Registered Funds Alert
This edition of the Simpson Thacher Registered Funds Alert discusses recent developments in
the registered funds industry, including recent academic speculation regarding potential antitrust
implications of horizontal shareholdings by mutual funds, the SEC’s liquidity management
proposals for open-end funds and ETFs, and the possibility of the SEC utilizing a third-party
inspection program to examine the growing number of registered investment advisers. In
addition, this Alert discusses the continued focus by the SEC on cybersecurity, including
additional examinations and a recent enforcement action, as well as the publication by the NYSE
of a cybersecurity guide aimed at directors and officers of listed companies. Finally, we report on
notable transactions that occurred in the third quarter of 2015, including M&A transactions andclosed-end fund initial public offerings.
November 2015

Do Mutual Fund Managers’ Horizontal Shareholdings in Competing Firms Create
Antitrust Risks?
Two recent academic papers, a law review article and an econometric study, theorize that mutual fundcomplexes owning significant shares in corporations that compete against each other, particularly inconcentrated industries, may violate U.S. antitrust laws. These recent papers invite regulatory agencies andthe private plaintiffs’ bar to bring antitrust claims against institutional investors who engage in horizontal
shareholdings. Indeed, the Department of Justice has initiated an investigation into possible collusion in theairline industry, and, it was recently reported, sought discovery of communications between the airlines andfirms that advise mutal funds. (click here for full article)

SEC Proposes Minimum Liquidity Requirement for Open-End Funds; Raises
Questions Regarding the Relationship Between Liquidity and Valuation
The SEC proposed new rules that would require open-end funds and ETFs (other than money market funds)
to develop and maintain liquidity management programs. If adopted, the proposed rules would impose avariety of new duties on advisers and fund boards and open-end funds would be permitted to utilize “swing
pricing” to shift costs associated with purchase and redemption activity to the purchasing/redeeming
shareholders. This Alert focuses on whether the SEC has the statutory authority to adopt one of its proposals
and discusses how the proposal raises questions regarding the relationship between liquidity and valuation.
(click here for full article)

Simpson Thacher & Bartlett LLP

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Possibility of Requiring Advisers to Undergo Third-Party Inspections Gains Traction
As the number of registered investment advisers has grown over the years, the SEC has struggled to keep
up when it comes to examining advisers. Over the years, a number of solutions have been proposed to solve
the shortfall in examining the growing number of investment advisers. The idea of a third-party inspection
program has recently gained traction and the SEC is currently developing a proposal for such a program.
(click here for full article)

SEC Increasing Scrutiny of Cybersecurity Practices; NYSE Publishes Cybersecurity
Guide
The SEC recently announced a new round of cybersecurity examinations and an enforcement action related tocybersecurity. Additionally, the NYSE published a cybersecurity guide aimed at directors and officers of listedcompanies that may be of interest to registered funds. (click here for full article)

3rd Quarter 2015 Notable Transactions
List of notable transactions occurring in the third quarter of 2015, including M&A transactions and closedend fund initial public offerings. (click here for full article)

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Do Mutual Fund Managers’
Horizontal Shareholdingsin Competing Firms Create
Antitrust Risks?
Two recent academic papers, a law review article andan econometric study, hypothesize that horizontal
shareholdings—a term that refers to the practice of
mutual fund complexes owning significant sharesin corporations that compete against each other,
particularly in concentrated industries—may violate
U.S. antitrust laws. For example, under the viewpresented in these papers, antitrust issues could
arise when institutional investors hold even relatively
small (5-10%) ownership stakes in competitors in
an industry with few (generally fewer than five)
major players. These recent papers invite regulatory
agencies and the private plaintiffs’ bar to bring
antitrust claims against institutional investors who
engage in horizontal shareholdings. Indeed, theDepartment of Justice has initiated an investigation
into possible collusion in the airline industry,
and, it was recently reported, sought discovery ofcommunications between the airlines and firms thatadvise mutual funds.
In a law review article published online this pastsummer and forthcoming in the Harvard Law
Review, Harvard Law School Professor Einer
Elhauge argues that shareholdings in competingcompanies should be subject to scrutiny under
Section 7 of the Clayton Act, which prohibits theacquisition of stock or assets where “the effect ofsuch acquisition may be to substantially lessen
competition, or to tend to create a monopoly.”1
According to Professor Elhauge, horizontal
shareholdings reduce the incentives of portfolio
companies to undercut each other on price andcompete for market share because such behavior
is contrary to the interests of the companies’
shareholders (to maximize profits across all portfolio
companies). He argues that the dilution in incentives
occurs “even if their respective management nevercommunicate or coordinate with each other.”
Professor Elhauge relies on a recently-publishedworking paper by economists José Azar, Martin
Schmalz, and Isabel Tecu, which concludes that
common ownership in the airline industry has
resulted in higher ticket prices. Using econometricanalysis and a modified Herfindahl-HirschmanIndex designed to capture the effects of common
ownership, these economists claim that horizontal
1. 15 U.S.C. § 18.

shareholdings of airlines has resulted inpresumptively anticompetitive concentration levels
and price increases of 3-5% on the average U.S.
airline route than would be the case in the absenceof such horizontal shareholdings. Notably, they
acknowledge that their work “does not contributedirect evidence of the mechanism that implements
the incentives” that supposedly cause higher average
prices.

