Registered Funds Alert
This edition of the Simpson Thacher Registered Funds Alert discusses recent developments in theregistered funds industry, including two recent SEC enforcement actions involving allegationsof deficiencies in the Section 15(c) process, the inconsistency with which the SEC brings charges
against chief compliance officers, the potential impact of a recent Ninth Circuit decision on theability of shareholders of mutual funds to bring suits against trustees and investment advisers,
as well as a Second Circuit decision that may make purchasing loans originated by nationalbanks more complicated. In addition, this Alert discusses a recent administrative proceedingregarding the use of “may” instead of “will” in disclosure documents and reliance on advice
from compliance consultants, a recent FAQ regarding ownership rights and the Shanghai-Hong
Kong Stock Connect Program, and a summary of our comment letter to the SEC on its proposed
amendments to investment company reporting requirements. Finally, we report on notabletransactions that occurred in the second quarter of 2015, including M&A transactions and closedend fund initial public offerings.
September 2015

Recent SEC Enforcement Actions Highlight the Importance of Establishing a Sound
Section 15(c) Review Process for Advisers and Trustees
A pair of recent SEC enforcement actions alleged deficiencies in the Section 15(c) approval process. These andother recent enforcement actions demonstrate that the SEC is actively pursuing cases related to the Section
15(c) process and indicate a growing trend of the SEC charging independent trustees in connection with
Section 15(c) violations. (click here for full article)

SEC Statements and Recent Enforcement Actions Send Mixed Messages to CCOs
Two recent enforcement actions have involved allegations that an adviser’s violations were, at least in part,caused by its CCO, and have drawn strong reactions from several SEC commissioners and SEC Chair MaryJo White. While Chair White has emphasized that CCOs should not be worried about the SEC “second
guessing [their] good faith judgments, but rather when their actions or inactions cross a clear line that deserve
sanction,” recent SEC enforcement actions appear to show inconsistency in levying allegations against CCOs.
(click here for full article)

Ninth Circuit Decision Invites Plaintiffs’ Bar to Bring Claims Against Massachusetts
Business Trusts, Trustees and Advisers for Violations of Fundamental Investment
Policies
An April 2015 opinion from the Ninth Circuit Court of Appeals may open the door for a significant increasein suits by shareholders of mutual funds against trustees and investment advisers. The opinion is seemingly
at odds with both federal and state court precedent on key issues, and in the event that the law is not clarified
in the near future, there are several steps that mutual funds should consider taking to protect against some of
the case’s potential implications. (click here for full article)
Simpson Thacher & Bartlett LLP

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SEC Loses First Round of Administrative Proceeding Regarding Use of “May” andReliance on Advice from Compliance Consultants, Appeal Pending
As discussed in a prior Alert, the SEC brought an enforcement action against an adviser partially on the basisthat its Form ADV stated that it “may” receive compensation from the broker, which the SEC argued wasmisleading because it was in fact receiving compensation. An administrative law judge recently dismissed
the case, but the SEC staff has appealed the decision to the full Commission. If the dismissal is upheld, it may
discourage the SEC from pursuing enforcement actions on scienter-based claims related to issues where anadviser relied on advice of a third-party compliance professional and it calls into question whether sayingthat a practice “may” occur when in fact that practice actually occurs is a sufficient cause for an enforcement
action. (click here for full article)

Second Circuit Decision Has Potential Implications for Purchasers of Loans
Originated by National Banks
A recent Second Circuit decision potentially complicates purchasing loans originated by national banks. The
decision could affect a wide array of bank-originated loans that are subsequently sold to non-bank investors(such as funds and business development companies). As the industry awaits further guidance from thecourts and regulators, there are several steps that purchasers of these loans can take to minimize their
exposure. (click here for full article)

Chinese Regulator Clarifies Ownership Rights Relating to Shanghai-Hong Kong Stock
Connect Program
The Chinese Securities Regulatory Commission published a “Frequently Asked Questions on Beneficial
Ownership” in connection with the Shanghai-Hong Kong Stock Connect Program. The FAQ discusses how
foreign investors can exercise their rights as owners of shares purchased through the program.
(click here for full article)

Simpson Thacher Comments on SEC’s Proposed Amendments to Investment
Company Reporting Requirements
Simpson Thacher & Bartlett LLP submitted a comment letter regarding the SEC’s recently proposed rules tomodernize existing investment company reporting requirements. Among other topics, we emphasized thatthe new reporting requirements could unintentionally disturb the competitive equilibrium among investmentcompanies, asset managers, service providers or unrelated third parties and urged the SEC to eliminate
from any new disclosure requirements provisions that would compel disclosure of certain types of sensitive
information, particularly in respect of private loans that may be owned by bank loan funds.
(click here for full article)

2nd 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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Recent SEC Enforcement
Actions Highlight theImportance of Establishinga Sound Section 15(c)Review Process for Advisers
and Trustees
Section 15(c) of the Investment Company Act of 1940,
as amended (the “1940 Act”), imposes an affirmative
duty on a registered fund’s board members to request
and evaluate, and a duty on the fund’s investment
adviser to furnish, “such information as may
reasonably be necessary to evaluate the terms” of any
advisory contract being considered for approval or
renewal. A pair of recent SEC enforcement actions
highlight the importance of having a sound review
and approval process in building a fulsome record
upon which trustees can base their approval.
In an action against Commonwealth CapitalManagement (“Commonwealth”) and several trusteesof the Commonwealth mutual funds, including two
independent trustees, the SEC alleged deficiencies in
the Section 15(c) approval process. According to theSEC, the trustees formally requested the informationneeded to satisfy their duties under Section 15(c), but
Commonwealth failed to provide various requested
information and some information provided to thetrustees was inaccurate. The SEC also alleged thatthe trustees failed to follow up with Commonwealthwith respect to the information that was notprovided.
In another action against Kornitzer CapitalManagement (“Kornitzer”) and the individual
serving as both chief financial officer and chiefcompliance officer, the SEC alleged that inaccurate
and incomplete profitability information wasprovided to the board of a mutual fund complex
advised by Kornitzer in connection with the Section
15(c) process.
The Commonwealth action underscores theimportance of a sound review and approval process
in discharging the board’s and the adviser’s duties
under Section 15(c). The SEC alleged numerous
examples of the trustees requesting specificinformation and receiving no response or an
incomplete response. Trustees often rely on their
independent counsel to craft and review theirrequests for information. Trustees, including in
consultation with counsel, may conclude that
information requested may not be ultimately
necessary in order for them to act on the approvals or

