Investment companies and investment advisory services have become a significant part of the financial system. They host and manage most of the retirement assets in this country and have spread their services abroad as well. This case book is designed to prepare students to practice in this area, including sensitizing students to the possible changes in money management and the legal adjustments to these changes.

This book deals with the laws governing investment companies: their creation, structure, corporate governance, operations (including the distribution of shares and the management of the portfolios) and dissolution. In particular, this case book focuses on new structures that have evolved in this area, such as ETFs and money market funds.

The purpose of this book is to prepare students, and lawyers who are not familiar with the subject area, to provide effective advice. In addition, it focuses on practicing in this area before the Securities and Exchange Commission.

About the Authors

Tamar Frankel

Tamar Frankel is a Professor of Law at Boston University Law School, where she has been teaching for many years. She was a visiting Professor at Harvard Law School and Harvard Business School and has lectured in Japan, Oxford, UK, Switzerland, Malaysia and India. She served as an attorney fellow at the Securities and Exchange Commission and was a Visiting Scholar at the Brookings Institution, Washington D.C.

Her writings include The Regulation of Money Managers (3d ed. 2015) (with Professor Arthur Laby and Ann Taylor Schwing, Esq.), Securitization (2d. ed. 2006) (translated into Chinese), Trust and Honesty, America's Business Culture at a Crossroad (2006),Fiduciary Law: The Law of Different Fiduciary Relationships: Definitions, Duties, Remedies Over History and Cultures (Oxford University Press)Translated to Japanese) and The Ponzi Scheme Puzzle (Oxford University press). She is the author of over 70 articles on fiduciary law, the regulation of investment companies and corporate governance, Internet governance of names and numbers. Prof. Frankel holds a law degree from the Jerusalem Law Classes in Israel, and an LL.M. and S.J.D. degrees from Harvard Law School.

Kenneth E. Burdon

Kenneth E. Burdon is an investment management attorney at Skadden, Arps, Slate, Meagher & Flom LLP. He represents public and private investment funds, investment advisers, financial services companies and other financial institutions in connection with the structuring and distribution of investment products, and in a variety of regulatory, compliance, corporate, governance, operational and transactional matters. Mr. Burdon received his J.D., summa cum laude, from Boston University School of Law, and was an Editor of the Boston University Law Review. The views and opinions expressed in this book are Mr. Burdon's alone, and such views and opinions are not necessarily those of Skadden, Arps, Slate, Meagher & Flom LLP or any one or more of its clients.

Investment Management Regulation, Fifth Edition

Summary Table of Contents

Chapter 1 The Financial System

A. The Nature of the Financial System and the Place of Investment Companies and Investment Advisers in the System

B. The Investment Management Profession

C. The Pattern of Investment Management Regulation

Chapter 2 The Investment Advisers Act

A. The Investment Advisers Act: History, Outline, and Definition of Advisers

B. The Exclusion of Publishers from the Definition of an Investment Adviser

C. The Exclusion of Broker-Dealers from the Definition of an Investment Adviser

D. The Relationship of Federal and State Law

E. Registration and Disclosure Requirements

F. Regulation of Advisers

Chapter 3 What is an Investment Company?

A. Introduction to the Basic Definition

B. Who is an Issuer?

C. Definition of Investment Company by the Nature of its Business and by the Nature of its Assets, Presentation to the Public and its Main Business: Section 3(a)(1)(A); Section 3(a)(1)(C) and Section 3(b)

Chapter 4 Companies Excluded from the Definition of an Investment Company and from the Investment Company Act

A. Introduction

B. Exceptions for Operating Companies

C. Venture Capital Companies and Business Development Companies: Sections 2(a)(48), and 54 through 63

D. Private Investment Companies

E. Banks and Savings and Loan Associations: Section 3(c)(3)

F. Insurance Companies: Section 3(c)(3)

G. Financing, Factoring, and Real Estate Companies: Section 3(c)(5)

H. Charitable Corporations: Section 3(c)(10)

I. Pension Plans: Section 3(c)(11

Chapter 5 Financial Institutions That Do Not Fall Squarely Under the 1940 Act: Special Purpose Corporations