Legal Framework Under the Clayton Act
Potential liability under Section 7 of the Clayton
Act most commonly arises when an entity acquires
the whole, or any part, of the stock or assets of adirect competitor. Because Section 7 does not apply
to stock purchases that are solely for investment
purpose (a provision known as the “passive investor
defense”), acquisitions by mutual fund complexes
and other institutional investors have generally
not been subject to antitrust scrutiny. However,investors invoking the passive investor defense
bear the burden of proving a lack of control overportfolio investments. The concept of “control” is notclearly defined and requires a case-by-case analysis;
however, the defense is generally unavailable if:(i) the investor acquires or attempts to acquirea sufficient stake to give it control; (ii) seeks to
influence business decisions; (iii) appoints members
to the portfolio company’s board of directors; or (iv)
has access to non-public information.
Although rare, application of Section 7 to horizontal
shareholdings by an investment firm not otherwise
controlling at least one of two direct competitors is
not entirely unprecedented. For example, in 1974
the Department of Justice brought an enforcement
action challenging an investment company’s minority
holdings in competing brick companies.2 Together,the brick companies held a market share of about
50%. The Department of Justice argued that thepassive investor defense was unavailable because
the investment company appointed members to thebrick companies’ boards of directors and used its
voting rights to influence management and policy
decisions. Before a decision could be reached, oneof the portfolio brick companies rendered the action
moot by voluntarily exiting the market.
The recent literature takes this argument a stepfurther, and many would say goes a bit too far.
Professor Elhauge would lower the burden forregulators and private plaintiffs by arguing thathorizontal shareholdings are subject to antitrust
scrutiny even absent significant voting andgovernance rights. First, he argues that “passive”
investors engage in behind-the-scenes “active
2. See United States v. Cleveland Trust, 392 F.Supp. 699 (N.D. Ohio 1974).
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ownership,” such that the passive investor defense
should not apply. Second, and most novel ofall, Professor Elhauge claims that the mere factof horizontal shareholdings alone can restrain
competition by inducing portfolio companies
to compete less aggressively or by facilitating
coordinated action. He interprets the passive investor
defense under Section 7 to require not only that apurchase of stock be solely for investment, but alsothat such shareholdings not bring about a substantial
lessening of competition. Thus, all a regulator orplaintiff needs to establish, according to Professor
Elhauge, is evidence (in the form of an econometricstudy) that horizontal shareholdings actually raised
prices in a relevant market.

working paper is subject to numerous potential
criticisms and says nothing about the effect ofhorizontal shareholdings in industries other than theairline industry.
More likely, the U.S. regulators and the private
plaintiffs’ bar will, at least for now, favor explorationof more traditional Sherman Section 1 conspiracy
and Clayton Act Section 7 theories, including
whether competitors have used communications
with fund advisers to facilitate collusion andwhether mutual fund shareholdings were, in fact,
not acquired solely for investment purposes. Indeed,
recent media reports concerning the Department ofJustice investigation of the major airlines suggestthat the Department of Justice is focused on a more
traditional line of inquiry under the Sherman Act.
Mutual fund advisers, meanwhile, should review
and consider updating their antitrust compliancepolicies and heighten employee awareness ofthe potential antitrust risks that may arise fromboth traditional and possibly novel approaches
to horizontal shareholdings in competitors inconcentrated industries.
For questions regarding the potential antitrust
implications, please contact members of ourantitrust team.

Will the Recent Novel Theory andEconomic Study Gain Traction?
It is too early to predict whether U.S. regulators or
the plaintiffs’ bar will test Professor Elhauge’s novel
interpretation of the passive investor defense incourt or rely on econometric studies similar to that
presented in the Azar, Schmalz and Tecu working
paper. The legal theory under Section 7 of the
Clayton Act appears fundamentally misconceived
given the wording of the passive investor exception:“This section shall not apply to persons purchasing
such stock solely for investment and not using
the same by voting or otherwise to bring about,or in attempting to bring about, the substantial
lessening of competition.”3 In contrast to the twoprong passive investor test posited by Professor
Elhauge, the statutory language only requires thata shareholder not affirmatively use shares to bringabout anticompetitive effects. That is a far cry from
imposing liability on mutual fund complexes ortheir advisers simply because an alleged effect ofotherwise passive shareholdings is to increase prices
in a concentrated industry. Beyond this legal flaw,
the econometric study described in the economists’

