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News January 12, 2015 Issue

Will the SEC Revisit the 1940 Acts in 2015?

Itís been more than 20 years since the SEC took a fresh comprehensive look at the Investment Company Act of 1940, and even longer since it revisited the Advisers Act of 1940. Will 2015 be the year when at least one of these landmark legislative milestones is comprehensively revisited?

It may be, if the comments made by Division of Investment Management director Norm Champ in a speech last month are read as an initial step toward such a review, suggested Willkie Farr partner and former Division of Investment Management director Barry Barbash.

Champ, speaking at the Investment Company Instituteís 2014 Securities Laws Development Conference on December 10 in Washington, D.C. (see related article this issue), noted that 2015 will mark the 75th anniversary of both Acts, and that the SEC will mark the year "with a day of roundtables and dialogue, including opportunities to hear from industry pioneers, former regulators and bright lights from academia," which Barbash suggested may mean the beginning of revisiting the statutes.

"The last time the Investment Company Act was really looked at from a big picture point of view was in May 1992, and it probably is time to look at it again," Barbash said. That review resulted in a detailed analysis with significant recommendations, "Protecting Investors: A Half Century of Investment Company Regulation," more informally known as the "Red Book Study."

On the other handÖ

One former SEC official who was credited with a leadership role in the Red Book Study by the Investment Management Division director at the time,

Marianne Smythe, does not think a revisit of the Investment Company Act is likely. "Itís a major undertaking," said Wilmer Hale partner and former SEC Division of Investment Management associate director Matthew Chambers. "It would take a significant commitment of Division resources to do it. Also, it would be surprising to revisit a securities law so soon after the Dodd-Frank Act, which revised the securities laws significantly."

Champís comment regarding roundtables, he said, and dialogues may mean nothing more than a one-day ceremony, although he added that "the ceremony could open something."

As for the Advisers Act, it has yet to be revisited in the same comprehensive way that the Investment Company Act was in 1992. "It has been studied and amended numerous times in the last 25 years, including most recently in the Dodd-Frank Act," said

Stroock partner and former SEC Division of Investment Management deputy director Robert Plaze.

Plaze, who also participated in the 1992 Red Book Study, is not a fan of another study of the Investment Company Act because of "the time resources a comprehensive study like the one done in 1992 would take." The SEC already has a lot of unfinished regulatory business on its plate in the investment company space, given that it was essentially forced by Congress to implement Dodd-Frank, he said.

Champ, in his speech, did not provide much more in the way of just what the "roundtables and dialogues" would consist of, or what the goal of the session would be, other than to say that the event is "still in the planning stages."

"It would be a great idea to revisit both Acts," said

Sutherland partner and former SEC chief counsel at the agencyís Office of Compliance Inspections and Examinations John Walsh. "Itís been a fairly lengthy period of time since the Red Book Study. There have been significant changes in a number of ways, such as the use of data and what this means for regulatory disclosure, expectations placed on fund boards of directors, and the effect of the global marketplace." The 75th anniversary of both Acts might be a great occasion "to stop, take a look back, and ask, where are we?"

That said, Walsh said he understood Champ to be announcing a celebratory event, though, he added,†that would be a great opportunity to take a look back at whatís been accomplished and what has changed in the past 20 years or so.

The Red Book Study

The 525-page Red Book Study, which was created near the 50th anniversary of the Investment Company Act, "became a blueprint for what would be going on in the regulatory area for at least 10 years after its publication," Barbash said. That Champís remarks occurred in the year marking the Actís 75th anniversary might also lend itself to the possibility of a new comprehensive revisit.

Hereís what the SEC chair in 1992,

Richard Breeden, wrote to the then-director of the Division of Investment Management Marianne Smythe in a May 1 letter that appears in the Red Book Study:

"Two years ago, with the approach of the 50th anniversary of the Investment Company Act of 1940, you asked the Division to take a fresh look at the regulation of investment companies to determine whether existing regulation imposed unnecessary constraints on investment companies or the provision of other financial services and whether there were gaps in investor protection."

The conclusion the Division reached, Smythe replied in a letter to Breeden, was that "the regulatory system crafted half a century ago has worn well, providing the framework for the development of a dynamic industry," but that, "In some respects, Ö regulation has not kept pace with the changes in financial markets and may prevent investment companies from offering flexible, efficient and competitive vehicles for investing in financial markets. It also may distort the activities of companies that should not fall within the Act." While avoiding changes to the "fundamental protections" of the Investment Company Act, she said the Division did recommend some changes.

There was a lot of resistance to the Red Book Study, said Chambers, some of it simply because there frequently is resistance to change in any large organization.

What followed was a comprehensive report that looked at a variety of topics, including performance-based compensation, investment company governance, the sale of open-end investment company shares, advertising, affiliated transactions, and more.

Specifically, said Barbash, the study paved the way for the addition of the Investment Company Act Section 3(c)(7) exemption from SEC registration for pooled investment entities limiting their investors to "qualified purchasers." The exemption is generally viewed as facilitating significant growth in the private fund business. Previously, private funds were limited to no more than 100 investors.

Provisions adopted on the basis of the recommendations of the study also changed the regulation of certain insurance and securitization investment products, he said.