renewals of advisory contracts they are considering.
While the SEC does not speculate as to the reasons
why the Commonwealth trustees and/or theircounsel did not follow up with Commonwealth forany missing or incomplete information, there are a
few factors that generally help to facilitate a sound15(c) process.
First, a sound process cannot take place overnight.
The process should be structured to allow enoughtime for both (i) an investment adviser to preparea fulsome response to the trustees’ request for
information and (ii) the trustees and their counsel
to review the adviser’s response and ask appropriate
follow-up questions. Second, it is important for theadviser to explain, and the trustees to understand,the source and methodology behind certain typesof information. The Commonwealth and Kornitzer
actions both include allegations that the advisers
failed to provide adequate context or explanation
regarding certain information provided to thetrustees. For example, in providing information
related to profitability, Kornitzer allegedly
intentionally provided an inaccurate explanationof its methodology for allocating expenses, suchas employee compensation, among its advisory
clients. Commonwealth allegedly provided somecomparative fee/expense information pulled froma standard industry database, but failed to explainthat certain information might not be an appropriatecomparison and did not remove the information.
Third, if information is not available with respect
to a particular request, trustees should documentthat the fact that the information was not received
was not an impediment to their approval or renewal,
in light of all relevant factors. For example, in the
Commonwealth matter, the adviser was waiving alladvisory fees for the periods covered by the allegedly
faulty 15(c) process. If the minutes of meetings ordisclosure to shareholders had noted that the waiverinfluenced the trustees’ decision not to follow up on
certain requests, it would seem that an enforcement
action could only be brought when the trustees’
determination failed to meet the standards ofthe business judgment rule. Put another way, thequestion of what is “reasonably necessary” to make adetermination is one where the judgment of trustees
should be entitled to deference.
The Commonwealth and Kornitzer actions are thelatest enforcement actions indicating that the SEC ispursuing cases related to the Section 15(c) process.
Additionally, the Commonwealth action is part ofa growing trend of the SEC charging independent
trustees in connection with Section 15(c) violations.
In light of the foregoing, trustees and advisers should
evaluate their own processes and consider whether
there is any room for improvement.
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SEC Statements and Recent
Enforcement Actions Send
Mixed Messages to CCOs
As mentioned above, the Kornitzer enforcement
action was brought against the adviser’s CCO aswell as the adviser itself. In addition to Kornitzer,
two other recent enforcement actions have involved
allegations that an adviser’s violations were, at leastin part, caused by its CCO, illustrating a trend thathas sparked significant debate within the ranks of
the SEC and seemingly drawn a target on the backsof CCOs.
The first case, settled in April 2015, involved aprominent investment manager (the “Firm”) and its
CCO. The SEC alleged that a portfolio manager of
certain private funds, registered funds and separately
managed accounts advised by the Firm, had engaged
in outside business activity, of which the Firm
and its CCO were aware, that created a conflict ofinterest but was not disclosed to the funds’ boards orinvestors. The SEC alleged that the failure to disclose
this conflict of interest violated Section 206(4) andRule 206(4)-7 under the Investment Advisers Act
of 1940, as amended (the “Advisers Act”) and Rule38a-1 under the 1940 Act, and that the violations
were caused by the CCO. We addressed some of thecompliance lessons from this action in a separate
client memorandum.
A second case, settled in June 2015, involved SFX
Financial Advisory Management Enterprises,
Inc. (“SFX”) and its CCO. An employee of SFX
allegedly misappropriated funds from multiple client
accounts, and the CCO allegedly failed to implement
SFX’s compliance procedures, did not conduct anannual compliance review and caused a material
misstatement in SFX’s Form ADV.
These cases have sparked strong reactions fromseveral SEC commissioners and SEC Chair MaryJo White. Commissioner Daniel Gallagher issued astatement shortly after the SFX settlement to explain
his rationale for voting against both settlements.
Commissioner Gallagher stated that “[b]oth
settlements illustrate a Commission trend toward
strict liability for CCOs” and expressed his belief thatthe responsibility for implementation of compliancepolicies and procedures rests with the advisory
entity, not the CCO.
Commissioner Luis Aguilar responded by issuing
his own statement, saying that he believes that
CCOs must be supported and that the SEC is nottargeting CCOs who “do their jobs competently,

diligently, and in good faith to protect investors.”
He also cited a subsequent SEC enforcement action
involving Pekin Singer Strauss Asset Management,
Inc. (“Pekin”), in which the SEC alleged violationsof Pekin and its top executives for failing to provide
adequate resources to Pekin’s CCO, who was not a
party to the enforcement proceedings. Additionally,
Commissioner Aguilar noted that CCOs are notusually targeted in enforcement actions against
advisers and investment companies, but thoseactions that have included CCOs involved situations
where a CCO held multiple positions within anadviser. He notes that those cases are usually either
egregious or involve actions of CCOs unrelated totheir compliance functions. Chair White echoed
Commissioner Aguilar’s sentiments in a July speech
before the SEC’s Compliance Outreach Program for
Broker-Dealers. She emphasized that CCOs should
not be worried about the SEC “second guessing[their] good faith judgments, but rather when theiractions or inactions cross a clear line that deserve
sanction.”