SEC Proposes Minimum
Liquidity Requirement forOpen-End Funds; Raises
Questions Regarding theRelationship Between
Liquidity and Valuation
On September 22, 2015, the Securities and Exchange
Commission (“SEC”) proposed new rules that would
require open-end funds and exchange-traded funds(“ETFs”) (other than money market funds) to develop
and maintain liquidity management programs (the“Release”). The SEC stated that the proposed rules
are intended to create a regulatory framework thatwill reduce the risk that a fund will be unable tomeet its redemption obligations. If adopted, theproposed rules would impose a variety of newduties on advisers and fund boards. Additionally,
under proposed amendments to Rule 22c-1 underthe Investment Company Act of 1940 (“1940 Act”),
open-end funds (other than money market funds andETFs) would be permitted to utilize “swing pricing”
under certain circumstances to adjust their net
asset value per share (“NAV”), a practice common in

3. 15 U.S.C. § 18.
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non-U.S. jurisdictions that permits a fund to impose
transaction costs on purchasing or redeeming
shareholders, instead of diluting the value of shares
held by all fund shareholders.
The Release has been summarized by manyindustry commentators, and this Alert does not
attempt to summarize the proposed new rules andamendments. As we have previously discussed, theliquidity management proposal is part of a seriesof regulatory initiatives by the SEC that are part ofa broader initiative by the SEC and the Financial
Stability Oversight Council to impose risk-based
and prudential standards on the asset management
industry. This Alert focuses on the SEC’s claimed
statutory authority to adopt one of its proposals anddiscusses how the Release raises questions regarding
the relationship between liquidity and valuation in
the context of the 1940 Act.

Questions Regarding the SEC’s
Authority to Enact a Minimum Liquidity
Requirementof portfolio liquidity, other than Rule 2a-7 under the1940 Act. However, Rule 2a-7 is an exemptive rule
limited to money market funds, enacted to allow
money market funds to operate on an amortizedcost basis. Under any exemptive rule, a regulator
has significant latitude to impose the conditions andrequirements that it sees fit.
The Release goes on to state that the statutory
authority for Rule 22e-4 comes from Sections 22(c)and (e) and 38(a) of the 1940 Act. As discussed,
Section 22(e) provides no apparent basis for this rulemaking. Section 22(c) is a stronger argument—the
SEC, under that section of the statute, has the ability
to adopt rules for the “purpose of eliminating or
reducing so far as reasonably practicable any of thedilution of the value of other outstanding securities…
[as a result of a] redemption….” However, the cited
language modifies the granting of a right to adopt
rules relating to computation of net asset value
or minimum holding periods of a security, and aproper reading of the statute does not support the
proposed Rule.

Long-standing SEC guidance on liquidity standards
for open-end funds has been based on Section 22(e)of the 1940 Act, which provides that the right ofredemption or the payment of redemption proceeds
may not be suspended for more than seven days,
except in unusual circumstances. The SEC has very
limited rulemaking authority under this section of
the statute; it may only make rules to determine
when trading on the New York Stock Exchange
should be deemed to be restricted or an emergency
exists (in which cases redemptions or payments
may be suspended), or may issue orders to suspend
redemptions or payments in other circumstances.
Proposed Rule 22e-4 would require open-end
funds and ETFs (other than money market funds)
to establish a minimum level of “three-day liquid
assets” in their portfolios. “Three-day liquid assets”
are defined in proposed Rule 22e-4(a)(8) as cash andany position that the fund believes is convertible into
cash within three business days at a price that does
not materially affect the value of the position. So how
does the SEC go from a statute designed to provide
for redemptions in seven days with limited rulemaking authority to a prescriptive three-day liquidity
determination requirement?
While SEC guidelines have espoused the position
that open-end funds can hold no more than 15%of their assets in illiquid securities, 4 the Releaseacknowledges that there are “no requirements under
the federal securities laws or Commission rules” that
require open-end funds to maintain a minimum level

Finally, the SEC suggests that Section 38(a) grants
it the power for this Rule, which states in relevant
part, “[t]he [SEC] shall have authority from time totime to make, issue, amend, and rescind such rules
and regulations and such orders as are necessary or
appropriate to the exercise of the powers conferred
upon the [SEC] elsewhere” in the 1940 Act. If 38(a)is properly read to allow the SEC to justify any
prudential regulation, even when the statutory
sections governing the subject matter at issue
prescribe precisely the range and nature of permitted
rule-making, there presumably is no practical limiton the SEC’s rule-making authority.
Even if one were to concede the SEC’s rule-making
authority in this area, a second step is necessary tojustify a three-day, as opposed to seven-day, liquidity
requirement. The proposed rule does not explicitly
impose any minimum level of liquidity, making it
theoretically possible for a fund to determine that

