Registered Funds Alert
This edition of the Simpson Thacher Registered Funds Alert discusses recent developmentsin the registered funds industry, including an overview of the SEC’s 2015 rulemaking andenforcement priorities, recent guidance relating to cybersecurity practices, proposed newhedging disclosure requirements and controversy regarding “bad actor” waivers. In addition, it
discusses the SEC’s increased comfort with innovative exchange-traded funds. Finally, we reporton notable transactions that occurred in the first quarter of 2015, including M&A transactions
and closed-end fund initial public offerings.
May 2015

2015 SEC Priorities and FY 2016 Budget Proposal Emphasize Examinations,
Enforcement
The SEC’s rulemaking priorities in 2015 include: (i) modernizing and enhancing data reporting for funds andadvisers; (ii) imposing controls on registered funds to better identify and manage risks related to modern
investment portfolios, including liquidity management and use of derivatives; and (iii) effective planning forpossible impacts of market stress events and adviser transition plans. These initiatives reflect the SEC’s effort
to shift from its traditional rules-based regulation approach to a more prudential, risk-based approach. The
SEC’s proposed budget for FY 2016 indicates an increasing focus on examinations and enforcement activity.
If approved, approximately 430 new SEC Staff employees would be hired and the vast majority of the newpositions would be allocated to OCIE and the Division of Enforcement. (click here for full article)

Recent SEC Priorities Combine to Increase the Degree of Difficulty for Alternative
Funds
The SEC’s focus on alternative funds has been amplified by its emphasis on minor violations or “broken
windows.” The focus on nuanced requirements of the 1940 Act is showcased in the recent enforcement action
against Water Island Capital for alleged violations, even though no shareholder harm occured. Other recent
areas of emphasis that may affect alternative funds include: (i) an increased focus on mutual fund disclosure
issues; (ii) concern regarding potential conflicts of interest with hedge funds; and (iii) the need to conduct
stress-testing for fixed-income funds to ensure compliance with the 1940 Act’s liquidity requirements.
(click here for full article)

SEC and FINRA Report on Cybersecurity Sweep Examinations—Broker-Dealers Better
Positioned than Advisers; SEC Issues Cybersecurity Guidance Update
Both the SEC and FINRA recently issued reports on cybersecurity practices following their respective
sweep examinations. The SEC Report and FINRA Report each indicate that there likely will be an increased
emphasis on cybersecurity issues in the coming years. A comparison of the reports also reveals that brokerdealers may be in a better position than advisers to handle the increased regulatory scrutiny, as they are
more likely to have adopted written cybersecurity policies and procedures and to conduct periodic auditsof their compliance with such policies and procedures. The SEC has urged funds and advisers to treat theircybersecurity policies as an ongoing compliance endeavor. (click here for full article)

Simpson Thacher & Bartlett LLP

1

SEC Proposal Would Require Listed Closed-End Funds to Disclose Hedging of
Securities by Directors and Officers
The SEC recently announced proposed amendments that would expand the scope of existing hedging
disclosure requirements to cover officers and directors of exchange-listed closed-end funds. Congress recently
added directors to the scope of the hedging disclosure requirements under the Dodd-Frank Act, but the SEC
has gone one step further by proposing to expand the requirements to include listed closed-end funds, adecision that has been met with some push back by the industry. (click here for full article)

SEC Approves New and Complex ETFs and Streamlined Listing Process, But One
Commissioner Voices Concerns
Recent SEC actions, including the approval of “Paired Class Shares” ETFs, have indicated the SEC’s growing
comfort-level with innovative ETFs. The SEC also recently proposed an amendment to the NYSE Arca listing
standards that would establish generic listing criteria that would allow actively-managed ETFs to be launchedwithout first receiving exemptive relief from the SEC. (click here for full article)

SEC Divided on “Bad Actor” Waivers
The SEC Commissioners are divided over the SEC’s practices in granting “bad actor” waivers. Commissioner
Stein has been especially vocal in her dissent of the waivers process. Her objections center on the concern that
the SEC may set a bad precedent that certain large financial institutions are “too big to bar” and can expect
waivers even when faced with serious or repeated enforcement actions. (click here for full article)

1st Quarter 2015 Notable Transactions
List of notable transactions occurring in the first quarter of 2015, including M&A transactions and closed-end
fund initial public offerings. (click here for full article)

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2015 SEC Priorities
and FY 2016 Budget
Proposal Emphasize
Examinations, Enforcement
SEC 2015 Priorities
In a speech, likely aimed in part at the Financial
Stability Oversight Council (FSOC), at the SEC
Speaks Conference on February 20, 2015, MaryJo White, Chair of the Securities and Exchange
Commission (SEC), outlined the SEC’s 2015
rulemaking priorities. She indicated that the SEC
Staff plans to release initial recommendations on
the following topics: (i) modernizing and enhancing
data reporting for funds and advisers; (ii) imposing
controls on registered funds to effectively identify
and manage risks related to modern investment
portfolios, including liquidity management and theuse of derivatives in mutual funds and exchangetraded funds (ETFs); and (iii) effective planning forpossible impacts of market stress events or when anadviser is no longer able to provide advisory services.
More recently, in a series of speeches (found here
and here), Dave Grim, Director of the SEC Divisionof Investment Management,1 reiterated Chair White’s
priorities and expanded upon how they will affectthe asset management industry, and advisers inparticular. With respect to the asset management
industry, Mr. Grim touched on the following
specific initiatives:• Data Reporting: According to Mr. Grim,
the SEC Staff is currently considering ways tomodernize data reporting by funds, including:(i) updating the information reported on Form
N-SAR (which is still filed in MS DOS format)
to reflect new market developments, products,
practices and risks; (ii) improving the portfolio
information reported on Forms N-CSR and
N-Q to increase understanding of how funds
are implementing their strategies and to help
assess the adequacy of fund disclosures; and (iii)
considering ways to standardize Form N-CSR
and N-Q information regarding certain fundinvestment practices, such as use of derivatives
and securities lending. Mr. Grim also cited the
SEC’s recent modernization of money market
fund reporting, which requires monthly reports
on Form N-MFP, as an example of how recent
enhanced reporting measures have beensuccessful.
1 At the time of these remarks, Mr. Grim was Acting Director. Chair White
announced on May 8, 2015 that he would remain in that position as Director.