Chair White’s attempt to reassure CCOs, however,begs the question of where that “clear line” is drawn.
For instance, what separates the Pekin case fromthe other two cases? Pekin includes allegations ofcompliance failures including (i) missing annualcompliance reviews, (ii) undetected complianceviolations, (iii) misleading Form ADV disclosuresand (iv) not adequately disclosing conflicts of interest
to clients. Similar allegations can be found in one orboth of the other two cases (but notably, neither caseincludes all four alleged compliance violations). The
main distinction between Pekin and the other twocases is that the SEC placed significant emphasis on
the fact that Pekin’s CCO was wearing multiple hats
and asked for additional resources to help him fulfill
his compliance responsibilities. There is an acronym
for the message these actions seem to prescribe for
CCOs—CYA—that cannot be written out for the sakeof propriety.
4Ninth Circuit Decision
Invites Plaintiffs’ Bar to
Bring Claims Against
Massachusetts Business
Trusts, Trustees and Advisers
for Violations of Fundamental
Investment Policies
An April 2015 opinion from the Ninth Circuit Courtof Appeals may open the door for a significant
increase in suits by shareholders of mutual funds
against trustees and investment advisers. By
approving novel interpretations of the law to allow
claims for breach of contract and breach of fiduciary
duty, as well as finding that shareholders are thirdparty beneficiaries to an agreement between a fundand its adviser, the Ninth Circuit gave shareholders
potentially powerful new tools that the plaintiffs’
bar will likely seek to exploit. There are several steps
that mutual funds should consider taking to protect
against some of the case’s potential implications.
In Northstar Financial Advisors, Inc., the Ninth
Circuit allowed a financial advisor that managed over
200,000 shares of a mutual fund to proceed withclaims for breach of contract and breach of fiduciary
duty directly against the fund’s trust, trustees, andinvestment adviser for their alleged failure to operate
the fund in compliance with two of its fundamental
investment policies. The fundamental policies
stated (i) the fund was seeking to track a particularbond index and (ii) the fund would not invest 25%
or more of its assets in any one industry, and could
only be removed or changed upon approval byshareholders. The plaintiffs alleged that the violationof these fundamental policies exposed the fund andits shareholders to losses in the tens of millions ofdollars.
The fund in question was a series of a Massachusetts
business trust. The Ninth Circuit applied
Massachusetts law to the contract and fiduciary duty
claims and, pursuant to a clause in the investment
adviser’s contract, applied California law to theshareholders’ claims as third-party beneficiariesof that contract. It remains to be seen whether theNinth Circuit’s opinion will stand and, if so, whether
it will be adopted by other courts. A petition forcertiorari has been made to the U.S. Supreme Court
to appeal the decision and, of course, courts in
Massachusetts could settle what Massachusetts law
says on these issues by deciding new cases broughtin state court. But, while Northstar is not legallybinding on any federal court outside of the Ninth
Circuit or on the courts of the states whose laws it
purports to apply, other courts may choose to adopt
the Ninth Circuit’s reasoning, and future plaintiffs
may try to find ways to bring their claims in federal
courts in the Ninth Circuit.
The Northstar opinion came to several potentially
important conclusions. First, the court held that byhaving fundamental investment policies approved byshareholder vote through a proxy statement, and byincorporating the approved policies into the fund’s
prospectus and registration statement going forward,
the fund and the trust created a contract with eachshareholder. Read broadly, the language in theopinion indicates that violation of any fundamental
investment policy, even if approved by a sole initialshareholder of a fund, may give rise to a breach of thecontract claim.
Second, the Ninth Circuit declared that mutual funds“are essentially puppets of the investment adviser”
and held that under Massachusetts law shareholders
could bring their claims directly against the fund’s
trustees, bypassing a demand on the board of
directors and a derivative suit.
Finally, the court held that the shareholders of thefund were third-party beneficiaries to the investment
advisory contract between the investment adviser
and the fund, and could file a claim against theinvestment adviser for breach of contract forviolating the fundamental policies.
The Northstar opinion is seemingly at odds withboth federal and state court precedent on key issues
and, should other suits be brought under these
theories, defense counsel would need to mount avigorous defense based on these contradictions. For
example, the opinion states that Massachusetts law
requires a shareholder filing a direct suit to showthat his or her injury is distinct from that of theshareholders generally, or that it was connected toa violation of the shareholder’s contractual rights(including voting rights). The court then assumed,
however, that Massachusetts would adopt a change
in that law articulated by Delaware courts in 2004,
eliminating the requirement that a plaintiff’s injury
be distinct from that of other shareholders.1 The
Massachusetts Supreme Judicial Court does notappear to have ever cited that case in the intervening
eleven years, nor has the Massachusetts legislature
explicitly adopted that change in the law. The Ninth
Circuit’s concept of fiduciary duty in mutual funds isalso difficult to reconcile with other federal decisions,
including Goldstein v. SEC, which determined thatan investment adviser to a hedge fund cannot owe
1. Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004).