4. The SEC would codify the 15% limit as part of the proposed rules.
5

it does not need to maintain any minimum threeday liquid assets. However, the proposed rule does
impose certain factors that funds are required toconsider in this assessment and the Release statesthat “it would be extremely difficult to conclude,
based on the factors it would be required to consider,that a zero three-day liquid asset minimum would
be appropriate.”
The Release states that the SEC considered a sevenday liquidity requirement, but that “would not as wellmatch regulatory requirements and disclosures that
require most funds to meet redemption requests inshorter periods and market practices and investor
expectations that effectively require all funds tomeet redemption requests in shorter time periods.”
In particular, the regulatory requirement that theRelease cites to support this proposition is Rule15c6-1 under the Securities Exchange Act of 1934,
which requires open-end fund redemptions that areprocessed through broker-dealers be met within
three business days.
Nonetheless, it is unclear whether any commenters
or industry groups intend to challenge the SEC’s
authority to enact proposed Rule 22e-4 and its threeday liquid asset requirement. Generally speaking,the asset management industry appears to take thebroad-based view that the SEC is the appropriate
regulator for the asset management industry, due
to its deep understanding of the industry through75 years of close examination and regulation.
Frustrating the SEC’s ability to maintain that role
may not, many believe, be ultimately to the industry’s
benefit. Secondly, as a practical matter manyindustry participants already engage in close analysis
of liquidity of portfolios in various circumstances.
Many industry participants do in fact commit to athree-day (or fewer) period for payment of proceeds.
As such, while we expect significant comment
regarding the prescriptive nature of the liquidity“buckets” for portfolio securities, it may well be thatno one raises a significant challenge to the statutory
basis for the proposed Rule 22e-4 itself.

Redefining the Relationship Between
Liquidity and Valuation
Another aspect that merits attention is how theconcepts of liquidity and valuation will relate to
one another in light of the proposed guidance andrule-making. Valuation is defined in the 1940 Act,and relies entirely on market quotations whenthose quotations are “readily available.” Whenmarket quotations are not readily available, boards(or, pursuant to guidance, their designees) must
determine fair value in good faith. While there is noone standard for fair value, it is usually considered tobe, based on prior SEC and accounting guidance, “theamount which the [fund] might reasonably expect
to receive for [a security] upon [its] current sale”5
and/or “the price that would be received [for the
security] … in an orderly transaction between market
participants at the measurement date.”6 Neither
market quotations nor these fair valuation standards
permit or require that one consider whether an entire
position in a security held by a fund can be currently
sold. If a fund holds a large stake in a company, thevalue, particularly where there is a market quotation,is unaffected by that fact.
As noted above, the Release proposes that a liquidity
category be assigned to a position based on thenumber of days it would take to convert the position
into cash at a price that does not materially affect its
value. The Release sets forth six liquidity categories:• Convertible to cash within 1 business day.
• Convertible to cash within 2-3 business days.
• Convertible to cash within 4-7 calendar days.7• Convertible to cash within 8-15 calendar days.
• Convertible to cash within 16-30 calendar days.
• Convertible to cash in more than 30
calendar days.
In assigning a liquidity category, the Release statesthat a fund must assess the liquidity of its entire
position, or each portion of that position. This
standard implies that some parts of a position can,or even should, be deemed to have differing levelsof liquidity. If a fund holds a large position (or thefund’s adviser holds large positions across many
funds, presumably), then it might be that some
portion could be reduced to cash in three days
without affecting the value, for example, but therest would need another ten days. Thus, if one views
an orderly sale as what would happen if a sale of an
entire position were attempted today, then it might
be that some portion should be carried at a lower
value today. What is a fund supposed to do with that
information? For securities with market quotations,
there is no leeway in the statute to change thevaluation of a security based on this information. But
if a security is being fair valued, does this liquidity
determination require the fund to consider using the
5. See Statement Regarding “Restricted Securities,” Inv. Co. Act Rel. No.
IC-5847 (1969).
6. See Financial Standards Accounting Board, Accounting Standards
Codification: Fair Value Measurements and Disclosures (Topic 820) (Jan.
2010).
7. Note that there may be overlap in the 2-3 business days and 4-7 calendar
days categories.
6

same calculation for valuation of different portions of
the same security? If not, why not?
The interplay of liquidity and valuation, in
unprecedented ways, shows up in other parts of theRelease as well. For example, the Release includes
new interpretive guidance regarding the use ofcross-trades. Section 17 of the 1940 Act generally
prohibits transactions between affiliated funds.
Rule 17a-7 under the 1940 Act allows cross trading
between affiliated funds and accounts if certain
conditions are met. In order to prevent a cross-tradefrom being consummated at a price that is unfair
to a registered fund, one of the conditions of Rule17a-7 is that market quotations be readily available
to price exchange-traded securities, and that overthe-counter securities be priced at the average of thethen-highest bid and lowest offer. In the Release,
the SEC states that this condition may cause certain
less liquid securities to be ineligible for crosstrading (presumably, focusing on over-the-countersecurities). While the SEC has broad powers tointerpret its own rules, the text of Rule 17a-7 and theguidance thereunder has previously been predicatedon appropriate valuation mechanisms, not sufficientliquidity. To suggest that liquidity and valuation arecompletely separate concepts would be absurd, ofcourse, but valuation plays a central role in the 1940
Act and any changes in the SEC’s understandingof the valuation responsibilities of funds should be
explicit. In the context of the Rule 17a-7 guidance
discussed here, the SEC has expressly invitedcomment.