• Derivatives Use: Mr. Grim discussed someof the questions posed by the SEC in its 2011
Concept Release regarding use of derivatives
by funds. He stated that the SEC Staff has been
analyzing comments received in connection with
the Concept Release and is considering measuresthat would require funds to “establish broad risk
management programs to address risks related
to their derivatives use.”• Liquidity: Mr. Grim stated that the SEC wasconsidering revisiting liquidity management by
mutual funds, noting that guidelines limiting
open-end fund investments to no more than 15%of net assets are many years old. He explainedthat the Staff is focused on redemption rights
of investors. In this connection, the SEC
Staff is considering recommending “a newcomprehensive approach to the management of
the liquidity risks associated with fund portfolio
composition” with the goal of providing bettertransparency to investors regarding liquidity
risks associated with funds.
Regarding advisers, Mr. Grim noted thefollowing priorities:• Data Reporting: The SEC Staff is currently:(i) analyzing ways to improve the usefulnessof Form ADV to investors and (ii) considering
whether any additional information, such as
information about separately managed accounts,
should be reported on Form ADV to help the
SEC’s risk assessment efforts.
• Transition Plans: The SEC Staff is currently
developing recommendations that would require
advisers to create transition plans (in the eventof a major disruption). Mr. Grim noted that plans
should be tailored to any unique aspects of anadviser’s business, addressing issues such as thedeparture of key personnel.
• Stress Testing: Mr. Grim noted that the
Dodd-Frank Act requires the SEC to implement
requirements for annual stress testing by large
advisers and funds. He stated that the SEC
Staff is developing recommendations for suchrequirements building upon lessons learned
about stress testing through money market
reform.
Taken together, these initiatives clearly indicatepressure from the FSOC for the SEC to behave
more like a prudential regulator, like many of its
cohorts on the FSOC, rather than the traditionalrules-based regulator that it has been to date. The
data gathering initiative can best be seen as an
attempt to provide the SEC with a level of insight3

into the asset management industry that would
justify its role as the primary regulator of theindustry. The derivatives, liquidity management,
transition planning and stress testing initiatives haveclear analogues among the prudential regulators’
regulatory regimes, and the statements in thoseregards indicate an intent to impose a risk-based
analytic approach on the industry. Because riskbased analytics are necessarily dependent on theparticular facts and circumstances of a fund, it
follows that no “one size fits all” approach would
be workable, and thus oversight of rules of thisnature would draw the SEC further into the role ofprudential regulator.
It is not clear, however, that the SEC will have thestatutory authority to implement true risk-based,prudential regulations. The SEC’s authority for such
regulation, other than the Dodd-Frank requirement
to impose stress-testing on pools of a certain size,
would need to stem from one of the following three
accepted avenues for rule-making: (i) statutory
authority that explicitly grants the SEC power toadopt rules to effectuate the particular statutory
provisions (for example, Section 17(d), which allows
the SEC to effectuate rules regarding affiliatedjoint transactions); (ii) exemptive rules that can beconditioned on adopting standards imposed by theSEC (most famously, imposing fund governancestandards in order to rely on several exemptive
rules; Rule 2a-7 is another example); or (iii)
disclosure requirements that can require disclosureof non-adoption of SEC-suggested practices (forexample, disclosure if a fund does not have a policy
on market timing). More controversially, the SEC
could also claim a policy is required by Rule 38a-1(the compliance rule) and prosecute firms for noncompliance with that rule or violations of written
policies. None of these bases would seem to exist for,for example, the requirement for firms to stress test
for liquidity in various interest rate environments.
Given the recent successful challenges to SEC
rule-making initiatives in the D.C. Circuit Court,
we would expect the SEC to tread carefully in thisarea. But between these limitations on the one hand,and pressure from the FSOC on the other, the SEC
must feel as if it is navigating between Scylla andCharybdis.

OCIE 2015 Priorities
In its Examination Priorities for 2015, the SEC
Office of Compliance, Inspections and Examinations(OCIE) identified three “thematic areas” of priorities:(i) matters involving retail investors; (ii) assessmentof market-wide risks; and (iii) using data to identify
and examine registrants engaged in illegal activity,

such as excessive trading. Below is a summary of
OCIE’s priorities as they relate to registered funds:• Noting the “rapid and significant growth” ofalternative funds, OCIE will continue to focus onalternative funds and will look at: (i) leverage,
liquidity and valuation policies and practices;(ii) the adequacy of internal controls; and (iii)marketing practices.
• With respect to fixed income funds, OCIE
noted the impending rise of interest rates andstated that it will review compliance policies
and procedures related to investment andtrading controls to ensure that fund disclosuresalign with a fund’s liquidity profile and are
not misleading.
• OCIE will continue focusing on cybersecurity in
examinations of advisers and broker-dealers, andwill expand its efforts to include transfer agents(as discussed in greater detail later in this Alert).
• OCIE will be conducting focused examinations
on “never-before-examined” fund complexes (asalso further discussed later in this Alert).

AMU 2015 Priorities
In her February 26, 2015, speech titled “Conflicts,
Conflicts Everywhere,” Julie M. Riewe, Co-Chiefof the SEC Division of Enforcement’s AssetManagement Unit (AMU) provided an overview
of the AMU’s 2015 priorities. With respect toregistered funds, Ms. Riewe listed a number of focus
areas, including:• Valuation of fund assets;• Performance advertising;• Deviation from fund investment guidelines or
pursuing undisclosed strategies;• Fund governance, including boards’ and advisers’discharging of their obligations under Section
15(c) of the Investment Company Act of 1940
(1940 Act); and• Fund distribution, including whether advisers
are causing funds to violate Rule 12b-1 bymaking distribution payments outside of Rule12b-1 plans.
Notably, Ms. Riewe specifically described several
2014 enforcement actions regarding performanceadvertising and Section 15(c), and stated that she
expects there to be additional actions brought inthese areas. As the title of her speech suggests, Ms.
Riewe also discussed conflicts of interest related toregistered funds, noting several 2014 cases related4to advisers failing to seek best execution for fundclients. She noted that additional conflicts of interest
cases are “in the pipeline” and stressed that advisers
have a fiduciary obligation to identify, disclose andmitigate conflicts of interest.

