[29298]
August 31, 2015
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 20-15CHIEF COMPLIANCE OFFICER COMMITTEE No. 17-15
ETF (EXCHANGE-TRADED FUNDS) COMMITTEE No. 22-15
ETF ADVISORY COMMITTEE No. 21-15
SEC RULES COMMITTEE No. 27-15
SMALL FUNDS COMMITTEE No. 26-15
UNIT INVESTMENT TRUST COMMITTEE No. 8-15 RE: ICI DRAFT LETTER ON SEC'S CLAWBACK PROPOSAL; COMMENTS DUE BY SEPTEMBER 9
In July, the SEC proposed a new rule and form amendments to implement the provisions of Section 954 of the Dodd-Frank Act [1] by a 3-2 vote. [2] This statutory provision, which adds new Section 10D to the Securities Exchange Act of 1934 (the “Exchange Act”), directs the SEC to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for:
- disclosure of the issuer’s policy on incentive-based compensation, and
- recovery of incentive-based compensation that is received in excess of what would have been received under an accounting restatement.
As noted in Institute Memorandum No. 29181, the SEC effectively exempted the securities of most registered investment companies because “the compensation structures of issuers of these securities render application of the rule and rule amendments unnecessary.” [3] The Proposal would apply only to those registered funds that:
- list their securities on an exchange (i.e., exchange-traded funds and closed-end funds);
- have internal management (i.e., have paid employees of their own, as opposed to relying on an investment adviser’s employees, whom the adviser pays); and
- pay their executive officers incentive-based compensation. [4]
Because of the paucity of internally-managed funds, the SEC estimated that the Proposal would apply to approximately seven registered investment companies. [5]
Summary of the Draft ICI Comment Letter
In our draft comment letter attached below, we support the SEC’s determination to exclude most registered investment companies from the Proposal. We recommend, however, that the SEC exclude all registered investment companies. In support of this recommendation, we make the following points:
- The concerns behind this Dodd-Frank Act provision do not apply to listed funds;
- The SEC excluded all registered investment companies from certain prior compensation-related rulemakings;
- Listed funds’ financial statements and accounting practices are less complex than those of operating companies; and
- Costs of implementation and compliance will outweigh any benefits.
We also address in the letter the reach of the Proposal with respect to the fund industry. As mentioned above, the SEC estimated that the Proposal will affect only a handful of listed funds. But as we explain in the letter, we believe the SEC neglected to consider how fund complexes compensate their chief compliance officers (“CCOs”), and how this could affect the Proposal’s reach. We are particularly interested in your comments on this section.
If you have questions or comments, please reach out to me (202-371-5406 or matt.thornton@ici.org) by Wednesday, September 9 COB. Comments on this Proposal are due to the SEC by September 14.
Matthew Thornton
Counsel
endnotes
[1] Listing Standards for Recovery of Erroneously Awarded Compensation, SEC Release No. 33-9861 (the “Proposal”), available at www.sec.gov/rules/proposed/2015/33-9861.pdf. See Institute Memorandum No. 29181, dated July 16, 2015, for a summary of the Proposal.
[2] SEC Commissioners Gallagher and Piwowar did not support the proposal.
[3] Proposal at 11.
[4] The Proposed Rule expressly exempts unit investment trust securities and “[a]ny security issued by a management company, as defined in 15 U.S.C. 80a-4(3), that is registered under section 8 of the Investment Company Act of 1940…, if such management company has not awarded incentive-based compensation to any executive officer of the company in any of the last three fiscal years, or in the case of a company that has been listed for less than three fiscal years, since the listing of the company.”
[5] Proposal at 108.