5

a fiduciary duty to both the fund and the fund’sinvestors because the adviser would “inevitably
face conflicts of interest,”2 and Burks v. Lasker,
in which the Supreme Court noted that Congress,in enacting the 1940 Act, placed a great deal oftrust in the hands of the independent directors ofinvestment companies.3
In the event that Northstar is not overturned by theSupreme Court or its interpretation of Massachusetts
law is not clarified by the Massachusetts courts or
Attorney General, however, mutual funds could
potentially take several steps to mitigate the riskof similar suits. Although Section 13(a) of the 1940
Act requires a majority vote of a fund’s shareholders
to deviate from or change certain investment
policies, including diversification, borrowing andconcentration policies, trustees could be given as
much control as possible over investment policies.
Additionally, funds may consider adding explicit
declarations to their prospectuses and registration
statements that they are not contracts and do notcreate contractual rights or obligations. Funds andinvestment advisers might consider including clauses
in new advisory contracts stating explicitly that
there are no third-party beneficiaries to make it evenclearer that shareholders are not beneficiaries of thecontract and should not be able to sue the adviser
directly for breach of its contract with the fund.
It may also be possible to use a fund’s trust
instruments to limit expressly the fiduciary andcontractual rights owed to shareholders. In supportof its declaration that trustees owe a fiduciary
duty to shareholders of the fund in Northstar, theNinth Circuit quoted a journal article saying that“[t]he familiar standards of trust fiduciary law
protect trust beneficiaries of all sorts, regardless ofwhether the trust implements a gift or a businessdeal (unless, of course, the terms of the transaction
expressly contraindicate).” 4 This implies that trusts
can structure (or restructure) their declarations oftrust to contract around the issues raised by theNinth Circuit’s decision. Some states, like Delaware,
specifically provide by statute that a trust may limit
or eliminate a trustee’s fiduciary or other duties
or liability for breach of contract or duties in its
governing document, so long as it does not limit oreliminate the implied covenant of good faith and fairdealing.
As a general matter, fund contracts include forum
selection and choice of law clauses, specifying
the law that will govern any dispute and in which
2. 451 F.3d 873, 881 (D.C. Cir. 2006).
3. 441 U.S. 471, 484–85 (1979).
4. John H. Langbein, The Secret Life of the Trust: The Trust as an
Instrument of Commerce, 107 Yale L.J. 165, 166 (1997) (emphasis added).

court litigation will take place. Unless and until
Northstar is overruled or Massachusetts law
is clarified or changed, it may be advisable todesignate a forum outside of the Ninth Circuit in
new advisory contracts. Incorporating a change
of forum in an existing advisory contract may be
more difficult, as it could be considered a materialchange that requires shareholder approval under the1940 Act, but if a contract is slated for shareholder
approval for any other reason, advisers and funds
could consider changing the forum as well, withappropriate disclosure regarding the reasons for theamendments.

SEC Loses First Round of
Administrative Proceeding
Regarding Use of “May” andReliance on Advice from
Compliance Consultants,
Appeal Pending
As discussed in a prior Alert, on September 2,
2014, the SEC initiated administrative proceedings
against the Robare Group (“Robare”), a Houstonbased investment advisory firm, seemingly related
to its widely reported “distribution in guise”
sweep examination. The SEC alleged that Robare
violated Sections 206(1), 206(2) and 207 of theAdvisers Act, by failing to disclose in its Form
ADV an alleged hidden fee arrangement with abroker that compensated Robare for investingclient assets in certain mutual funds through thebroker’s platform. Notably, some of the language
at issue in Robare’s Form ADV stated that it “may”
receive compensation from the broker, which the
SEC argued was misleading because it was in fact
receiving compensation.
In June 2015, an administrative law judge (the “ALJ”)
dismissed the SEC’s case against Robare by findingthat the Division of Enforcement failed to carry its
burden of proof (the “Initial Decision”). Specifically,
the ALJ separated the time period in question into
two segments, pre-2005 and post-2005. During
the post-2005 period, Robare’s clients received theparticipating broker’s agreement, which the SEC
conceded sufficiently disclosed the potential conflicts
under the commission program. Emphasizing thatthe overriding goal of the Advisers Act was full
disclosure by advisers, the ALJ concluded that
disclosure through an adviser’s Form ADV was not
the only means to disclose adequately conflicts toclients. The ALJ also specifically pointed to Form
6

ADV’s instructions, which provide that conflicts may
be disclosed “to clients in [the firm’s] brochure orby some other means.” Thus, the only timeframe inquestion as to whether Robare adequately disclosed
the program’s conflicts was pre-2005, during which
Robare accepted approximately 150 clients who were
not provided the broker’s agreement. Additionally,
the ALJ disagreed with the SEC’s assertion that useof the term “may” was misleading with respect toRobare’s receipt of payments from the broker, as theparties were free to terminate the payments (withnotice) after an initial period.
Scienter and intent are required elements ofany violation based on Section 206(1) and 207,
respectively; however, scienter can be shown throughboth intent as well as an extreme departure from theordinary standard of care. Significantly, the ALJ’s
decision acknowledged, “for purposes of this matter,… investment advisers operate in an uncertain
regulatory environment in respect to disclosing
potential conflicts of interest.” Noting that many
firms, especially small to mid-sized firms, consult
third-party compliance professionals, a practicethe SEC itself has acknowledged as acceptable,
the court concluded that the relevant standard ofcare entails the consultation and application of theprofessional’s advice regarding a firm’s disclosure
obligations. Additionally, the ALJ acknowledgedthat reliance on compliance professionals as wellas counsel demonstrates good faith and showsan absence of the intent to defraud required for
a Section 206(1) violation. In the same vein, thecourt found that Robare’s good faith reliance oncompliance professionals as well as its own diligencedemonstrated a lack of willfulness as required for
any Section 207 violation.
Even though a Section 206(2) violation requires
only a demonstration of negligence, or a failure to
exercise reasonable care, the ALJ found that Robare’s
diligence and use of compliance professionals
demonstrated that Robare did use reasonable care.
Accordingly, the court found that the SEC provided
no evidence of Robare breaching the standard ofcare, an essential element to the SEC’s Section 206(2)violation.
The SEC staff appealed the Initial Decision to thefull Commission on June 26, 2015, asserting thatthe decision “shifts the burden of fully disclosing
a conflict of interest from an investment adviser,
who has a fiduciary duty to and a relationship with
its clients, to a compliance consultant (who has nosuch connection).” Robare’s motion for summaryaffirmance of the Initial Decision was also recently
denied on August 12, 2015. The SEC staff’s brief insupport of the petition for review is scheduled to be