SEC Budget for 2016 Fiscal YearIn February 2015, the White House released its
budget proposal, which included a $1.722 billion
funding request for the SEC. The request, if
approved, would represent a nearly 15% increaseover the SEC’s 2015 fiscal year budget ($1.5 billion).
A large portion of the increased funding request isallocated toward the hiring of approximately 430
new SEC Staff employees (as outlined in the SEC’s
FY 2016 Congressional Budget Justification). Given
the SEC’s increasing focus on examinations andenforcement actions, it is not surprising that a vast
majority of the 430 new Staff positions have been
allocated to OCIE and the Division of Enforcement,with the budget calling for 225 new examiners ofadvisers and 93 new Enforcement positions (althoughadding additional AMU personnel does not appear
to be a priority). The SEC states that the increased
funding for additional examiners would expand
OCIE’s examination potential, increasing the numberof investment adviser examinations from around 10%
in 2014 to an estimated 14% of all registered advisers
once the new examiners are trained. Coupled with
the SEC’s focus on “broken windows,” discussed
below, the budget request indicates a strong
likelihood of increased enforcement activity in thenear future.

Recent SEC Priorities
Combine to Increase theDegree of Difficulty for
Alternative Funds
The SEC’s growing focus on alternative funds is well
documented, including in our prior Alert. Alternative
funds have been featured in OCIE’s annual list ofpriorities since 2013. In 2014, OCIE published arisk alert regarding due diligence and oversight ofalternative investment managers as advisers andsub-advisers to mutual funds and announced asweep examination of alternative funds. While theseactions have attracted the bulk of the industry’s
attention, certain other SEC priorities also have
implications for alternative funds.

Broken Windows
In October 2013, SEC Chair Mary Jo White declaredthat the SEC would have a renewed focus on minor
violations of securities laws or “broken windows,”
harkening back to the famous strategy that Mayor
Rudy Giuliani employed in his efforts to clean up thestreets of New York City. The rise of alternative funds
has attracted advisers with no previous experienceadvising registered mutual funds, meaning thatthese new advisers may lack experience with thenuanced requirements of the 1940 Act. A recent SEC
enforcement action signals that alternative fundmanagers may be a target for the “broken windows”
approach. On February 12, 2015, the SEC announced
a settled administrative proceeding against Water
Island Capital LLC (Water Island), which serves as
an investment adviser and sub-adviser to various
alternative funds. Although the relevant funds
suffered no losses or other actual harm, the SEC
order alleged that Water Island violated Section
17(f)(5), Section 12 and Rule 12b-1(h), and Rule38a-1 under the 1940 Act by failing to implement
policies and procedures that the funds had in place
to abide by these regulations. The SEC noted thatit discovered these issues during an examinationof Water Island, but it is unclear whether this wasconnected with OCIE’s sweep examination ofalternative funds.
Section 17(f)(5) addresses the safeguarding of fundassets. If a fund maintains its portfolio holdings in
the custody of a bank, its other cash assets must also
be kept in bank custody. The SEC order states that
Water Island’s funds generally kept fund investmentsin the custody of a bank, thereby triggering therequirements of Section 17(f)(5). As Water Island’s
investment strategy involves the use of various
derivatives, including swaps, the relevant funds were5

required to post cash as collateral for various swap
agreements. The SEC order alleges that Water Island
allowed approximately $247 million to be held in
the custody of the broker-dealer counterparties tothe swap agreements, instead of being held in thecustody of the fund’s custodian bank through a triparty arrangement (the common industry practice).
Section 12 and Rule 12b-1(h) require an adviser tokeep a list of approved brokers for executing fundtransactions, and to document the relevant fund’s
compliance with directed brokerage requirements.
The SEC order alleges that Water Island failed tocreate the required lists and did not maintain therequired documentation.
The SEC order also includes a violation of Rule38a-1, which requires funds to adopt and implement
policies and procedures reasonably designed toprevent violations of federal securities laws. While
the SEC order states that the relevant funds had
adopted policies and procedures to address therequirements noted above, Water Island allegedly
failed to implement those policies and procedures.
In a certain sense, the allegations against Water
Island could be viewed as violations of “Mutual
Funds 101.” In a broader sense, however, theparticular practices are unique to the mutual fundregulatory scheme, and a regulator with a different
view of its mission may have treated these as
deficiencies rather than as enforcement matters,
particularly where no shareholder harm was alleged.

Disclosure, Conflicts and Fixed-Income
During a February 2015 webinar, Raymond Slezak,
Assistant Regional Director of the SEC’s New YorkRegional Office, discussed several other current
and future SEC initiatives that have implications
for alternative funds. One initiative is the SEC’s
increasing focus on mutual fund disclosure issues.
Mr. Slezak stated that while the SEC would expect all
funds to have accurate and complete disclosure thatis presented in plain English, alternative funds could
face a tougher task in meeting these expectations.
For instance, alternative funds may change the way
they implement their investment strategies as newderivative products enter the market. When that
happens, alternative funds must make sure that their
day-to-day investment strategy matches the fund’s
prospectus disclosure. Additionally, Mr. Slezak notedthat alternative funds with multiple sub-advisers
should be wary of marketing materials overstating
the due diligence process regarding the fund’s
sub-advisers.
Conflicts of interest have also been on the SEC’s
radar, as evidenced by Julie Riewe’s speech titled“Conflicts, Conflicts Everywhere,” discussed earlier
in this Alert. Mr. Slezak, expanding on this theme,
explained that alternative fund advisers are often
advisers to hedge funds with similar investment
strategies, thus presenting the possibility for themutual fund to be treated less favorably than ahedge fund (the latter of which often pays theadviser performance fees). He noted that the SEC
has identified two particular risks in this area:(i) favoring hedge funds in allocating investment
opportunities and (ii) allowing a hedge fund to takea short position in a security immediately prior to amutual fund selling its interest in that security.
Additionally, the SEC has been vocal about potential
liquidity issues and stress testing for fixed-income
funds, in light of potential changes in interest rates.
Mr. Slezak expressed his belief that alternative
funds operating in the fixed-income space should
be conducting stress testing to ensure that theirportfolios can comply with the 1940 Act’s liquidity
requirements in changing market conditions.
Given that alternative funds may be starting from abaseline of investing in less liquid investments than
traditional funds, changes in interest rates could
be more likely to cause alternative funds to run up
against the 1940 Act’s liquidity requirements. Mr.
Slezak’s comments presumably were focused on
open-end funds, as opposed to closed-end funds andbusiness development companies, which are common
structures for alternative funds and not subject toparticular 1940 Act liquidity requirements.