A. Pools that Are Used to Securitize Financial Assets: Special Purpose Vehicles (SPVs)

B. Offshore Funds

C. Commodity Pools

Chapter 6 Registration and Disclosure

A. Registration Under the Investment Company Act

B. Disclosure: The Prospectus and the Statement of Additional Information (SAI)

C. Electronic Delivery of Disclosure

D. Prospectus Updates

E. Liability for a Misleading Prospectus

F. The Relationship Between the Prospectus and the SAI

G. Advertising

H. Disclosure of Adviser Holdings and Fund Transaction Costs

I. Abusive Trading Practices

J. Privacy of Consumer Financial Information and Use of Consumer Financial Information in Marketing Solicitations

Chapter 7 Fund Management: The Advisory Function, Fees and Contract Terms

A. Introduction

B. Structuring Advisory Services

C. Regulatory Response to the Potential Conflicts of Interest Posed by the Determination of the Adviser's Fees

Chapter 8 Corporate Governance: Fund Directors and Shareholder Voting

A. Introduction

B. Relationship Between State Law and the Investment Company Act

C. Composition of the Board: Section 10(a)

D. The Role of the Board

E. Shareholder Voting

Chapter 9 Capital Structure

A. Issuance of Stock: Redeemability and Sections 2(a)(32), 22(c), 22(e) and Rule 22c-1

B. Issuance of Senior Securities (e.g., Bonds and Preferred Stock): Section 18 of the Investment Company Act

Chapter 10 The Investment Company as Investor

A. Introduction

B. Restrictions on Investments of Investment Companies: Section 12

C. The Role of the Investment Company in the Portfolio Company's Board Room

D. Custody of Investment Company Assets: Section 17(f)

E. Personal Investment Activities of Investment Company Personnel: Section 17(j)

F. Portfolio Managers' Access to Information

Chapter 11 Distribution of Investment Company Shares

A. Regulation of Sales Loads; Different Methods of Paying for Distribution

B. Retail Price Maintenance

C. Buying Mutual Fund Shares on Margin

D. Exchanging Investment Company Shares

Chapter 12 Protection Against Conflicts of Interests

A. Introduction: The Nature of Conflicts and the Structure of Fiduciary Law

B. Section 17 of the Investment Company Act of 1940

C. The SEC's Self Limitations on the Use of Exemptive Relief

D. Conflict of Interest in Joint Transactions: Section 17(d) and Rule 17d-1

E. Conflict of Interest in Agency Transactions: Section 17(e)

F. Conflict of Interest by Underwriters: Section 10(f)

G. Disclosure Regarding Portfolio Managers

H. Conclusion

Chapter 13 Money Market Funds

A. The History of Money Market Funds

B. Proposals for Reform and Fundamental Changes in 2014

C. Regulatory Framework of Rule 2a-7

Chapter 14 Unit Investment Trusts

A. Introduction

B. Regulation of UITs

C. 1940 Act Regulation Which Does Not Apply to UITs

Chapter 15 Closed-End Investment Companies

A. Use and Nature of Closed-End Investment Companies

B. Distribution of Closed-End Fund Shares and the Puzzle of Closed-End Investment Companies: Their Shares Sell at a Discount from Their Net Asset Value

C. Proposed Solutions to the Discount Problem

D. Capital Structure of Closed-End Investment Companies

Chapter 16 Exchange-Traded Funds

A. Issues Under Section 22(d) and Rule 22c-1

B. Advantages and Disadvantages for Investors

C. ETFs' Use of Derivatives; Leveraged and Inverse ETFs

D. Affiliated Index Providers

F. Exchange Listing Standards

Chapter 17 Variable Insurance Products

A. The History and Structure of Variable Insurance Products

B. The Status of Variable Financial Instruments as Securities

C. The Status of "Mixed" Contracts as Securities

D. The Status of Separate Accounts as Investment Companies

E. 1940 Act Regulation of Variable Financial Instruments

F. Variable Annuities and Section 27 of the Investment Company Act of 1940: Sales Charges of Periodic Payment Plans

Chapter 18 Ethics Issues

A. The Investment Management Profession

B. Responsibility of Lawyers to Disclose Clients' Misdeeds

C. In-House Counsel

D. Behavior of Lawyers Engaged in Occupations Other than Lawyering

E. Investment Managers' Ethical Issues

F. Issues Regarding Fund Directors

Epilogue

Tables of Authorities

Professors may request a review copy by emailing us. Please let us know the title of the course you teach, the anticipated dates of the course and your name, college or university and mailing address.

Important Resources for
Investment Management Attorneys and Professors

Laws That Govern the Securities Industry

SEC Division of Investment Management
SEC Rulemaking
SEC EDGAR Filings
SEC Form s
SEC News
SEC Investment Adviser Search (Form ADVs)
FINRA Rules
FINRA BrokerCheck (Form BDs)
NYSE Listed Company Manual
Investment Company Institute
ICI Factbook

Internet Links referenced in the Fifth Edition

These links from the tables in Investment Management Regulation, Fifth Edition are provided here so they can be kept updated as they change and the references in the book become dated.

The Atlantic Monthly Group

Deutsche Bank Also 'Victimized' Goldman 'Victim', The Atlantic (April 26, 2010)

Charles Schwab Corp.