Over the years, a number of solutions have been
proposed to solve this perceived examining
shortfall, including: (i) increasing SEC resources;(ii) reallocating current SEC resources; (iii)
delegating examination authority to a self-regulatoryorganization (“SRO”), such as the Financial Industry
Regulatory Authority or a newly created body (eitherof which would presumably be funded by dues frominvestment advisers); or (iv) requiring advisers to beaudited by a third-party each year.
An act of Congress would be required to increase SEC
resources as well as to turn over regulatory oversight
to a SRO. And, while Chair White has consistently
requested significant budget increases over theyears, appropriations have fallen short, and it isdifficult to imagine the bipartisan effort that would
be required for either such option to materializein the current political environment. However,no such Congressional act would be required for
the SEC to implement a third-party inspection
program. Given this, it is not surprising that thethird-party inspection/audit program recently
has gained significant traction. Chair White has
directed SEC staff to develop a proposal that would
require investment advisers to undergo third-party
compliance inspections, which would supplement,
not replace, SEC examinations and then make suchinspection results available to the SEC.

Comments on the proposed rules are due January
13, 2016.

Possibility of Requiring
Advisers to Undergo
Third-Party Inspections
Gains Traction
As the number of registered investment advisers
has grown over the years, the SEC has struggled tokeep up when it comes to examining advisers. SEC
Chair Mary Jo White has consistently acknowledgedthat the SEC currently does not have sufficientexamination resources, with a current ratio of
approximately 450 examination staff to 11,500
registered investment advisers and 9,000 investmentcompanies. Currently, the SEC only examines about
10% (or about 30% of total assets under management)of advisers in a given year, and on average an adviser
can expect to be examined once every 11 years.

Proponents of the third-party inspection program,
such as former SEC Commissioner Dan Gallagher,
have pointed to certain unique benefits of thisapproach, such as the ability to “leverage theresources and expertise of the private sector.”
Advisers would have the flexibility to “shop around”
for an examiner and select the firm that provides
the best fit for it. From an investor-protection
perspective, a third-party inspection program would,
proponents argue, give the SEC the ability to oversee
effectively a much larger percentage of the growing
number of investment advisers, which theoretically
could increase the deterrent effect of inspections aswell as detect a higher percent of wrong-doing within
the industry.
7However, some interested parties argue against
imposing a third-party inspection requirementon advisers. Some have concerns and questions
regarding the quality, scope, cost, oversight andconfidentiality of such an inspection program.
For example, what standards would apply? Unlike
for financial statement audits, there are no clear
standards and principles that deal with grey areas. If
the inspections only focus on black-and-white issues,
it raises the question of whether there is really aproblem that needs to be addressed (i.e., is clear-cut
non-compliance a significant enough concern that
this huge imposition of costs, ultimately borne atleast in part by investors, is justified?). Separately,
would inspection results be subject to FOIA requests
and civil discovery?
Others have raised questions regarding thequalifications of potential third-party examiners,
noting that Chair White has acknowledged thatcurrent SEC examiners are the most qualified
experts in this field. Finally, given that the proposed
third-party inspection program would only
supplement SEC inspections, some also contend thatthe proposed system would only add another burden
on advisers, as even after an adviser made available
the results of its third-party inspection, it would
not exclude the SEC from also performing its own
inspection of the adviser. As in the current debate
over the fiduciary rule, initiatives that may serve
to make investment advice more costly for retailinvestors need to be considered carefully to avoid
unintended consequences.

SEC Increasing Scrutinyof Cybersecurity
Practices; NYSE Publishes
Cybersecurity Guide
The SEC continues to focus on cybersecurity, as
demonstrated by recent announcements of moreexaminations and an enforcement action related tocybersecurity. Additionally, the NYSE published acybersecurity guide aimed at directors and officersof listed companies that may be of interest to
registered funds.

OCIE Announces a Second Round of
Cybersecurity Examinations
On September 15, 2015, the SEC’s Office ofCompliance Inspections and Examinations (“OCIE”)
issued a new Risk Alert announcing a second roundof cybersecurity examinations in light of recent
breaches and threats against financial services firms.

