Remarks – PLI Investment Management Institute 2019
Deputy Director and Chief Counsel, Division of Investment Management
New York, NY
March 21, 2019
Good morning. Thank you Barry [Barbash] and Paul [Roye] for the invitation to join you today and for that kind introduction.
As Paul mentioned, I serve as Deputy Director and Chief Counsel for the Division of Investment Management (the “Division”). This is actually my second tour of duty here at the Commission and in IM. I first joined the Commission over two decades ago, left in 2004, and rejoined about a year and a half ago. As a result, I have been fortunate to see the Commission’s work from a number of different perspectives, including thirteen years of experience at two large financial services companies.
Having spent significant parts of my career working at investment management and advisory businesses and on the staff, I have come to appreciate how important the staff’s work is. I also appreciate that, from the outside, there is not always great visibility into the full range of that work. That may be particularly true for those of you who are new to the area of investment management regulation. With that in mind, I am going to talk today about the Chief Counsel’s Office, including how we are organized and what we do. I will start with an overview of our work as well as some tips for engaging with the Office, whether on exemptive applications or requests for no-action relief. I will then share some thoughts on our Office’s current review of past staff statements and guidance. And, finally, I will highlight two current areas of focus for us – international engagement and our board outreach initiative. In my role as Chief Counsel, I have the pleasure of working with over fifty talented attorneys who make up the Office, and as I talk about the variety and complexity of the questions they tackle daily, I hope to convey a sense of the remarkable expertise that their work demands.
Before I continue, however, I’ll qualify my remarks in two ways. First, I am speaking today only for myself and not for the Commission, the Commissioners, or the staff. Second, the Division currently has a very full agenda, and I will only have time to touch on part of it. If you are interested in learning more about the Division’s recent accomplishments and agenda, I would recommend reading the remarks that Dalia Blass, our Director, delivered earlier this week. They are available on the Commission’s website.
Overview of the Chief Counsel’s Office
In broad terms, the Chief Counsel’s Office serves two roles. First, we are the Division’s internal legal counsel, advising primarily on the Investment Company Act of 1940 and the Investment Advisers Act of 1940 (collectively, the “1940 Acts”). And, second, we provide advice and assistance to the public.
Supporting the Commission, colleagues and Congress
In the first role, our work looks similar to that of many of you in the private sector bar. I imagine many in the room today have received a call from a client where the client has laid out a fact pattern and asked, what legal issues could arise? Or a client may have called after reading about new legislation and asked, what are your thoughts on potential impacts? Each day, we tackle questions like this from Commissioners, colleagues on the staff and Congress. These questions typically fall into one of four categories:
- Support for rulemaking, disclosure review and analytics. We lend our expertise to our colleagues within the Division. For example, our Office has provided assistance in the Division’s rulemaking recommendations covering the standards of conduct for investment professionals, exchange-traded funds, fund of funds, and the Volcker rule. We also provided support on offering reform for business development companies and closed-end funds, which the Commission just proposed yesterday. We also support our Disclosure Review and Accounting Office on interpretive questions that arise in the course of their filing reviews, as well as our Analytics Office in their outreach efforts.
- Support for enforcement and exam programs. Our Office provides guidance concerning asset management law for a number of offices and divisions within the Commission. For instance, we have a team of experienced, dedicated attorneys who provide technical assistance on the 1940 Acts to the Enforcement Division. Enforcement investigates possible violations of the federal securities laws and brings civil actions to enforce these laws in federal courts as well as administrative proceedings. A number of their cases involve investment advisers and investment companies. Our staff members are often involved from the early stages of these investigations through to their conclusion. The Chief Counsel’s Office also coordinates closely with the Office of Compliance Inspections and Examinations (“OCIE”), which conducts the Commission’s National Exam Program. We provide OCIE with guidance interpreting the 1940 Acts, and OCIE staff shares with us observations of industry practices and trends they see in the examination field.
- International policy. The Chief Counsel’s office leads the Division’s engagement on international policy matters in coordination with the Commission’s Office of International Affairs. I will talk more about international engagement later.
- Technical assistance to Congress. Our Office also coordinates with the Commission’s Office of Legislative and Intergovernmental Affairs to provide technical assistance on pending legislation. Our role is to share our expertise, to explain the effects that a piece of legislation may have on our rules and programs, and to identify technical issues that could arise under the 1940 Acts.
Supporting the public through advice and assistance
Our Office’s second major role is to provide advice and assistance to market participants and other members of the public. This is not legal advice but rather a public service through which we share our expertise. For example, we respond to hundreds of phone and email inquiries every year. Sometimes, they present discrete questions with clear technical answers. Other times, these inquiries involve, or develop into, requests for relief such as staff no-action letters. We have a well-developed process for reviewing these requests.
