Citing Alleged Misrepresentation in Application, SEC Plans to Yank Previously-Granted Exemptive Order
The SEC recently settled an enforcement action against two Delaware Investments funds for allegedly making a misrepresentation in an exemptive application about providing Section 19(a) notices to shareholders. The application, which had been filed in 2002 by the fundsí administrator, had sought 19(b) relief necessary for the funds to offer a managed distribution policy (IM Insight, September 4, 2006).
Turns out, thereís more to the story. Following the enforcement action, the SEC announced that it planned to rescind the fundsí 19(b) order. "If an application contains an untrue statement of material fact," said the SEC in its September 1 announcement of the planned recession, "the Commission cannot properly exercise its power" to make the findings required before granting the exemptive order.
Moreover, the SEC warned that if a firm does not comply with the terms and conditions in the order, the exemptive relief is not valid:"The Commission also reiterates that any exemption provide by an order issued under the Act is available only to a person that complies with the terms and conditions set forth in the application based on which the exemption was granted."
The moral of the story: If you are relying on an SEC exemptive order, youíd better be doing all those things you promised the SEC youíd do in your exemptive application. Or else that order could be whisked out from underneath you.
Snap! Just like that.
A recession of the Delaware Investment fundsí order would be the first time in recent memory that an order administered by the SECís Division of Investment Management has been withdrawn based on an alleged misrepresentation in an exemptive application. Since 1979, the SEC apparently has rescinded only three previously-granted exemptive orders. One of those recessions was made at the applicantís request; the other two recessions involved technical issues not related to any misconduct on the part of the applicant.
Itís not clear whether the two Delaware Investments funds will be able to continue featuring their managed distribution policies once the SEC rescinds the 19(b) order. A statement about regulatory matters posted on the fund groupís website last week did not mention the pending recession of the 19(b) orders. The administrator and funds said that they "do not expect that the settlement Ö will materially adversely affect [their] ability to service its clients." IM Insight asked the fund group whether a rescession of the exemptive order would have some affect on the fundsí shareholders. "At this time, we do not have any comment on the matter," said a firm spokesperson.
In light of the SECís action, Mayer Brown partner Stephanie Monaco suggested that advisers go back and check compliance on their exemptive applications on an annual basis. "Comply literally with every condition that you have had included in your application and on which the order has been granted," she said. "I definitely think it should be part of the firmís annual review." That advice, she added, goes for compliance with exemptive rules and no-action letter relief, as well. Reliance on such relief, she said, "needs to be supported every year with a review to ensure that all the conditions required to have a bona fide reliance have been met."
Added Monaco: "If I was on the examination staff, that would be the lowest hanging fruit around."