OCIE’s first round of cybersecurity examinations
started in 2014, concluding with a Risk Alert on
February 3, 2015, summarized in our prior Alert.
As part of its 2015 Examination Priorities, OCIE
announced that, in contrast to the 2014 Initiative, the2015 Initiative would concentrate more on evaluatinga firm’s implementation of systems regarding its
individual cybersecurity preparedness. The mostrecent Risk Alert noted six core focus areas for thesecond round of exams. By asking to review policies
on these topics, OCIE is effectively requiring firms tohave such policies. The six core focus areas includedin the Risk Alert are:• Governance and Risk Assessment: OCIE willassess cybersecurity policies, procedures,and processes, including whether they areevaluated regularly.
• Access Rights and Controls: OCIE will examine
how firms control access to various systems
through management of user credentials,
authentication and authorization, such as the useof RSA tokens to access firm systems.
• Data Loss Prevention: Examiners will evaluate
whether a firm monitors its own network traffic,
including content transferred outside of thefirm by its employees or by third parties asemail attachments or uploads. Additionally,
they will assess how firms block unauthorized
data transfers and verify the authenticity of acustomer request to transfer funds.
• Vendor Management: Reviews may include
firm practices and controls related to vendor
management, such as vendor selection, due
diligence, monitoring and contractual terms.
• Training: Examiners will note whether and how
training of employees and vendors is tailoredto specific job functions in order to encourage
responsible behavior, in addition to procedures
for responding to cyber incidents under anincident response plan.
• Incident Response: OCIE will assess whether
firms have established policies, assigned roles,
located vulnerabilities, and developed plans toaddress possible future cyber-events.

SEC Brings Enforcement Action Against
Registered Investment Adviser
Further demonstrating the SEC’s focus on
cybersecurity, on September 22, 2015, the SEC
announced that R.T. Jones Capital Equities
Management (“R.T. Jones”), a St. Louis-based
investment adviser, had settled charges that it8had not adopted written cybersecurity policies
and procedures before a 2013 data breach thatcompromised the personally identifiable information(“PII”) of approximately 100,000 individuals,consisting of both clients and others. In connection
with the attack, an unknown hacker who was later
traced to China was able to gain access to sensitive
PII stored by R.T. Jones on a third party-hosted web
server. In light of the incident, R.T. Jones provided
notice of the breach to any individual whose PII may
have been compromised and further offered free
identity theft monitoring.
Following an investigation, the SEC allegedthat the firm had entirely failed to adhere to the“safeguards rule”—Rule 30(a) under Regulation
S-P—which requires registered investment advisers
to adopt written policies and procedures reasonably
designed to protect the security and confidentialityof customer records and information against
anticipated threats or unauthorized access. For
example, the firm had never conducted periodic risk
assessments, implemented a firewall, encrypted
PII stored on its server, or maintained a response
plan for cybersecurity incidents. In settling theallegations, R.T. Jones agreed to cease and desist
from committing or causing any future violations ofRule 30(a) of Regulation S-P, and also agreed to be
censured and pay a $75,000 penalty.

NYSE Publishes Cybersecurity Guide
In October 2015, the NYSE published a 355-pagebook to serve as what it deems the “definitive
cybersecurity guide for the directors and officers of
public companies.” The subject areas of the book –which was written by over 35 contributors acrossthe information security, business, and government
arenas – range from board obligations and actionplans to how to protect trade secrets, in addition to
consumer protection and incident response. The bookaims to outline a listed company’s responsibilities tooversee, manage, and mitigate cyber risks.
Notably, the NYSE provides a decision tree regardingwhether companies should disclose a cybersecurity
breach. The book offers a flexible response depending
on a multitude of factors, including whether the hackis material, whether there is a separate obligation
to disclose (e.g., under trading rules); whether the
discovery of the breach is likely or inevitable; andwhether there is a potential requirement to disclose
the incident pursuant to Regulation FD.
The NYSE book may serve as a useful resource forregistered funds, including open-end funds (which
may have access to PII of thousands of individuals)
and listed closed-end funds (which have similar
Regulation FD obligations to those of other publiccompanies).