filed by September 11, 2015, and Robare’s brief in
opposition is scheduled to be filed by October 12,
2015. Arguments will commence shortly thereafter.
If the Initial Decision is upheld, it may discourage
the SEC from pursuing enforcement actions basedon scienter where an adviser consulted a third-party
compliance professional and followed their advice inconnection with the conduct giving rise to an alleged
violation. Furthermore, the comments from the
ALJ regarding the meaning of the word “may” is in
direct contrast to positions that we are aware havebeen taken by the SEC staff in communications withregistrants in several contexts. Specifically, it calls
into question whether saying that a practice “may”
occur when in fact that practice actually occurs is asufficient cause for an enforcement action (although
we continue to believe that it is a good practice toaffirmatively disclose the occurrence of a practice if itis actually taking place).

Second Circuit Decision
Has Potential Implications
for Purchasers of Loans
Originated by National BanksThe Second Circuit’s June 2015 decision in Maddenv. Midland Funding, LLC, potentially complicatespurchasing loans originated by national banks.
Interpreting the National Bank Act (“NBA”), thecourt held that an assignee of a loan originatedby a national bank could not rely on federal NBA
preemption to avoid liability under state usury
laws if the assignee was not itself a national bank.
If interpreted broadly, the Madden decision could
affect a wide array of bank-originated loans that aresubsequently sold to non-bank investors (such as
funds and business development companies).
Federal law permits national banks to “take, receive,
reserve, and charge” interest at the rate allowed by
the state where the bank is located.5 It also provides
the exclusive cause of action for usury claims against
national banks, and therefore completely preempts
analogous state-law usury claims.
In Madden, a New York resident plaintiff openeda credit card account with a national bank.
Subsequently, the national bank amended the credit
card agreement to permit the bank to charge aninterest rate that, while permissible under the law of
the bank’s home state of Delaware, exceeded the limit
set by New York law. After the plaintiff defaulted,
5. See 12 U.S.C. § 85.

7

the national bank charged off plaintiff’s $5,000
remaining balance as a bad debt and sold the accountto the defendant Midland, which is not a nationalbank. Midland subsequently sent a letter to theplaintiff seeking to collect on her debt and applying
the interest rate that exceeded the New York limit.
The plaintiff filed a putative class action alleging that
Midland had violated the federal Fair Debt Collection
Practices Act and New York law by charging ausurious interest rate. Midland responded that
the NBA preempted the plaintiff’s claim because anational bank had originated the debt. The district
court initially decided in favor of Midland but, on
appeal, the Second Circuit reversed.

The Second Circuit recognized that while theSupreme Court has held that NBA preemption
may extend to operating subsidiaries and agentsof national banks when those entities effectively
exercise the powers of the national bank, that
authority does not extend to Midland as an unrelated
entity that merely purchased the debt. Thus,
although NBA preemption applies to claims arisingout of alleged violations of state usury laws, Midland
was not entitled to rely upon NBA preemption
because it was not a national bank. In vacating the
district court judgment for Midland, the Second
Circuit reasoned that applying NBA preemption
to encompass Midland under the circumstancespresented “would create an end-run around usury
laws for non-national bank entities that are notacting on behalf of a national bank.”
In the weeks since the decision, commentators havecriticized the economic conclusions the Second
Circuit relied upon in its opinion. In particular, theopinion noted that the application of state usury
laws to third-party assignees of bank-originatedloans would not prevent or “significantly interfere”
with the exercise of national bank powers, which thecourt noted includes the power to sell debt for a fee.
To the contrary, critics argue that if for any reason
non-national bank purchasers are unable to enforce

the terms of a loan according to the pre-sale terms
between the bank and borrower, there could be achilling effect on the bank-originated debt market.
Further, the viability of related activities such as
certain types of securitizations and originate-to-sellbusiness models may have to be reevaluated entirely.
The potential for the application of criminal usury
statutes from states such as New York and Florida
will also increase the price of the transactions asbuyers begin to factor greater legal risks into theirpricing models.
While state usury laws do not apply to all loans—for
example, New York usury laws only apply to loans ofless than $2.5 million—as the industry awaits further
guidance from the courts and regulators, investors
purchasing debt, such as bank loan funds, can takecertain steps to minimize their exposure. To begin, it
may be beneficial to review existing and pending loanpurchase agreements for potential violations of usury
laws in states where borrowers reside, starting with
the Second Circuit states (New York, Connecticut,
and Vermont). Further, a preference for transactions
where the originating bank retains some aspect ofownership or other continuing interest in loans soldmay also avoid many of the complications potentiallyintroduced by the Madden decision.

