, N.A., a commercial bank based in Chicago with approximately $15 billion in
assets, entered into an agreement to acquire MSA Holdings, LLC and its wholly-owned subsidiaries
MainStreet Investment Advisors, LLC and Cambium Asset Management, LLC. MainStreet
provides investment advisory services for insurance companies, banks and independent trust companies.
It also functions as a sub-advisor, providing investment recommendations, research, marketing andinvestment manager support to its investment manager clients. Cambium provides wealth management
services such as separate account management, retirement planning and small account platform services.
• Affiliated Managers Group Inc., a global asset management company with aggregate assets undermanagement of approximately $619 billion agreed to acquire an equity interest in three investment
managers: Ivory Investment Management LP, Abax Investments (Pty) Ltd and Systematica
Investments LP. Ivory is a Los Angeles-based investment firm, and its aggregate assets undermanagement are approximately $3.6 billion. Abax is a Cape Town-based investment manager specializing
in South African equity, fixed income and strategic and tactical asset allocation strategies, and its assets
under management are approximately $5.4 billion. Systematica is a technology-driven investment firmwith offices in Geneva, London, New York, Singapore and Jersey, and it manages approximately $8.8
billion in assets.

14

• BlackRock, Inc. announced that it will assume $87 billion of assets under management from Bankof America’s Global Capital Management. The acquisition will increase BlackRock’s global cashmanagement business to approximately $370 billion. The transaction is expected to close in the first halfof 2016, and it is subject to the approvals of fund boards, fund shareholders and regulatory agencies.
BlackRock, Inc. also, in a separate transaction, agreed to acquire FutureAdvisor, a digital wealthmanagement firm with over $600 million in assets under management.
• Baird signed an agreement to acquire Chautauqua Capital Management, a global investment
manager based in Boulder, Colorado that manages growth-oriented international and global equity
portfolios for institutional investors. Meanwhile, Baird focuses on wealth management, capital markets,
private equity and asset management, with approximately $152 billion in client assets. Chautauqua
Capital Management will continue to operate under its name but will join Baird Investment Management,
Baird’s institutional equity asset management business.
• Conning Inc. announced that it agreed to acquire New York-based Octagon Credit Investors LLC,
a credit investment firm that manages $12.8 billion in assets through its various investment vehicles,
which include collateralized loan obligations, bank loans and high yield bonds. Octagon will operate as a
subsidiary of Conning Inc. following the closing of the transaction.
• IG Group Holdings Plc, a UK based global online trading company with offices across Europe,
Africa, Asia-Pacific, the Middle East and the United States, announced that it completed its acquisitionof InvestYourWay Ltd., an online investment manager that builds bespoke investment solutions.
The acquisition will allow IG Group Holdings Plc to expand its offerings to a wider range of ETF-based
portfolios per its partnership with Blackrock.
• Raymond James Financial, Inc. entered into a definitive agreement to acquire Deutsche Asset& Wealth Management’s U.S. Private Client Services unit, which provides financial services
to sophisticated and high-net-worth clients and institutional investors in large metropolitan areas.
The Private Client Services unit will operate under the Alex Brown, Inc. brand of Raymond James
Financial, Inc.
• AGF Management Limited acquired a majority of the equity of FFCM LLC, a Boston-based ETF
advisor and asset management firm that creates, structures, and manages ETFs and is currently
co-portfolio advisor of AGF U.S. Sector Class. AGF Limited is an independent investment management
firm with over one million investors and approximately $33 billion in total assets under management.
• American Century Investments and the Stowers Institute for Medical Research announced thata non-controlling 41 percent economic interest in American Century Investments held by CanadianImperial Bank of Commerce would be acquired by Nomura Asset Management. Nomura willpurchase Canadian Imperial Bank of Commerce’s shares for approximately $1 billion. CIBC has held anon-controlling equity interest in American Century since August 2011.
• OppenheimerFunds, Inc., a global asset manager with approximately $220 billion in assets undermanagement, finalized its acquisition of 100% of the equity interest in independent institutional
investment adviser VTL Associates, LLC. The transaction, which was announced in September,
expands OppenheimerFunds, Inc.’s client offerings into smart-beta strategies. As of September 2015, VTL
managed $1.7 billion for its investors across 8 ETFs and separate accounts.

15

Closed-End Fund Initial Public Offerings:
RiverNorth Opportunities Fund, Inc. (NYSE: RIV)
• Amount raised: $72.6 million• Investment Objective/Policies: The Fund’s investment objective is total return consisting of capital
appreciation and current income. The Fund seeks to achieve its investment objective by pursuing atactical asset allocation strategy and opportunistically investing under normal circumstances in closedend funds and exchange-traded funds. Under normal market conditions, the Fund will invest at least
65% of its Managed Assets in closed-end funds and at least 80% of its Managed Assets in Underlying
Funds. In selecting closed-end funds, the Subadviser will opportunistically utilize a combination of shortterm and longer-term trading strategies to seek to derive value from the discount and premium spreads
associated with closed-end funds. The Fund will invest in other Underlying Funds that are not closed-end
funds to gain exposure to specific asset classes when the Subadviser believes closed-end fund discount or
premium spreads are not attractive or to manage overall closed-end fund exposure in the Fund.
• Managers: ALPS Advisors, Inc. and RiverNorth Capital Management, LLC.
• Book-runners: Wells Fargo Securities, RBC Capital Markets and Stifel.
Nuveen High Income December 2018 Target Term Fund (NYSE: JHA)
• Amount raised: $261 million• Investment Objectives/Policies: The Fund’s investment objectives are to provide a high level of current
income and to return $9.86 per share (the original net asset value per common share before deducting
offering costs of $0.02 per share) to Common Shareholders on or about December 1, 2018. The Fund’s
subadviser seeks to identify securities across diverse sectors that are undervalued or mispriced. In
seeking to return the target amount of $9.86 per share to investors on or about the Termination Date, theFund seeks to utilize various portfolio and cash flow management techniques, including setting aside a
portion of its net investment income, retaining gains and limiting the longest maturity of any holding tono later than June 1, 2019. As a result, the average maturity of the Fund’s holdings is generally expected toshorten as the Fund approaches its Termination Date, which reduces interest rate risk over time.
• Managers: Nuveen Fund Advisors and Nuveen Asset Management.
• Book-runners: Morgan Stanley, Wells Fargo Securities and Nuveen Securities.

16

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

Sarah E. Cogan+1-212-455-3575
scogan@stblaw.com

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.

17SimpsonThacherWorldwide

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