The Players
Sponsor: organizes and promotes the Fund; arranges service providers Investment Advisor/Manager: manage the portfolio and invest the assets Investment Managers may retain Sub-Advisors Directors: > 50% independent Administrator: accounting, NAV calculation May be affiliated with Advisor Distributor: broker-dealer activities Custodian: certain banks Transfer Agent: keep shareholder records Auditors: annual audit and opinion on financials Fund Counsel: registration statement, filings, opinions, Board meetings, advice Chief Compliance Officer: annual report to Board re compliance with securities laws
The Laws
Investment Company Act of 1940 Investment Advisers Act of 1940 Internal Revenue Code, Subchapter M ERISA NASD Rules Securities Exchange Act of 1934 SEC Interpretations, Statements, NoAction Letters, Enforcement Actions
The Paper
Registration Statement Prospectus Statement of Additional Information Part C Shareholder Reports SEC Filings Agreements Investment Advisory Distribution Administration Custody Other Board Materials
Restrictions on Advisor
Prospectus and SAI Disclosure Disclose investment objective and policies Certain policies may only be changed upon shareholder vote Advisory Contract Annual Board approval includes review of investment performance, compensation, brokerage, fund expenses Board of Directors Valuation of securities Approve distribution arrangements Approve service providers Private Rights of Action (Lawsuits) Adviser has fiduciary duty with respect to the amount of compensation received Affiliated Transactions Transactions between affiliated funds Joint transactions Affiliated brokerage Investment Restrictions Disclosure Fund-of-funds Diversified/Non-Diversified (e.g. no more than 5% in one security)
Advisory Contract
Approval by shareholders
Includes material amendments
Annual approval by Board In-Person meeting of independent directors Termination in the event of assignment or on 60
notice
days
Services Invest pursuant to Prospectus & SAI Place orders Vote proxies Report to Board Back office work Fees based on AUM Limits on performance fees Breakpoints
Sub-Advisory Contracts
Approval by shareholders required Allocation of responsibilities
Records retention
Trading
No purchases if an affiliate is a member of an underwriting syndicate (n.b. Rule 10f-3) Effecting trades through affiliated brokers (n.b. Rule 17e-1) Restrictions on agency cross trades (Advisers Act, ERISA
Custody
Qualified Bank Foreign Custody Foreign Sub-Custodian Qualified Foreign Banks Financial strength Ability to enforce judgments and protect assets No exchange controls Access to auditors Eligible Securities Depository Board approval and reporting Custody at Futures Commission Merchant for exchangetraded futures contracts and commodity options
Segregation of assets Sweeping of gains
Proxy Voting
Must disclose proxy voting policies and procedures in Registration Statement
Conflicts between shareholders and adviser
Fund must file proxy voting record Allocate proxy voting responsibility between adviser and sub-adviser (and third party) Advisers Act requires proxy voting in the best interest of clients and procedures for resolving conflicts of interest ERISA requirements
Conflicts of Interest
Affiliate: investment adviser, officers, directors, partners, etc. (n.b. complex definition) An Affiliate may not: Sell any security to the Fund Purchase any security from the Fund Borrow money from the Fund Exception for exchange-traded securities at the current market price (Rule 17a-7) E.g. seeding of GOBF fund An affiliate may not engage in a joint enterprise with a fund (e.g. securities purchases, kickbacks from service providers, trade allocation) An affiliate may not act as agent for compensation in a transaction with the Fund (e.g. broker)
Rule 17e-1: permissible affiliated brokerage
Personal Trading
No fraudulent, manipulative, deceptive practices in connection with purchase/sale of securities by related persons Includes securities held by the fund during the last 15 days or had been considered for purchase during the last 15 days Excludes Treasuries, Short-term instruments, Mutual Funds Fund and Adviser must adopt a Code of Ethics Approved by Board Periodic reporting of violations Advisers Act (More restrictive Code of Ethics) Form ADV disclosure Broader holdings reports
Code of Ethics
Pre-approval of participation by investment personnel in IPOs and private placements Recordkeeping: Code, violations, certifications, access persons, holdings reports Disclosure about personal trading policies in prospectus
Rules apply equally to internet advertising Effect on marketing to non-US jurisdictions UK: directed communications, reasonable precautions
Balance benefits of fund structure/attributes with risks (e.g. high yield bonds, emerging markets, IPOs) Exaggerated claims about manager skill or process Misleading comparisons to other funds
NASD members cannot use sales literature that includes related account information Note: Portfolio Holdings Policy and disclosure
Recordkeeping
Financial records, shareholder account ledgers, agreements, board meeting minutes, brokerage reports All records must be maintained in easily accessible place (aka on-site) for 2 years Certain records must be maintained indefinitely: journal entries and ledgers, portfolio histories, corporate documents, minute books Other records must be maintained for 6 years Electronic storage permissible SEC access upon request Third party service providers may hold records Advisers Act requirements (generally 5 years)
Compliance
Fund must adopt and implement policies and procedures reasonably designed to prevent violations of the securities laws
Portfolio management, trading, disclosures, recordkeeping, valuation, privacy, market timing Oversight of Fund service providers
Summary
Mutual Funds are highly regulated Consult your Legal or Compliance Professional
Todd Cipperman is the principal of Cipperman & Company, which provides legal services to investment managers, investment advisers, broker-dealers, mutual funds, hedge funds, and technology providers. Cipperman & Company provides a wide range of services for the industry including regulatory advice, product development, distribution arrangements, compliance programs, and client and vendor agreements. Mr. Cipperman has more than 15 years of experience in the investment management and financial services industries. As a principal of Cipperman & Company, he has represented a wide range of investment management clients with a focus on distribution issues facing advisers and broker-dealers. He previously served as general counsel of a public mutual fund and financial technology firm, including its $65 Billion proprietary mutual fund family. He has also served as general counsel of one of the largest international equity 1905 General Alexander Drive managers. He spent several years in private practice on Wall Street representing both buy Malvern, PA 19355 side clients in investment and sell 610.648.9449 tcipperman@cipperman.com management and capital markets transactions. He is a graduate of www.cipperman.com the University of Pennsylvania Law School and Cornell University.