Chinese Regulator Clarifies
Ownership Rights Relating to
Shanghai-Hong Kong Stock
Connect Program
In November 2014, China launched the ShanghaiHong Kong Stock Connect (“Stock Connect”), whichallows foreign investors to trade shares listed on
the Shanghai Stock Exchange (“SSE Shares”).
While the launch of Stock Connect was greeted withenthusiasm, many investors have expressed concerns
about the legal regime governing the program.
In particular, there has been doubt over whether
Chinese law recognizes the concept of beneficial
ownership, and if the concept is recognized, whether
investors can enforce their ownership rights.
Under the rules governing Stock Connect, the SSE
Shares acquired by foreign investors are held in an
omnibus account with Hong Kong Securities andClearing Company Limited (“HKSCC”). Governedby a civil law system, China traditionally lacked
the concepts of beneficial ownership and trusts.
Therefore, initially it was unclear whether HKSCC
merely holds the SSE Shares in trust for investors,
and whether investors have beneficial ownership in
the SSE Shares.
8

In response to investor concerns, the Chinese
Securities Regulatory Commission (the “CSRC”)
published a “Frequently Asked Questions on
Beneficial Ownership” in May 2015. In the FAQ, theCSRC identifies the basis for nominee shareholding
under Chinese law and concludes that, for purposesof the Stock Connect, overseas investors “are entitledto proprietary interests” in the SSE Shares held
through HKSCC. These investors must exercise
their rights over the SSE Shares, such as the rightto participate in shareholders’ meetings and theright to receive dividends, through HKSCC as thenominee holder.
With regard to the question of enforcement, theCSRC acknowledges there is some legal ambiguity:“Mainland law does not expressly provide fora beneficial owner under the nominee holding
structure to bring legal proceedings, nor doesit prohibit a beneficial owner from doing so.”Nonetheless, based on its interpretation of China’s
civil procedure, the CSRC stated its position that aforeign investor “may take legal action in its own
name in Mainland courts,” as long as the investor
can “provide evidential proof of direct interest as abeneficial owner.”

Simpson Thacher
Comments on SEC’s
Proposed Amendments
to Investment Company
Reporting Requirements
As noted in a prior Alert, the SEC recently proposed
rules to modernize existing investment company
reporting requirements. The proposed rules would
require monthly reporting and drastically expand
the scope of information required to be reported.
On August 11, 2015, we submitted a comment letter
regarding the proposal. Our main comment was thatwhile any modernization effort would be expected to
impose administrative and compliance burdens on
investment companies, the proposed reforms may
impose material competitive burdens on funds andinvestment advisers, particularly those employing
alternative investment strategies.
Our assumption is that the SEC does not intend forthe proposed new reporting requirements to disturb
the competitive equilibrium among investmentcompanies, asset managers, service providers or
unrelated third parties. Accordingly, we urged
the SEC to eliminate from any new disclosure
requirements provisions that would compel

disclosure of certain types of sensitive information.
In this regard, our comments addressed four areasof concern:• Disclosure of whether a debt security is indefault, or otherwise distressed, would impose
a competitive burden on funds that hold privateloans. The disclosure could disrupt fundmanagement and the private loan market.
• Reporting of position-level information
regarding derivatives would place an unintended
competitive burden on investment companies
and asset managers that employ alternative
investment strategies, as such detailed
information is more likely to cause investor
confusion than improve investor understanding.
• Disclosure of portfolio-level interest rate risk,
credit spread risk and duration would pose acompetitive risk that an investment strategy
could be reverse-engineered, especially for fixedincome funds that hold a relatively low number of
positions.
• Disclosure of securities lending “splits” infinancial statements could disrupt the securities
lending market, thereby imposing a competitive
burden on investment companies and securities
lending agents alike.
In addition to our comments regarding theimposition of competitive burdens, we addressed
four other topics in our comment letter:• We noted that some of the new information thatwould be required to be reported regarding
derivatives and convertible securities may not bereadily available or easily obtainable.
• We urged the SEC to provide additional details
regarding cybersecurity and the safekeepingof confidential reported information prior to
finalizing the new reporting requirements.
• We discussed our belief that the SEC’s burden
estimates are not realistic given the frequency
and volume of new reports.
• We suggested an improvement to proposed
Rule 30e-3 that would allow investors to opt
for electronic notification of the availability ofshareholder reports in addition to receiving
reports electronically.
We will closely monitor developments related to the
SEC’s proposals, and provide additional updates infuture Alerts, as relevant.