9

3rd Quarter 2015 Notable Transactions
M&A Transactions• Janus Capital Group Inc. announced and closed the acquisition of a 51% interest in Kapstream
Capital Pty Limited, a global unrestrained fixed income asset manager with approximately $6.6 billion
in assets under management. With this transaction, the total Janus Global Macro Fixed Income assets
under management increased to approximately $8.7 billion. The transaction included initial upfront cash
consideration of approximately $85 million. Janus has the option to purchase the remaining 49% interestin the future.
• F-Squared Investments announced that it entered into an asset purchase agreement with
Broadmeadow Capital, LLC, a wholly owned subsidiary of Cedar Capital, LLC, which will acquire
the intellectual property, investment strategies and substantially all of the investment contracts of
F-Squared.
• Eagle Ridge Investment Management, LLC, an independent advisory firm headquartered in
Westport, CT, and Laidlaw Group, LLC, an investment adviser headquartered in Bedford Hills, NY,
announced that they merged effective July 1, 2015. The combined firm, which will be known as Eagle
Ridge Investment Management, LLC, will have approximately $550 million in assets undermanagement.
• BT Wealth Management LLC, an independent adviser providing fee-only wealth management
services to high-net-worth individuals and families and an affiliate of Atlanta-based certified
public accounting and consulting firm Bennett Thrasher LLP, announced that it acquired Excelsia
Investment Advisors. With the addition of Excelsia, BT will have more than $350 million in assets
under management.
• Ares Management, L.P. and Kayne Anderson Capital Advisors, L.P. announced that they hadentered into a definitive merger agreement to create Ares Kayne Management, L.P., which would havebecome one of the largest and most diversified alternative asset managers with combined assets undermanagement of approximately $113 billion. Under the terms of the agreement, Ares would have provided$2.55 billion in consideration, the majority of which would have been in the form of Ares OperatingGroup Units. On October 27, 2015, the parties announced the termination of the merger agreement.
• Titan Advisors, LLC, which focuses on the liquid long/short equity and global macro CTA sectors,
announced that it completed the acquisition of Saguenay Strathmore Capital, a leading fund of hedge
funds business with a 13-year track record and an emphasis on credit-related strategies.
• Gávea Investimentos Ltda, a Brazilian investment firm based in Rio de Janeiro with approximately$5.3 billion in assets under management, announced that its founders reached an agreement to buy backthe fund manager from JPMorgan Chase & Co., which had initially acquired 55% of Gávea in 2010 andhad since exercised its option to purchase the remaining 45% of Gávea. The deal calls for JPMorgan to be
paid over the next 10 years with part of Gávea’s earnings.
• Federated Investors, Inc., one of the nation’s largest investment managers, completed a transition of
approximately $4 billion in shareholder accounts from Reich & Tang’s domestic and offshore money
market funds into Federated funds with similar investment strategies.
• Legg Mason Inc., a global asset management firm with approximately $699 billion in assets undermanagement, reported that it agreed to acquire a majority interest in RARE Infrastructure, Ltd., an
Australia-based alternative asset manager with approximately $7.6 billion in assets under management.
Legg Mason will acquire a 75% equity stake in RARE, while RARE’s management team will retain10

a 15% equity stake, and The Treasury Group, a previous minority holder, will retain a 10% equity
stake. Following the closing of the deal, RARE will operate as an independent investment affiliate ofLegg Mason.
• American International Group, Inc. announced that it will acquire First Principles CapitalManagement, LLC, a privately held investment management firm. First Principles is a fixed income
investment manager and has approximately $10 billion in assets under management. Following theconsummation of the transaction, First Principles will operate as a wholly-owned subsidiary of American
International Group, Inc.
• Sun Life Financial Inc., an international financial services organization that provides financial
services to both individuals and corporate customers, announced that it completed its purchase of Prime
Advisors, Inc., a Washington-based investment advisory firm with approximately $13 billion of assets
under management as of June 30, 2015. Prime Advisors will maintain its brand and continue to operate
as a standalone unit but will also be a member company of Sun Life Investment Management platform,
which provides investment solutions to institutional investors on behalf of Sun Life.
• Pramerica Asset Managers Pvt Ltd. entered into a definitive agreement with Deutsche Bank
to acquire its asset management businesses in India. Deutsche Asset Management India wasestablished in 2003 and is the second-largest foreign-owned asset manager in the country.
• Apollo Global Management, LLC, a global alternative investment manager with assets undermanagement of approximately $162 billion, announced that it intended to acquire a majority interest
in AR Global Investments, LLC, a new company that would own a majority of the ongoing asset
management business of AR Capital. The acquisition would have more than doubled Apollo’s real estate
assets under management to approximately $27 billion. On November 9, 2015, the parties announced thatthey terminated the acquisition agreement.
• Bronfman E.L. Rothschild LP, a wealth management advisory firm and a registered investment
adviser, acquired Highline Wealth Management LLC, which together will manage more than $3.6
billion.
• United Capital Financial Advisers LLC, a financial management firm with approximately $15
million in assets under management, acquired Seneca, North Carolina-based McDonald, Cox &Klugh, Inc. The acquisition includes approximately $415 million in assets under management.
• Aberdeen Asset Management Inc., an independent asset management company formed in 1983
and based in Aberdeen, Scotland, announced that it entered into an agreement to acquire Arden AssetManagement LLC, a provider of hedge fund solutions with offices in New York and London. Aberdeen
manages approximately $480 billion on behalf of institutional and private investors.
• Keeley Asset Management Corp., a privately owned Chicago-based asset management firm with over$4.0 billion under management, announced that it entered into a definitive agreement for the transfer ofthe voting shares of its parent company, Joley Corp., to TA Associates, a global growth private equity
firm which has invested in more than 450 companies and raised $18 billion in capital.
• BlackRock, Inc. announced that it entered into a definitive agreement to acquire digital wealthmanagement firm FutureAdvisor, a San Francisco-based registered investment advisory firm that uses
software to actively monitor and manage its clients’ 401(k), IRA and taxable accounts. After the closing of
the transaction, FutureAdvisor will operate within BlackRock’s Solutions platform.