Our assistance to the public also includes reviewing exemptive applications. Fund sponsors have developed a wide range of product innovations since 1940. While these innovations originate with sponsors, they also, in many cases, depend on the flexibility of the Company Act to accommodate new ideas and choices while preserving investor protections. For example, Commission exemptive orders permitted the first offerings of funds with multiple share classes and exchange-traded funds, and have allowed greater flexibility and efficiencies in multi-manager and fund of funds arrangements. In some cases, these Commission orders have later formed the basis of rule proposals, where learning from the exemptive laboratory becomes part of the Company Act framework.
Tips for Engagement on Exemptive Applications and Requests for No-Action Relief
In substance, Commission exemptive orders are very different from staff no-action letters. For example, orders are issued with the authority of the Commission, while no-action letters are statements of the staff regarding enforcement and do not have the force of law. In terms of process, however, our review of exemptive applications and requests for no-action relief share some similarities. With that in mind, I would like to offer some observations on our process for reviewing exemptive applications and requests for no-action relief and how practitioners like you can support an efficient review by the staff.
- First, is there precedent? Exemptive orders and no-action letters tend to fall into one of two broad categories – routine relief that has recent precedent and novel relief that has little or no precedent. In particular, requests for routine relief are common in the exemptive application area. If what you are seeking is routine relief, the key is to pick a recent precedent that is appropriate for your facts and stick to it. There generally should not be much need for changes. However, if you think a change is appropriate for substantive reasons, I would encourage you to call our Office to discuss it.
- Second, when you have a novel idea, we welcome a dialogue. We want to support innovative ideas that promote the goals of the 1940 Acts and expand choice for investors, and we welcome a call when you have a new idea. If you are developing something entirely new, it is usually most helpful to start the process with a conversation rather than a draft application or letter. Term sheets can be a useful vehicle for advancing early discussions like these.
- Third, be prepared for a few key questions. We will be interested in understanding the business rationale for any exemptive or no-action request, but there are some other questions you can expect from us as well. For example, under applicable law, what policy concerns was Congress or the Commission trying to address and how does your proposal address those concerns? How will your proposal preserve and promote investor protection? How will the relief work in your business model five or ten years from now? How would the relief work if many other funds request the same relief over the next five or ten years? If the Commission grants relief in your specific case, will it retain the ability to draw appropriate lines when asked for broader relief?
- Fourth, a well-written document is worth the time. When it comes to preparing a novel exemptive application or a request for no-action, it is worth taking the time to develop a well-written document. An application or request for no-action needs to lay out the facts and the relevant law, and it needs to make a persuasive policy argument. It should respond to the staff’s questions about policy and investor protection, but it should also be succinct and tightly focused. Applications and incoming letters seeking no-action relief become historical documents, so it is important that they provide a clear explanation of the rationale for the relief to future readers. Dialogue with us in advance can help here as well.
- Fifth, we work with you to keep the process moving. We strive to respond quickly and effectively to applications and requests for no-action relief. Counsel can support an efficient process by responding to comments in a timely manner and by withdrawing applications or notifying the staff when requests for relief have gone dormant. Sometimes, there is a perception that it is important to submit the first exemptive application for a novel type of relief and that this will ensure getting the relief first. The truth is, we do not have a queue – we approach each application on its own terms. We work with applicants until we have no further comments and are prepared to take a position, including a recommendation to the Commission if appropriate. Where exemptive or no-action relief presents novel issues, it is more important to address the issues fully and adequately than to be the first to submit.
- Finally, we believe in transparency. For exemptive applications, we generally discourage applicants from sending in draft applications. The exception would be special circumstances where, for example, the public filing of an application would have a market impact. I encourage you to engage with our Office in advance if you think a draft application is warranted.
We welcome input from practitioners and others about how we can improve what we do. What concrete steps can we, on the staff, take to improve our process for exemptive applications and requests for no-action relief? Could applications that largely track previously granted applications for routine relief follow a more streamlined process? I invite you to share with us your thoughts on this critical function of the Division.
Review of Prior Staff Statements and Staff Positions
While we continue to review new requests for relief, we are also looking back at prior staff statements and staff positions. We have a team in the Chief Counsel’s Office that is actively reviewing whether any prior statements or staff positions should be modified, rescinded or supplemented given market or other developments. So far, one important takeaway from our review is that, when formulating staff positions, in many cases it is helpful to seek additional facts or test our analysis through dialogue with interested parties outside the staff. This has long been the practice for no-action requests, where normally there is a dialogue with the requestor that helps the staff shape the relief and assess the practical implications.