SEC and FINRA Report
on Cybersecurity Sweep
Examinations—BrokerDealers Better Positioned
than Advisers; SEC
Issues Cybersecurity
Guidance Update
The SEC issued a National Exam Program risk alert
summarizing OCIE’s cybersecurity examination
sweep of advisers and broker-dealers on February
3, 2015 (SEC Risk Alert). On the same day, FINRA
issued its report on cybersecurity practices of brokerdealers, based on its own sweep examination (FINRA
Report). Neither the SEC Risk Alert nor the FINRA
Report creates any new rules or legal obligations, buteach provides insight into current industry practice.
Many commentators have interpreted the reported
results as a sign that the industry is on top ofcybersecurity issues, but OCIE specifically included
6cybersecurity controls among its examination
priorities for 2015. Additionally, at various industry
conferences and panels, members of the SEC’s
Division of Enforcement have mentioned thepossibility of future enforcement actions relating tocybersecurity. A closer look at the SEC Risk Alert
and FINRA Report reveals that broker-dealers may
be in a better position than advisers in dealing withthe anticipated increase in regulatory scrutiny ofcybersecurity practices (although we of course are
not expressing a view as to whether brokers are
actually better positioned to prevent cyber-attacks
than advisers). While that may not be surprising,
given the significantly greater access brokers haveto personal identifying information, advisers may
nonetheless benefit from considering implementationof certain practices that have already been embraced
by broker-dealers.

more likely to conduct periodic audits than advisers(57%). Similarly, broker-dealers (88%) are much
more likely to refer to well-known cybersecurity
risk management standards in developing theircybersecurity practices, such as the National
Institute of Standards and Technology (NIST),International Organization for Standardization (ISO)and the Federal Financial Institutions Examination
Council (FFIEC), than advisers (53%). Also
according to the report, broker-dealers (93%) are
more likely than advisers (79%), to conduct periodic
cybersecurity risk assessments and consider them inestablishing practices.
Vendors• Identifying risks related to cybersecurity;		

In some of the most high-profile cybersecurity
incidents (e.g., the Target breach), third-party
vendors have been the gateway for attackers to accessa company’s systems. In the mutual fund arena,boards are increasingly asking advisers about theirdiligence and oversight of vendor cybersecurity
practices. Thus, the disparity found in OCIE’s report
between broker-dealer and adviser practices withrespect to cybersecurity is notable. As discussed
above, broker-dealers are more likely than advisers
to conduct periodic risk assessments regarding theircybersecurity practices. With respect to vendors,
broker-dealers (84%) are significantly more likely torequire vendors to conduct periodic risk assessments
than advisers (32%). Similarly, broker-dealers (72%)
are much more likely to incorporate cybersecurity
provisions into contractual agreements with vendors
than advisers (24%) and broker-dealers (51%) are
more likely to conduct cybersecurity training forvendors who have access to their networks thanadvisers (13%).

• Establishing cybersecurity governance, including
policies, procedures and oversight processes;

FINRA Report

SEC Risk Alert
The SEC Risk Alert was the most recent step in theagency’s ongoing cybersecurity initiative, which wasformally announced in April 2014. During its sweep,
OCIE examined 57 registered broker-dealers and 49
registered advisers. The SEC report indicates that
OCIE attempted to capture a cross-section of eachindustry—the examined broker-dealers varied bynumber of registered representatives and types ofservices offered, while the advisers varied by amountof assets under management, client-type and whether
they held custody of client assets.
The SEC report outlines the areas targeted in thesweep examination:• Protecting firm networks and information;• Identifying and addressing risks associated withremote access to client information and funds
transfer requests;• Identifying and addressing risks associated withvendors and other third parties; and• Detecting unauthorized activity.
Written policies/procedures
In summarizing OCIE’s observations, the SEC Risk
Alert begins by noting that the vast majority of
examined broker-dealers (93%), but fewer advisers(83%), had adopted written cybersecurity policies/
procedures. In evaluating compliance with written
policies/procedures, broker-dealers (89%) were much

As outlined above, broker-dealers generally appear tobe better positioned for future OCIE examinations or
SEC enforcement initiatives related to cybersecurity
than advisers. In light of that observation, advisers
may benefit from some of the results and bestpractices stated in the FINRA Report, which focuseson the practices of broker-dealers.
Metrics
The FINRA Report states that almost all brokerdealers (95%) use metrics to assess cybersecurity
performance. Examples of metrics cited in the
FINRA Report are: distributed denial of services
attacks; network intrusions; data theft; encryption
coverage (e.g., portable devices, e-mail, etc.); Adobe
and Microsoft patch coverage; anti-virus coverage;
and employee training (both initial and ongoing).

7

Firms then set a threshold for certain metrics andmanage their activities accordingly. The FINRA
Report provides the example of a firm setting athreshold of keeping 95% of its computers up-to-date
on Adobe and Microsoft patches (i.e., less than 90days old). If the firm falls below that threshold, itwould escalate the issue for prompt resolution. The
FINRA Report suggests that cybersecurity metrics
can be useful in developing cybersecurity practices,
as the discussions and decisions about what to track,
where to set thresholds and organizational reportingfor issues may lead to more well defined policies/
procedures.
Inventories
Both the SEC Risk Alert and FINRA Report espouse
the importance of asset inventories as a foundational
tool in establishing sound cybersecurity practices.
Generally, advisers’ practices were in line withbroker-dealers with respect to conducting firm-wide
inventories of physical devices and systems andsoftware platforms and applications, but advisers
lagged behind in taking inventories of: network
resources; connections and data flows; connections
to firm networks from external sources; hardware,data and software; and logging capabilities andpractices. The FINRA Report notes that manybroker-dealers maintain strong policies to ensurethat all assets are subject to centralized review
and control.
Vendor contracts
As discussed in connection with the SEC Risk
Alert, broker-dealers are much more likely toincorporate cybersecurity provisions into contractual
arrangements with vendors. The FINRA Reportoffers several examples of standard contract
provisions for vendors that will have access to firm
systems, addressing topics such as: non-disclosure/confidentiality; data storage, retention and delivery;
breach notification responsibilities; right to audit
clauses; vendor employee access limitations; useof sub-contractors; and vendor obligations upon
contract termination.