Charles Schwab Corp. Managed Accounts

Congressional Budget Office

Cost Estimate: H.R. 1800, Small Business Credit Availability Act (rev. Jun. 30, 2014)

C-Span, National Cable Satellite Corporation

Securities and Exchange Commission: Wall Street Journal CFO Network Conference, C-SPAN (Jun. 25, 2013)

Federal Deposit Insurance Corporation

FDIC Trust Examination Manual, Appendix D: Securities Law

Investment Company Institute

Investment Company Fact Book (55th ed. 2015)
Proposed Rules Relating to Selective Disclosure and Insider Trading (Apr. 27, 2000)
Report of the Money Market Working Group Submitted to the Board of the Governors of the Investment Company Institute, Executive Summary, (Mar. 17, 2009)

Jim Hamilton Blogspot

Jim Hamilton's World of Securities Regulation, Dec. 22, 2010 President Signs Legislation Modernizing Federal Tax Code Treatment of SEC-Regulated Investment Companies

New York Stock Exchange

NYSE Arca Equities Rules, Rule 5.2(j)(3)
NYSE Arca Equities Rules, Rule 8.600
NYSE MKT Rules, Rule 1000A, Commentary .02(b)(1)

The New York Times

A Wall Street Scapegoat Goes Down, The New York Times (Aug. 2, 2013)
Trich, Teresa, NY Times, A Wall Street Scapegoat Goes Down, The New York Times (Aug. 2, 2013)

North American Securities Administrators Association

Form ADV, Part 1B

Notre Dame Law Review

Farina, Richard H., John P. Freeman & James Webster, Mutual Fund Industry: A Legal Survey, 44 Notre Dame L. Rev. 732 (1969)

Reuters

Adler, Lynn, BDCs Step Closer to New Legislation, More Leverage, REUTERS, Nov. 19, 2015

Securities and Exchange Commission

Carey, Paul R., Commissioner, Securities & Exchange Commission, Remarks to the Investment Company Institute Procedures Conference
Champ, Norm, Director, Division of Investment Management, U.S. Securities & Exchange Commission, Remarks to the ALI CLE 2012 Conference on Investment Adviser Regulation (Dec. 6, 2012)
Comments of David B. Jones, Senior Vice President, Fidelity Management & Research Co. & Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Co. 8-9 (June 4, 2004)
Comments of David B. Jones, Senior Vice President, Product Strategy & Communications, Fidelity Management & Research Co. & Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Co. (Mar. 2, 2004)
Cybersecurity Guidance, IM Guidance Update, No. 2015-02 (Apr. 2015)
Division of Investment Management, Securities and Exchange Commission, Report on Mutual Fund Fees and Expenses (Dec. 2000)
Donohue, Andrew J., Director, Division of Investment Management, Securities and Exchange Commission, Investment Company Act of 1940: Regulatory Gap between Paradigm and Reality?
Exchange-Traded Funds
Form 19b-4
Form ADV, Fast Answers
Form ADV, in PDF format
Form ADV, Part 1A
Form ADV, Part 2A, Instruction 8
Form ADV, Part 2A, Instruction 10
Form ADV, Part 2A, Item 18 C
Form ADV, Part 2B
Form ADV, Part 2, General Instructions
Guidance Updates
Johnson, Norman S., Commissioner, U.S. Securities and Exchange Commission, Suits Against Lawyers, Speech Before the American Bar Association Federal Securities Law Committee (Nov. 8, 1996)
Letter in Response to Petition for Rulemaking from Investment Company Institute
Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
Money Market Fund Reform, Investment Company Act Rel. No. 29132 (Feb. 23, 2010)
Office of Compliance, Inspections and Examinations, U.S. Securities & Exchange Commission, Inspection Report on the Soft Dollar Practices of Broker-Dealers, Investment Advisers and Mutual Funds (Sept. 22, 1998)
Office of Investigations, U.S. Sec. & Exch. Comm'n, Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme (Public Version) 1 (Aug. 31, 2009)
Office of Investor Education & Advocacy, SEC, Investor Bulletin: Exchange-Traded Funds (ETFs) (2012)
Registered Investment Company Use of Senior Securities—Select Bibliography, Staff of the SEC Division of Investment Management
Regulatory Actions section of the Commission's website includes concept releases dating back to 1994, U.S. Sec. & Exch. Comm'n, Regulatory Actions
Roye, Paul E., Remarks before the Mutual Fund Directors Forum Fifth Annual Policy Conference: Critical Issues for Investment Company Directors, (Feb. 17, 2005)
Schapiro, Mary, Chairman, U.S. Sec. & Exch. Comm'n, Speech: Statement on Money Market Funds Before the Open Commission Meeting (Jan. 27, 2010)
SEC Litigation Release No. 21489 (April 16, 2010), The SEC Charges Goldman Sachs with Fraud in Connection with the Structuring and Marketing of a Synthetic CDO
SEC Staff Evaluating the Use of Derivatives by Funds (Mar. 25, 2010)
Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2011)
Suh, Simona, Memorandum of, Certain Hedge Fund Trading Practices, NY-7563-A (Apr. 10, 2006)

Securities Law Home Page

Astarita, Mark J., The Wells Notice in SEC and NASD Investigations: Could It Possibly Be a Good Thing? (2010)

U. S. Department of the Treasury

U.S. Dep't of the Treas., Fact Sheet: Administration's Regulatory Reform Agenda Moves Forward: Legislation for Strengthening Investor Protection (July 10, 2009)