Over the last year, we have been putting this insight into practice in areas where we think there is potential value in staff positions. For example, in a number of areas where complex or novel issues are involved, we have been taking steps to obtain input from market participants before assessing whether staff positions may be needed or appropriate. For example, we have done this with respect to the impact of MiFID II on U.S. asset managers and research providers, where we have encouraged data and information from members of the public, and in December reminded market participants of our request. Similarly, in January of last year, our Division Director issued a staff letter that identified concerns with respect to funds’ investments in cryptocurrency, and invited industry engagement on these issues.
In addition, just this past week our Office issued a letter inviting industry engagement on a couple of complex and particularly challenging topics related to the Advisers Act Custody Rule. The first part of the letter relates to the regulatory status of trading by investment advisers in securities or instruments that are not processed or settled on a delivery versus payment, or “non-DVP,” basis. We have seen growth in the variety and complexity of the types of securities and other assets that settle on a non-DVP basis. The second part of the letter raises questions on the application of the Custody Rule to digital assets, which is also a developing area of interest for investment advisers. We welcome engagement on both of these topics. As the letter notes, amendments to the Custody Rule are on the Commission’s long-term rulemaking agenda, and we hope that the information we receive in response to the letter could be helpful in developing any staff recommendations.
Next, I would like to discuss a couple of policy areas of focus for the Chief Counsel’s Office, particularly over the last year – international engagement and the Division’s Board Outreach Initiative.
Involvement in International Matters
The Chief Counsel’s Office plays a leading role, together with the Office of International Affairs, in the Commission’s engagement on international matters in the asset management space. This engagement has become increasingly important as the asset management industry has become more global and as international bodies have shown a continued interest in asset management.
For example, our Office engages with IOSCO – the International Organization of Securities Commissions – and with the FSB – the Financial Stability Board – to discuss matters relating to asset management and the securities laws across borders. Many of you may be familiar with these organizations, but as background, IOSCO is an international group that brings together the world’s securities regulators. One aspect of IOSCO’s work is coordinating to develop, implement, and promote international standards for securities regulation. The FSB is an international body that monitors and makes recommendations about the global financial system. The FSB was formed after the financial crisis, and through its members, seeks to strengthen financial systems and increase the stability of international financial markets. The majority of its members are central banks and ministries of finance from around the world. Both of these organizations serve as forums for regulators to discuss, among other things, matters relating to financial regulation. They also publish some of their work; recent examples include IOSCO’s recommendations for fund liquidity risk management and the FSB’s annual report on non-bank financial intermediation. Although the agenda of these international bodies may not be front-and-center for you, I would encourage you to follow their work and provide meaningful input when they seek public engagement.
The Chief Counsel’s Office also follows closely international regulatory changes that could affect U.S. market participants. For example, like many of you, we have been monitoring developments on Brexit, which seem to change daily. In December, Chairman Clayton articulated a number of concerns regarding the potential effects of Brexit on U.S. markets and Main Street investors. In collaboration with the Office of International Affairs, we have continued to engage in an outreach effort to asset managers and other market participants to understand how they are preparing and where risks may arise. As the situation continues to develop, I invite you to reach out to Division staff and tell us if you are seeing any potential problems and if we can be of assistance. While U.K. and E.U. authorities are the key players in Brexit and its effects, the SEC staff stands ready to advise and assist market participants on U.S. securities law compliance obligations, as needed.
In a similar vein, we also have been closely monitoring the effects of foreign data privacy laws, such as the European Union’s General Data Protection Regulation (“GDPR”) that went into effect last May. GDPR places restrictions on collection and sharing of data, including for non-U.S. investment advisers seeking to register in the U.S. Because access to books and records is an important part of how the Commission carries out its investor protection mission, we have been seeking to understand how GDPR and other data privacy laws will affect compliance with U.S. law. For example, in connection with applications by foreign advisers for registration under the Advisers Act, we have asked applicants for information regarding their ability to comply with the books and records provisions of the Advisers Act. We have also asked about an adviser’s ability to certify that it will make its books and records available for inspection as required by law. As we continue to ask these questions, we welcome dialogue with advisers and their counsel on ways that advisers in jurisdictions subject to these types of data privacy laws can comply with the Advisers Act.
Now I would like to turn to my final topic, the Division’s Board Outreach Initiative. The Chief Counsel’s Office has been leading the Division’s effort to understand where board oversight is most valuable. Our outreach has focused on understanding the current role of fund boards and asking whether there are opportunities to recalibrate the responsibilities imposed on fund boards to better serve investors.