Subsequent SEC Guidance Update
On April 28, 2015, the SEC Division of Investment
Management issued a guidance update on
cybersecurity. Citing OCIE’s cybersecurity report,
the guidance update begins by emphasizing the needfor funds and advisers to review their cybersecurity
practices. The tenor of the guidance update indicatesthat the SEC views cybersecurity as an ongoingcompliance endeavor, where a “set it and forgetit” approach might be inadequate. Among otherconsiderations for funds and advisers, the guidance

update recommends implementing written policies
and procedures (citing Rule 38a-1), and training,with respect to the following measures:• Funds and advisers should conduct periodic
assessments of:◦◦ Technology systems and the nature,sensitivity and location of informationcollected, processed and/or stored;◦◦ Internal and external threats
and vulnerabilities;◦◦ Controls and processes;◦◦ The potential impact of systems being
compromised; and◦◦ Governance and management ofcybersecurity risk.
• Funds and advisers should engage in strategicplanning to prevent, detect and respond to
cybersecurity threats, including implementation(and testing) of:◦◦ Access controls, such as authentication andauthorization methods, firewalls and keeping
software up-to-date;◦◦ Data encryption;◦◦ Restrictions on the use of removable storage
devices, such as flash drives;◦◦ Software that monitors for unusual events;◦◦ Information sharing with vendors andindustry groups, such as the Financial
Services – Information Sharing andAnalysis Center;◦◦ Data backup; and◦◦ Response planning.

Future SEC Examinations andEnforcement
The SEC has increasingly cited cybersecurity as an
examination and enforcement priority. As noted,
OCIE has listed cybersecurity compliance andcontrols among its 2015 examination priorities,
and members of the SEC Staff have been dropping
hints of impending enforcement activity in thisarea. Given the general lack of existing guidance
and the evolving nature of this area, talk of potential
enforcement actions is a bit alarming. For example,
at an industry conference in early February, SEC
Office of Market Intelligence Chief Vincente Martinez
8raised some eyebrows when he suggested that theSEC can rely on Regulation SP (Privacy), Regulation
S-ID (Identify Theft) and Regulation SCI (Systems
Compliance Integrity) to bring an enforcement action
if a registered investment adviser’s cybersecurity
practices are deficient. Additionally, the SEC’s recent
guidance update states that the SEC Staff believes
that funds and advisers have compliance obligations
under federal securities laws related to preventing,detecting, responding and mitigating cybersecurity
threats, citing again to Regulation SP and Regulation
S-ID and also referencing Codes of Ethics rules,
prohibitions on open-end funds from suspending
shareholder redemptions and advisers’ general
fiduciary duty to clients to avoid the risk of being
unable to provide advisory services.
We believe that any talk of enforcement is, at best,premature. Even if the OCIE report accuratelyreflects a greater attention to cybersecurity on thepart of broker-dealers, as compared to advisers,
it does not suggest a lack of attention. Indeed, fora variety of reasons, including high profile hacks,
our experience suggests that the industry is taking
its obligations with regard to cybersecurity very
seriously. We note, in this regard, the creation ofindustry working groups to combat cyber threats. A
high-profile enforcement action has the benefit, fromthe regulator’s perspective, of focusing attention on
an issue that is being ignored by regulated entities.
However, cybersecurity is already a focus of industry
participants, and enforcement actions in thisarea would in our view push the industry towards
focusing on compliance policies at the expense of
focusing on operational mechanisms to prevent cyberattacks in the first place.

SEC Proposal Would
Require Listed Closed-End
Funds to Disclose Hedging
of Securities by Directors
and Officers
On February 9, 2015, the SEC announced proposed
amendments to Items 402 and 407 of Regulation S-K
and Schedule 14A, which govern the requirementsthat an issuer disclose its employees’ and directors’ability to hedge any decrease in the market value ofthe issuer’s equity securities in proxy statements. The
proposed amendments implement provisions of the
Dodd-Frank Act that expand the hedging disclosure
requirements. It is notable that the proposed
amendments would not prohibit hedging by officers
or directors, or impose any requirement that policies
or procedures be adopted regarding hedging.
Current regulations do not apply the hedging
disclosure requirements to directors or require
funds registered under the 1940 Act (open-end or
closed-end) to disclose such hedging, but do require
all listed and non-listed business development
companies (BDCs) to make the required hedging
disclosures regarding certain executive officers. The
SEC’s proposed amendments would expand the scopeof the hedging disclosure requirements to cover
officers and directors of exchange-listed closed-end
funds.
With respect to disclosure of hedging by directors,
Congress forced the SEC’s hand by explicitly adding
directors to the scope of the hedging disclosure
requirements in the Dodd-Frank Act. In expanding
the requirements to include listed closed-end