9

2nd Quarter 2015 Notable Transactions
M&A Transactions• Beacon Trust Company announced the completion of its acquisition of The MDE Group, Inc., anationally ranked, SEC-registered investment advisor based in Morristown, NJ and its affiliate, Acertus
Capital Management, LLC. As of the closing date, the assets under management of the combined
entities were approximately $2.5 billion.
• AMG Wealth Partners, LP, a subsidiary of Affiliated Managers Group, Inc. (NYSE: AMG),
announced the completion of its investment in Baker Street Advisors, LLC, a San Francisco-based
wealth management firm that provides customized wealth management and comprehensive investment
advisory solutions to individuals, families and foundations. Founded by Jeff Colin in 2003, the firm
advises on approximately $6 billion in assets.
• ALPS, a DST Company that provides products and services to the financial services industry,
announced it has agreed to acquire asset manager Red Rocks Capital LLC, a leader in listed private
equity and other private asset investments. The closing of the transaction is expected to occur in thesecond half of 2015. The purchase price of up to $65 million will consist of a combination of up-front cash
consideration and performance-related contingent consideration. The transaction will be funded using a
combination of cash and short-term borrowings on revolving credit lines.
• Focus Financial Partners, LLC, the leading international partnership of independent wealthmanagement firms, announced that Classic Capital, based in Short Hills, NJ, has merged with
Buckingham Asset Management, a Focus partner firm headquartered in St. Louis, MO. The merger
brings Buckingham additional scale and increases its total locations to eight.
• Lightyear Capital LLC, a private equity firm specializing in financial services investing, announced
that an affiliated investment fund signed a definitive agreement to purchase a majority equity stakein Wealth Enhancement Group, an independent wealth management firm with $4.7 billion inclient assets. Financial terms of the transaction were not disclosed. Under the terms of the agreement,
an investment fund affiliated with Lightyear Capital will purchase the equity stake currently heldby Norwest Equity Partners, a Minneapolis-based middle market investment firm. A number of
employees of Wealth Enhancement Group will continue to hold a stake in the firm.
• UniCredit, Santander Asset Management and affiliates of Warburg Pincus and General
Atlantic signed a preliminary agreement to combine Pioneer Investments and Santander. The
combined firm will have approximately €400 billion in assets under management and a presence in over
30 countries. The preliminary agreement contemplates the establishment of a holding company, with thename Pioneer Investments, which will control Pioneer’s operations in the United States along with the
combination of Pioneer and Santander’s operations outside the United States.
• Hillspire LLC, an entity that serves as an investment vehicle for Google Inc.’s Executive Chairman Eric
Schmidt and his family, bought a 20% stake in New York-based hedge fund firm D.E. Shaw Group.
Hillspire purchased the stake from Lehman Brothers Holdings Inc. for approximately $500 million.
Lehman Brothers Holdings Inc. had previously purchased its stake for approximately $750 million
in 2007.
• Samsung Asset Management Co., Ltd, Korea, the largest asset manager in Korea, signed a
Memorandum of Understanding for a strategic alliance with Reliance Capital Asset Management,
part of Anil Ambani’s Reliance Capital and India’s largest asset manager.
• JHS Capital Advisors LLC, a registered securities broker dealer and registered investment adviser
providing personalized client services for investors nationwide, announced it has signed a definitive
agreement to have its retail assets acquired by Ameriprise Financial. The JHS retail brokerage andinvestment advisor network consists of approximately 150 advisors in offices around the country, andretail assets in excess of $4.1 billion.
10• Wunderlich Investment Company announced the acquisition of Fiduciary Financial Servicesof the Southwest, a privately-held independent investment advisory firm based in Dallas, Texas,with over $400 million in assets under management. Fiduciary Financial will operate as a registeredinvestment adviser subsidiary of WIC.
• Westaim Corporation, a publicly traded Canadian investment company, announced its entrance into a
non-binding term sheet to acquire Arena Investors, LLC, a U.S. based investment firm specializing inasset-oriented credit investments. The term sheet also provides for the establishment and capitalizationof a new, specialty finance company to be named Arena Finance Company. Westaim is expected tofinance Arena Finance Company with $200 million.
• FolioMetrix LLC announced that it will merge with American Independence Financial Services,
LLC to create a new company, RiskX Investments, LLC, offering an array of risk-intelligent
investment solutions. The transaction is expected to close in September 2015. Deal terms were notdisclosed. RiskX will manage, post-merger, approximately $1.1 billion in funds and separately managed
accounts, comprised of the American Independence Funds (single-manager sub-advised funds andseparately managed accounts) and the FolioMetrix Rx Fund Series (multi-strategy tactical mutual funds).
• Blackstone Group LP announced its acquisition of a minority stake in Illinois-based Magnetar
Capital Partners. Blackstone bought the stake through its Strategic Capital Holdings fund, which has
raised more than $3 billion to buy minority stakes in alternative-investment firms.
• Fortress Investment Group LLC (NYSE:FIG), a leading, diversified global investment management
firm, and Mount Kellett Capital Management LP, a private, multi-strategy investment firm,announced they reached an agreement for an affiliate of Fortress to become co-manager with Mount
Kellett of the Mount Kellett investment funds and related accounts (collectively, the “Funds”). Mount
Kellett affiliates will continue to serve as general partner of the Funds. Additionally, affiliates of Fortresswill become special limited partners of the Funds. Financial terms of the transaction were not disclosed.
• Aberdeen Asset Management PLC announced it entered into an agreement to acquire FLAG
Capital Management, LLC, a manager of private equity and real asset solutions with offices in
Stamford, CT, Boston, MA, and Hong Kong. As of December 31, 2014, FLAG managed assets ofapproximately $6.3 billion of invested and committed capital on behalf of its broad client base.
• Ohio National Financial Services acquired the remaining ownership interest in Fiduciary CapitalManagement, an asset management firm based in Wallingford, Connecticut. As of December 31, 2014,
Ohio National had a total of $41.1 billion in assets under management.
• UMB Financial Corporation, a financial holding company headquartered in Kansas City, Missouri,
announced the completion of its acquisition of Marquette Financial Companies in an all-stocktransaction. As part of the acquisition, UMB acquired Marquette Asset Management, which provides
private asset management to individuals, families and institutions, based in Minneapolis, Minnesota.
UMB also acquired eight Marquette bank branches in the Phoenix area and five branches in Ft. Worth,
Dallas and Denton, Texas.
• Habib Bank Limited Asset Management, the asset management subsidiary of Habib Bank Limited,announced that it would acquire 100% of the shares of Pakistan Industrial Credit and Investment
Corporation Asset Management Company Limited.
• Washington Trust Bancorp, Inc., a bank holding company, announced that it agreed to acquire
Halsey Associates, Inc., an investment advisory firm based in New Haven, Connecticut. Washington
Trust will acquire all of the outstanding shares of Halsey capital stock for consideration consisting of cash
and Washington Trust common stock.
• Hunt Companies, Inc., through its wholly-owned subsidiaries, has completed an investment inAmber Infrastructure Group Holdings Limited, headquartered in London, England. Huntacquired a fifty percent (50%) ownership of Amber Infrastructure with an ability to appoint a majority of
directors of Amber’s holding company.