11• Savant Capital Management, one of the nation’s largest independent registered investment advisory
firms headquartered in Rockford, IL, announced plans to acquire The Corcoran Group, a Bethesda,
MD-based, RIA firm that has primarily served high to ultra-high net worth, senior level corporate
executives for publicly traded and private equity companies for more than 25 years.
• Federated Investors, Inc. reached an agreement to acquire certain assets of Huntington Asset
Advisors. Approximately $236 million in prime money market assets will be reorganized from the
Huntington Money Market Fund into Federated Prime Cash Obligations Fund, and approximately $870
million will be reorganized from the Huntington U.S. Treasury Money Market Fund into Federated
Treasury Obligations Fund.
• OppenheimerFunds, a leader in global asset management, announced its agreement to acquire VTL
Associates, LLC, an independent institutional investment firm best known for its RevenueSharesexchange traded funds and which manages $1.7 billion for investors across eight exchange traded funds
and its separate accounts. The acquisition expands OppenheimerFunds’ active client offering into thegrowing smart-beta space, subject to customary closing conditions and consents.
• Markel Corporation, a financial holding company, entered into an agreement with CATCo
Investment Management Ltd. to acquire all of the assets of CATCo, a specialist investment
management business that manages approximately $2.7 billion of retrocession and traditional
reinsurance portfolios. Upon completion of the transaction, the business will operate as Markel CATCo
Investment Management Ltd.
• NewStar Financial Inc. announced its agreement to acquire Feingold O’Keeffe Capital, LLC
d/b/a FOC Partners, a private alternative asset management firm based in Boston, Massachusetts. The
acquisition will add approximately $2.3 billion to NewStar’s assets under management, increasing total
pro forma AUM to approximately $6.4 billion.
• General Electric Co. agreed to sell its private-equity investment group, GE Capital Equity, to French
asset manager Ardian. The management group in charge of GE Capital is expected to remain in place
after the closing. The sale follows GE’s withdrawal from the alternative investment field. GE agreed in
April of 2015 to sell most of its real estate portfolio to Blackstone Group LP and Wells Fargo & Co. for$23 billion.
• Independent Financial Partners, an investment adviser and wealth management firm in Tampa, FL,announced that it merged with institutional advisor Private Wealth Alliance LLC, an RIA based outof Ft. Lauderdale, FL, with a team of 40 investment professionals who manage more than 5,000 clientsand more than $500 million in assets under management. Independent Financial Partners will now haveaccess to Private Wealth Alliance’s bank relationships, which consists of community and regional banks
and credit unions with assets ranging from $200 million to $21 billion.
• Rothschild Merchant Banking, the merchant banking arm of Rothschild, announced that it
acquired West Gate Horizons Advisors, LLC, a Los Angeles-based credit manager that specializes
in leveraged loans and related assets with approximately $1.5 billion in assets under management across
5 collateralized loan obligation structures. Post-transaction, West Gate Horizons Advisors is a wholly
owned subsidiary of Rothschild North America.
• CAPTRUST Financial Advisors entered into a definitive agreement to merge Parker Carlson &Johnson Investment Management, a Dayton, Ohio-based wealth-management and investment
advisory firm, into its wealth management practice. CAPTRUST is an independent investment research
and fee-based advisory firm headquartered in Raleigh, North Carolina that provides retirement plan andinvestment advisory services to retirement plan fiduciaries, executives and high-net-worth individuals; itcurrently represents about $176 billion in client assets.

12

Closed-End Fund Initial Public Offerings• First Trust Dynamic Europe Equity Income Fund (NYSE: FDEU)◦◦ Amount raised: $330 million◦◦ Investment Objective/Policies: The Fund’s investment objective is to provide a high level of current
income with a secondary focus on capital appreciation. Under normal market conditions, the Fund
will seek to achieve its investment objective by investing at least 80% of its Managed Assets in a
portfolio of equity securities of European companies of any market capitalization, including, but
not limited to, common and preferred stock that pay dividends, depository receipts and real estate
investment trusts. The Fund will seek to focus its equity investments on income-producing securities.
The fund will utilize a dynamic currency hedging process, which will include, at the discretion of theportfolio managers, the use of forward foreign currency exchange contracts to hedge a portion of theFund’s currency exposure.
◦◦ Managers: First Trust Advisors L.P. and Henderson Global Investors (North America) Inc.
◦◦ Book-runners: Wells Fargo Securities, Morgan Stanley, and UBS Investment Bank
• Nuveen High Income 2020 Target Term Fund (NYSE: JHY)◦◦ Amount raised: $124 million◦◦ Investment Objectives/Policies: The Fund’s investment objectives are to provide a high level ofcurrent income and to return $9.85 per share to holders of common shares on or about November 1,
2020. The Fund seeks to identify securities across diverse sectors and industries that the portfolio
managers believe are undervalued or mispriced. In seeking to return the target amount of $9.85 pershare to investors on or about the Termination Date, the Fund intends to utilize various portfolio
and cash flow management techniques, including setting aside a portion of its income, retaining
gains and limiting the final maturity of any holding to no longer than May 1, 2021. As a result, theaverage maturity of the Fund’s holdings is generally expected to shorten 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, RBC Capital Markets, and Nuveen Securities

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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.

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