9funds, however, the SEC seems to have acted of its
own volition. This expansion is viewed by many ascontroversial and unnecessary, as closed-end funds
are significantly different from traditional operatingcompanies historically covered by the disclosure
requirements. While all five SEC commissioners
voted to approve the rule proposals, Commissioners
Gallagher2 and Piwowar, both Republicans, releaseda joint statement voicing some concerns about the
proposed rules, including their skepticism of theneed to impose the hedging disclosure requirements
on closed-end funds.
Comments on the proposed amendments were dueon April 20, 2015. Among the 20 comment lettersthat the SEC received on this proposal, letters by
the Investment Company Institute (ICI) and Mutual
Fund Directors Forum (MFDF) addressed thequestion of closed-end funds.
The SEC’s proposing release includes three reasonsfor expanding the requirements to listed closed-end
funds, but not open-end funds. First, the SEC notes
that, unlike open-end funds, closed-end fund shares
trade at a price different from their NAV and are notredeemable from the fund. Second, the SEC statedthat market participants have been found to engage
in short sales of closed-end fund shares, which isunlikely (if not impossible) for open-end fund shares.
Third, the SEC cites the fact that listed closed-end
funds are required to hold annual shareholder
meetings, while open-end funds are not. It is notclear why the first and third cited reasons, at least,
explain why listed closed-end funds should therefore
be subject to the hedging disclosure requirements.
Additionally, the proposing release does not address
how closed-end funds fit within the stated intent of
the Dodd-Frank Act amendments, which is to “allow
shareholders to know if executives are allowed topurchase financial instruments to effectively avoid
compensation restrictions that they hold stock longterm, so that they will receive their compensationeven in the case that their firm does not perform.”
The SEC stated its belief that the Dodd-Frank Act
amendments relate to “the alignment of shareholders’interests with those of employees’ and directors’.”
Curiously, neither of these goals seems applicable toclosed-end funds because of the way such funds are
structured. As noted in the letters from the ICI and
MFDF, closed-end funds have more characteristics
in common with open-end funds than they dodifferences. The vast majority of funds are externallymanaged, meaning that they do not have employees,
and appointed officers are often compensated by thefund’s adviser, instead of the fund. With respect to
2 As this Alert was going to press, various press reports indicated that
Commissioner Gallagher intended to resign as a Commissioner but that hewould remain until a successor is confirmed.

fund directors, interested directors do not receive
compensation from the fund and independent
director compensation has no relationship to fundperformance and fund shares are not usually issued
as compensation. These structural characteristics
appear to mitigate the concerns raised by Congress
and the SEC. As closed-end funds seem to raise
minimal concerns in this area, the ICI’s comment
letter also argues that the costs of implementing
the necessary policies and procedures to ensurecompliance with the hedging requirements would
outweigh the any potential benefits to closed-end
fund shareholders.
There have been no further developments since thecomment deadline.

SEC Approves New
and Complex ETFs andStreamlined Listing Process,
But One Commissioner
Voices Concerns
Recent regulatory activity in the ETF space
could signal the SEC’s growing comfort-levelwith innovative ETFs. Notably, the SEC recently
approved the adoption of new listing standards for“Paired Class Shares,” a novel and complex activelymanaged ETF product. Furthermore, the NYSE
recently proposed a rule change that would allow
certain qualified actively-managed ETFs to list andtrade their shares on the NYSE Arca, Inc. (NYSE
Arca) exchange without first seeking approval
from the SEC’s Division of Trading and Markets.
Taken together with developments regarding nontransparent, actively managed ETFs discussed in aprior Alert, these developments are welcome respites(or potential respites, in the case of the rule proposal)
from the cumbersome regulatory process associatedwith the development of ETFs.

SEC Approves “Paired Class Shares” Rule
On February 18, 2015, the SEC approved NASDAQ
Rule 5713 allowing for the listing and tradingof “Paired Class Shares” issued by seven new
AccuShares ETFs on NASDAQ. The Paired Class
Shares function via a novel and somewhat complex
mechanism whereby the funds issue and redeem
pairs of shares of opposing classes, described as“Up Shares” and “Down Shares.” The values of the
opposing classes move in opposite directions as
the value of an “Underlying Benchmark,” such as
the CBOE Volatility Index. Up Shares are positively

10linked to the fund’s Underlying Benchmark while
Down Shares are negatively linked.

launch actively-managed ETFs. Comments on the
proposed rule were due March 31, 2015.

The SEC found that the proposed Rule was consistent
with the requirements of the Securities Exchange
Act of 1934, in particular that it was consistent with
Section 6(b)(5) of the Act which requires, among
other things, that NASDAQ’s rules be designed topromote equitable principles of trade and in generalprotect investors and the public interest.

The proposed rule would establish generic listing
standard criteria for qualifying Managed Fund
Shares, including certain requirements for derivative
instruments. While there would be no limitation to
the percentage of the portfolio that could invest inderivatives, at least 90% of an ETF’s investments infutures and exchange-traded options must consist of
futures and options for which the principal market isa member of the Intermarket Surveillance Group or amarket with which NYSE Arca has a comprehensive
surveillance sharing agreement. In addition, certain
information must be disclosed on an ETF’s website
including a description of the ETF’s holdings, identityof the asset upon which the derivative is based, thestrike price for options, the quantity of derivatives
held, maturity date, coupon rate, effective date,market value and the percentage weight of thederivatives in the ETF’s portfolio. Finally, under the
proposed rule Managed Fund Shares must have (i) astated investment objective that must be adhered tounder normal market conditions and (ii) its Portfolio
Indicative Value widely disseminated by one or more
major market data vendors at least every 15 seconds
during the “Core Trading Session.”

Notably, Commissioner Kara M. Stein dissented
from the Commission’s decision by voicing concern
as to whether the rule as adopted would “in general,
protect investors and the public interest” as requiredby Section 6(b)(5) of the Act. Commissioner Stein
points out that similarly structured products have
“imploded” in the recent past and casts doubt as
to whether AccuShares has solved for these past
problems. Furthermore, Commissioner Stein
believes the complex distribution mechanism which
the Paired Class Shares follow make it so that itis “difficult to envision a scenario where even themost sophisticated investors are not exposed to
extreme risks.”

NYSE Arca Proposed Rule Change
On March 4, 2015, the SEC published a noticesoliciting public comments in connection witha proposed NYSE Arca rule change. NYSE Arca
proposes to amend NYSE Arca Equities Rule 8.600
to adopt generic listing standards for securities
issued by actively-managed ETFs (Managed Fund
Shares). Under current NYSE Arca regulations,each new series of Managed Fund Shares must firstseek approval from the SEC’s Division of Tradingand Markets before being listed and traded, aprocess that can often takes several months or
longer. If approved, NYSE Arca would be able tolist Managed Fund Shares without the additionalburden of seeking a separate SEC approval, thereby
significantly reducing the cost and time required to

Outlook
The SEC Staff has noted on several occasions that arule permitting ETFs to launch without exemptive
relief is a priority, although it seems to have been
de-prioritized in recent months. While such a rule, atleast for traditional ETFs, is long overdue, the SEC’s
approval of non-transparent actively managed ETFs,“Paired Class Shares” and NYSE Arca’s rule proposal
suggest that regulators are becoming more familiarand comfortable with actively-managed ETFs. In
contrast, Commissioner Stein’s dissent regarding
paired class ETFs is a sign that proposals for new
and complex ETF products may face some resistancefrom the SEC if they expose investors to higher risks
than traditional ETFs.