11• Stifel Financial Corp. announced its entrance into a definitive purchase agreement to acquire
Barclays’ Wealth and Investment Management, Americas franchise in the U.S. As of May 31,
2015, Barclays had approximately 180 financial advisors in the U.S. managing approximately $56 billion
in total client assets. In addition, Barclays’ business had balance sheet assets of approximately $1.4 billion
and client loans of approximately $1.5 billion held through Barclays’ clearing firm. Barclays’ advisorybusiness is concentrated in New York and 11 other major metropolitan cities in the U.S. As part of thisagreement, Stifel will be the U.S. private wealth distribution partner for certain of Barclays’ equities andcredit new issue securities in the U.S.
• BlackRock, Inc. entered into a definitive agreement to acquire Infraestructura Institucional,
Mexico’s leading independently managed, infrastructure investment firm, expanding BlackRock’s
infrastructure capabilities in Mexico.
• First Republic Bank, a leading private bank and wealth management company, and Constellation
Wealth Advisors, one of the nation’s foremost independent wealth advisors, announced that First
Republic Investment Management, Inc., a wholly-owned subsidiary of First Republic, would purchase
Constellation Wealth Advisors for approximately $115 million, subject to the satisfaction of certain
closing conditions.
• Federated Investors, Inc. announced the completion of its acquisition of certain assets ofTouchstone Advisors, Inc. Federated is an investment manager with $355.8 billion in assets undermanagement as of March 31, 2015. With 130 funds and separately managed account options, Federated
provides investment management services to more than 7,700 institutions, including corporations,
government entities, insurance companies, foundations and endowments, banks and broker/dealers.
• Neuberger Berman, one of the world’s leading private, employee-owned investment managers,
announced an agreement with Merrill Lynch Alternative Investments LLC, the alternative
investment business of Bank of America Corp., whereby Neuberger Berman will acquire the management
rights to certain Merrill Lynch traditional non-registered and 40-Act-registered private equity fundof funds.
• Sun Life Financial Inc. announced that it reached an agreement to acquire Prime Advisors Inc., an
investment management firm specializing in customized fixed income portfolios, with approximately $13
billion in assets under management. Sun Life is an international financial services organization with $813
billion in assets under management.

Closed-End Fund Initial Public Offerings
AllianzGI Diversified Income & Convertible Fund (NYSE: ACV)
• Amount Raised: $280 million• Investment Objective/Polices: The Fund’s investment objective is to provide total return through a
combination of current income and capital appreciation, while seeking to provide downside protection
against capital loss. Under normal market conditions, the Fund will seek to achieve its investment
objective by investing in a combination of convertible securities, debt and other income-producing
instruments and common stocks and other equity securities. The Fund will normally invest at least 80%
of its net assets (plus any borrowings for investment purposes) in a diversified portfolio of convertible
securities, income-producing equity securities and income-producing debt and other instruments ofvarying maturities. It is expected that substantially all of the Fund’s debt instruments and a substantial
portion of its convertible securities will consist of securities rated below investment grade or unrated
but determined by Allianz Global Investors U.S. to be of comparable quality (sometimes referred to as“high yield securities” or “junk bonds”). The Fund also expects to normally employ a strategy of writing(selling) covered call options on the stocks held in the equity portion of the portfolio (the “Option
Strategy”). The Option Strategy is designed to generate gains from option premiums in an attempt toenhance amounts available for distributions payable to the Fund’s shareholders.
• Managers: Allianz Global Investors Fund Management LLC and Allianz Global Investors U.S. LLC• Book-runners: Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC,
Citigroup Global Markets Inc. and RBC Capital Markets, LLC
12

Eagle Growth & Income Opportunities Fund (NYSE: EGIF)• Amount Raised: $127.5 million• Investment Objective/Polices: The Fund’s investment objective is to provide total return through a
combination of current income and capital appreciation. The Fund seeks to achieve its investment
objective by investing, under normal market conditions, at least 80% of its Managed Assets (as definedin the prospectus) dividend or other income paying equity securities and debt securities, excluding
securities that distribute a return of capital, original issue discount bonds and payment-in-kind (“PIK”)
debt instruments. Debt securities may include, but are not limited to, below investment grade securities(commonly known as “high-yield” securities and “junk” bonds), notes, bonds, and convertible bonds. The
Fund may invest up to 20% of its Managed Assets in a combination of below investment grade securities
and debt instruments that generate PIK interest. Initially, the Fund expects to invest up to 15% of its
Managed Assets in securities of master limited partnerships (“MLPs”), generally in the energy sector,
and may invest up to 25% of its Managed Assets in preferred equity securities. The Fund may write (sell)covered call options with respect to up to 40% of its Managed Assets to seek to generate current income.
• Managers: Four Wood Capital Advisors LLC, Eagle Asset Management, Inc. and Recon CapitalPartners, LLC• Book-runners: Raymond James & Associates, Inc. and Stifel, Nicolaus & Company, Incorporated
Tekla World Healthcare Fund (NYSE: THW)
• Amount Raised: $580 million• Investment Objective/Polices: The Trust’s investment objective is to seek current income and longterm capital appreciation. Under normal market conditions, the Trust expects to invest at least 80% of
its Managed Assets in U.S. and non-U.S. companies engaged in the healthcare industries (“Healthcare
Companies”), including equity securities, convertible securities and debt securities. The Trust willconcentrate its investments in the healthcare industries. A company will be deemed to be a Healthcare
Company if, at the time the Trust makes an investment in a company, 50% or more of such company’ssales, earnings or assets arise from or are dedicated to healthcare products or services or medical
technology activities. Healthcare Companies may include companies in one or more of the following
sub-sectors: pharmaceuticals, biotechnology, managed care, life science and tools, healthcare technology,
healthcare services, healthcare supplies, healthcare facilities, healthcare equipment, healthcare
distributors and healthcare REITs. Tekla Capital Management LLC (the “Investment Adviser”)
determines, in its discretion, whether a company is a Healthcare Company.
• Manager: Tekla Capital Management LLC• Book-runners: Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. LLC, UBS Securities LLC and Ameriprise Financial Services, Inc.

13

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.

14

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15