Over the last year, we have already found a couple of opportunities to make improvements. For example, in light of the development of the fund chief compliance officer (“CCO”) role under rule 38a-1 of the Investment Company Act, our Office issued a staff no-action letter for boards to rely on representations of fund CCOs regarding quarterly approval of affiliated transactions under certain exemptive rules instead of the board itself determining compliance. In adopting rule 38a-1, the Commission assigned the responsibility for the day-to-day administration of a fund’s compliance program to the CCO.The no-action letter we issued acknowledges this development.
In light of technological developments, we also recently issued a staff no-action letter stating that the staff would not recommend enforcement action if fund boards do not adhere to in-person voting requirements in certain cases. While in-person meetings are an important and effective tool for fund boards, certain unforeseen or emergency circumstances, like weather events, natural disasters, or family emergencies, can make it impossible or impracticable for directors to attend a meeting in-person. In other cases, a fund board may have already met in person to discuss a matter thoroughly but did not take a vote at the prior-in person meeting. I believe the letter our Office issued recognizes that, in some circumstances, leveraging technology for board meetings can avoid burdens while respecting the importance that the Company Act places on these board determinations.
Another important part of this board outreach initiative is enhanced valuation guidance. Over the last few decades, there has been a tremendous evolution in how boards exercise their oversight responsibilities on fund valuation. Markets have grown and developed, and technology has improved. Standards for accounting, auditing, and reporting have evolved. But some of the existing guidance on valuation dates back to the 1970s or earlier and does not reflect this evolution.
Staff in our Office, in the Division’s Disclosure Review and Accounting Office, and in the Commission’s Office of the Chief Accountant are working together to consider possible recommendations for updates to Commission guidance on the valuation of portfolio securities and other assets held by registered investment companies. This effort includes seeking ways to modernize guidance to fund boards on performing their responsibilities concerning valuation in a way that recognizes changes in our regulatory framework over the past five decades. We look forward to continued engagement on this important initiative.
In closing, thank you again for the opportunity to speak today about the work of the Chief Counsel’s Office. The rest of the agenda for your conference will provide a great window into some of the other interesting projects currently happening in the Division, including presentations from a couple of my talented colleagues in the Division. Sarah ten Siethoff, Associate Director in our Rulemaking Office, will be on a panel later today covering the Commission’s proposed standards of conduct for financial professionals. And Bill Kotapish, Assistant Director in our Disclosure Review and Accounting Office, will be on a panel discussing insurance products and the Division’s recent variable product summary prospectus proposal.
It has been a pleasure to spend time with you today. With that, I am going to conclude my prepared remarks and join Barry and Paul for some questions.
 The Securities and Exchange Commission (“SEC” or “Commission”) disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
 See Dalia Blass, Keynote Address: ICI 2018 Mutual Funds and Investment Management Conference (March 18, 2019), available at https://www.sec.gov/news/speech/speech-blass-031819.
 See Securities Offering Reform for Closed-End Investment Companies, Investment Company Act Release No. 33427 (March 20, 2019), available at https://www.sec.gov/rules/proposed/2019/33-10619.pdf.
 See Letter from Paul G. Cellupica to the Investment Adviser Association on Engaging on Non-DVP Custodial Practices and Digital Assets (March 12, 2019), available at https://www.sec.gov/investment/non-dvp-and-custody-digital-assets-031219-206.
 See The Board of the International Organization of Securities Commissions, Final Report, Recommendations for Liquidity Risk Management for Collective Investment Schemes (February 2018), available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD590.pdf.
 See Financial Stability Board, Global Monitoring Report on Non-Bank Financial Intermediation 2018 (February 4, 2019), available at: http://www.fsb.org/2019/02/global-monitoring-report-on-non-bank-financial-intermediation-2018/.
 See Chairman Jay Clayton, SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks (December 6, 2018), available at https://www.sec.gov/news/speech/speech-clayton-120618.
 For more information on GDPR, see https://ec.europa.eu/commission/priorities/justice-and-fundamental-rights/data-protection/2018-reform-eu-data-protection-rules_en.
 See Independent Directors Council SEC Staff No-Action Letter (October 12, 2018), available at: https://www.sec.gov/divisions/investment/noaction/2018/independent-directors-council-101218.htm.
 See Compliance Programs of Investment Companies and Investment Advisers,SEC Release No. IC-26299, 68 F.R. 74714 (December 24, 2003), at 74724.
 See Independent Directors Council SEC Staff No-Action Letter (February 28, 2019), available at: https://www.sec.gov/divisions/investment/noaction/2019/independent-directors-council-022819.