11

SEC Divided on “BadActor” Waivers

the actual bad actors are usually a discrete set ofindividuals who can be separated from the firm aspart of mitigation measures.

Recently, the SEC’s practice of granting waivers
related to various “bad actor” rules has become
the center of a contentious debate among theCommissioners. Various securities law provisions
provide streamlined securities offering procedures,and the “bad actor” rules restrict a party’s ability torely on such procedures if the party has engaged incertain disqualifying conduct. One such “bad actor”
provision is Section 9(a) of the 1940 Act, which
disqualifies investment advisers, directors andunderwriters from serving in those capacities forany registered fund if they have a relevant criminal
conviction, regulatory or court order, or otherdisqualifying event. A party that receives a waiverwould avoid disqualification and be permitted tocontinue serving the fund. As the SEC has stepped
up its enforcement activity under Chair White’s“broken windows” approach, minor violations that
result in enforcement actions or settlements may
automatically result in a violation of bad actor
rules. To borrow the words of SEC Commissioner
Gallagher, for financial firms, failure to obtain awaiver in such circumstances could be akin to “acorporate death penalty.”

Commissioner Gallagher also defended the SEC’s
current practices and provided a useful history of bad
actor provisions in a speech on February 13, 2015. He
noted that the first bad actor rule was implemented
in 1936, and the legislative history of later bad actor
provisions shows a clear Congressional intent to keep
“so-called ‘bad actors’ out of the industry, thereby
preventing fraud.” Commissioner Gallagher argued
that the legislative history also demonstrates thatthe bad actor provisions are intentionally overbroad,which is why Congress allowed waivers to be
granted in the first place. Further, when Congress
expanded the SEC’s sanctioning powers in 1990,
disqualification waivers do not appear to have been
considered. Thus, he argued, waivers should be
granted “to those persons who are unlikely to abuse
that relief through fraudulent or other improper
conduct” and were never intended to be consideredas part of the SEC’s sanctions process. Commissioner
Gallagher noted that the SEC Enforcement Division
has adopted “an informal, non-Commission
approved, practice” that prevents settlementsfrom being conditioned upon the granting of adisqualification waiver. He took issue with thispractice and stated that he will condition his vote on
any enforcement proceeding on an understanding ofwhether a subsequent waiver will be granted.

The SEC’s two non-chair Democratic Commissioners
have become openly critical of how frequently bad
actor waivers are granted. Last year, in connection
with a waiver that was granted, Commissioner Stein
dissented strongly, publicly noting her fears that the
SEC “may have enshrined a new policy—that somefirms are just too big to bar.” Her opinion effectively
set the tone of the ongoing debate. Since then, many
commentators and politicians have echoed Stein’s
sentiments and have argued accusatorily that the
SEC has been rubber-stamping waiver requests fromlarge financial institutions that have faced serious orrepeated enforcement actions. Commissioner Stein
also recently suggested that more waivers should
include conditions, such as hiring consultants.
The increasing internal and external criticism
prompted Chair White to defend the bad actor waiverprocess in her address to the Corporate Counsel
Institute on March 12, 2015. Chair White responded
to Commissioner Stein directly, stating that no
institution was “too big to jail or even too big to bar,”
but went on to stress repeatedly that, in her view,
disqualification provisions were never intended toserve as an enforcement tool or to further punish
underlying criminal conduct. Rather, she argued,
the bad actor rules exist to protect the public fromcompanies that are incapable of producing reliabledisclosures. In the case of large financial institutions,

The Commissioners’ disagreements with respect
to bad actor waivers have caught Congress’s
attention. A March 2015 legislative proposal floated
by Representative Maxine Waters of California,
the senior Democrat on the House Financial
Services Committee, would rework the bad actor
waiver processes to explicitly make any automatic
disqualification a sanction and direct that waivers
only be granted sparingly. Representative Waters’ bill
has yet to be referred to committee for consideration.
Chair White’s view, along with Commissioners
Gallagher and (assumedly) Piwowar, represents the
majority position at this time. That said, companies
seeking a waiver should take care to distinguishthemselves from what she views as true bad actors
by fully describing any remedial activities they havetaken and explaining why, looking forward, thecompany will be able to produce reliable financial
disclosures.

12

1st Quarter 2015 Notable Transactions
M&A Transactions• Mariner Wealth Advisors announced that it acquired a majority interest in Pennsylvania-based
Vantage Investment Advisors, LLC, a registered investment advisory firm that manages over $1 billion
in assets on behalf of individuals, trusts, non-profits, businesses and pension plans.
• Beacon Trust Company announced that it agreed to acquire The MDE Group, Inc. and its affiliate,
Acertus Capital Management, LLC, a registered investor adviser. Beacon is a wholly owned subsidiaryof The Provident Bank, which in turn is a subsidiary of Provident Financial Services, Inc., an entitywith approximately $8.4 billion in assets. The combined entities will manage, on a pro forma basis,
approximately $2.5 billion in assets.
• NASDAQ OMX announced that it will acquire Dorsey, Wright & Associates, LLC, a firm focusing
on data analytics, passive indexing and smart beta strategies, for $225 million. As a result, Nasdaq Global
Indexes will become one of the largest providers of smart beta indexes with nearly $45 billion in assets
benchmarked to its family of Smart Beta indexes and more than $105 billion benchmarked to all Nasdaq
Indexes.
• Ares Management, L.P. announced that it completed its acquisition of Energy Investors Funds.
As a result of the transaction, the Ares Private Equity Group has approximately $14 billion of assets
under management.
• Westwood Holdings Group, Inc. announced that it reached an agreement to acquire Woodway
Financial Advisors, a private wealth and trust company based in Houston, Texas that manages over $1.6
billion in private wealth client assets.
• Belgium’s Bank Degroof announced that it signed a memorandum of understanding to merge withPetercam. The combined private banking entity would hold €47 billion assets under management.
• Tavistock Group plc announced that it entered into a conditional contract to acquire Standard
Financial Group Limited, the holding company of Financial Limited, a financial advisory business. The
acquisition will create a top-ten advisory group with over 300 financial advisers across the UK and 65,000
clients. The combined group’s turnover will be over £30m and assets under advice are projected to growfrom the current £400 million to over £3 billion.
• AMG Wealth Partners, LP, a subsidiary of Affiliated Managers Group, Inc., announced that it enteredinto an agreement to acquire a majority equity interest in Baker Street Advisors LLC, a San Franciscobased wealth management firm that advises approximately $6 billion in assets. AMG is a global asset
management company that, through its affiliates, manages approximately $626 billion of assets.
• Guggenheim Partners announced the sale of Guggenheim Global Trading to an investor group led
by GGT management. The new entity will operate under the name Deimos Asset Management and will
be supported by an equity investment from Ares Management, L.P.
• B. Riley Financial, Inc. announced that it acquired MK Capital Advisors, LLC, an investment adviserthat provides advisory services to ultra-high-net-worth families and individuals. The acquisition marks
B. Riley’s expansion into Wealth Management. B. Riley’s other subsidiaries include B. Riley & Co. LLC, an
investment bank which provides corporate finance, research, and sales & trading to corporate, institutionaland high net worth individuals; Great American Group, LLC a provider of advisory and valuation services,
asset disposition and auction solutions, and commercial lending services; and B. Riley Asset Management,
LLC, a provider of investment products to institutional and high net worth investors.
• BAWAG P.S.K. announced the closing of its sale of BAWAG P.S.K. INVEST, its asset management
unit, which has €5.0 billion of assets under management, to Amundi Group SA. The company’s namewill remain BAWAG P.S.K.INVEST, with a reference “Member of Amundi Group.” In addition, Amundi and
BAWAG P.S.K. entered into a long-term partnership where BAWAG P.S.K. will distribute Amundi’s funds
and continue to distribute INVEST products via its physical and digital distribution networks. BAWAG
P.S.K. has the largest centrally managed branch network with 500 branches across Austria. Amundi willcontinue to operate INVEST in Austria.
• Man Group plc announced that it entered into a conditional agreement to acquire the investment
management business of NewSmith LLP, an equity investment manager with $1.2 billion of funds undermanagement.
• Stifel Financial Corp. (NYSE: SF) announced that it entered into a merger agreement to acquire Sterne
Agee Group, Inc. for approximately $150 million. Sterne’s 730 financial advisors and independent
representatives and $20 billion in assets under management will join Stifel’s Global Wealth Management
13

segment. As part of the transaction, Sterne will be selling the FBC Mortgage business back to its founders
and will be operating its institutional equity and investment banking business as a stand-alone business
until it is spun off.
• Raymond James Financial, Inc. announced that it reached an agreement to acquire Cougar Global
Investments, Ltd., a Toronto-based investment adviser. As a result of the transaction, Raymond James’
wholly owned subsidiary, Eagle Asset Management, expects to offer Cougar’s global asset allocation
strategies to Eagle clients worldwide.
• Threadneedle Investments announced that its range of multi-manager funds will be transitioned toSeven Investment Management (7IM) to merge with funds managed by 7IM.
• Peapack-Gladstone Financial Corporation, the parent company of Peapack-Gladstone Bank,
announced that it reached an agreement to acquire Wealth Management Consultants (NJ), LLC.
• Vontobel Asset Management, the asset management division of the Swiss private bank, announced thatit reached an agreement to acquire a 60% interest in TwentyFour Asset Management LLP, with theremaining interest to be acquired by Vontobel over a longer term. The companies will have a combined CHF
17 billion of total fixed income assets under management.
• Genstar Capital, a middle market private equity firm based in San Francisco with total capitalcommitments of over $3 billion, announced that it agreed to acquire a majority interest in Mercer
Advisors Inc., a Santa Barbara-based total wealth management firm with 15 branch offices across thecountry and approximately $6 billion in assets under management, from private equity firm Lovell Minnick
Partners LLC.

Closed-End Fund Initial Public Offerings
Calamos Dynamic Convertible and Income Fund (NASDAQ: CCD)
• Amount Raised: $555 million• Investment Objective/Polices: The Fund’s investment objective is to provide total return through a
combination of capital appreciation and current income. Under normal circumstances, the Fund will
invest primarily in a portfolio of convertible securities (including synthetic convertibles, which are single
instruments, or multiple instruments held in concert, that are composed of two or more securities withinvestment characteristics that, when taken together, resemble those of traditional convertible securities)
and debt and equity income-producing securities, as well as other investments that generate current income
and dividends, including but not limited to common and preferred stocks, investment grade and below
investment grade (high-yield or “junk”) bonds, loans, equity-linked notes, and floating rate securities(referred to throughout as “income-producing securities”). Under normal circumstances, at least 80% of theFund’s managed assets will be invested in convertible securities and income producing securities, with atleast 50% of the Fund’s managed assets invested in convertible securities (including synthetic convertible
securities). The Fund will terminate on the fifteenth anniversary of the effective date of the registration
statement, March 26, 2030, absent shareholder approval to amend the limited term provision of the Fund’s
Declaration of Trust, as provided therein.
• Manager: Calamos Advisors LLC• Book-runners: Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Ameriprise
Financial Services, Inc., RBC Capital Markets, LLC

Goldman Sachs BDC, Inc. (NYSE: GSBD)• Amount Raised: $138 million• Investment Objective/Polices: The Fund’s investment objective is to generate current income and, to alesser extent, capital appreciation through direct originations of secured debt, including first lien, first lien/
last-out unitranche and second lien debt, unsecured debt, including mezzanine debt and, to a lesser extent,
investments in equities. The Fund invests primarily in U.S. middle-market companies, meaning companies
with earnings before interest expense, income tax expense, depreciation and amortization (EBITDA) of
between $5 million and $75 million annually. The Fund may from time to time invest in larger or smaller
companies.
• Manager: Goldman Sachs Asset Management, L.P.
• Book-runners: Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Morgan
Stanley & Co. LLC

14

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.

15

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16