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Mutual Funds: Law and Practice

Walter Nagel


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Mutual funds hold approximately one quarter of the value of the stock of U.S. companies, one third of the value of municipal securities, and forty-four percent of outstanding financial paper. Mutual Funds: Law and Practice is a comprehensive legal guide to this complex, $10 trillion industry.

This essential new book takes a multi-faceted approach to its subject, covering the Investment Company Act of 1940 and other securities acts; regulation by the SEC, the states, and self-regulatory organizations; and best practices promulgated by trade groups. It examines all aspects of fund structure, operations, marketing, financial disclosure, tax treatment, regulation, examination and enforcement.

Topics include board and director obligations unique to mutual funds, disclosure "do"s and "don't"s, insurance, limitations on the use of some investments and investment practices, mutual fund fees and expenses, and more. How should you prepare for an SEC examination of a fund? How can a fund avoid taxation on undistributed capital gains? How does a fund's capital structure affect its ability to borrow? You'll find answers to these questions and many others.

Whether you are a fund counsel, sponsor or manager, an investor or shareholder, a fund director or service provider, Mutual Funds: Law and Practice helps you choose the right strategies and avoid costly mistakes.

Book #710; looseleaf, one volume, 484 pages; published in 2011, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-171-2

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 484
  • ISBN: 978-1-58852-171-2
  • Pub#/SKU#: 710
  • Volume(s): 1

Author Image
  • Walter Nagel

Walter Nagel is a Partner with Crowell & Moring LLP resident in the Washington D.C. office. Mr. Nagel represents well known clients on tax and business matters, including multi-million dollar controversies. He is a past Chair of the American Bar Association State & Local Tax Committee, a former member of the District of Columbia Tax Revision Commission, and on governors task forces in New York and Virginia. He also served as counsel to the United States Advisory Commission on Electronic Commerce, and represented the American Bar Association on the steering committee of the National Tax Association Communications and Electronic Commerce Tax Project. Mr. Nagel was chief tax executive for MCI Communications where he held the title of Vice President and General Tax Counsel and previously held tax management positions at TWA and AT&T. He was president of Peracon, an on-line commercial real estate portfolio company. Mr. Nagel has authored or co-authored dozens of published works, including the law school textbook Leading U.S. Supreme Court State Tax Cases, and has lectured extensively. He has served as chair of various continuing legal education programs of the Georgetown University Law Center and on the advisory boards of several legal publications. Mr. Nagel has a B.A. from Rutgers College, a M.B.A. from Rutgers School of Business, a J.D. from Rutgers University School of Law and an LL.M. from Georgetown University Law Center. Mr. Nagel is admitted to practice law in the District of Columbia, New Jersey and before the U.S. Supreme Court.


Also by Walter Nagel:
State Business Taxes

CHAPTER 1
Industry Overview

§ 1.01 The Industry
[1] What is a Mutual Fund?
[2] Why Do Mutual Funds Exist?
[3] Historical Background
[4] The Size and Scope of the Industry
§ 1.02 The Regulatory Structure
[1] Introduction
[2] The Investment Company Act of 1940 (ICA)
[3] Other Federal Statutes
[4] The Securities and Exchange Commission (SEC)
[5] State Blue Sky Laws and State Regulators
[6] The Financial Industry Regulatory Authority, Inc. (FINRA)
[7] The National Securities Exchanges
[8] The Internal Revenue Service (IRS)
§ 1.03 The Stakeholders
[1] The Investment Managers
[2] The Investors/Shareholders
[3] The Directors
[4] The Service Providers
[5] The Trade Groups
§ 1.04 Conclusion

CHAPTER 2
Organizing a Mutual Fund

§ 2.01 Introduction
§ 2.02 Types of Funds
[1] Overview
[2] Classification of Investment Companies
[3] Sub-Classification of Funds
§ 2.03 Organization under State Law
[1] Overview
[2] Establishment of Entity
[3] Organizational Documents
§ 2.04 Registration with the SEC
[1] Overview
[2] The Mechanics of Registration
§ 2.05 Fund Names
[1] State Law Requirements
[2] Federal Law Requirements
§ 2.06 Board Approvals
[1] Overview
[1] Specific Approval Items

CHAPTER 3
Advertising and Marketing

§ 3.01 Introduction to the Regulation of Mutual Fund Advertisements
§ 3.02 Timing and Content of Mutual Fund Advertisements
[1] Securities Act Registration Statement and Prospectus Delivery Requirements
[2] Permissible AdvertisementsExceptions to Securities Act Prospectus Delivery Requirements
[3] Investment Company Act Requirements
[4] Anti-Fraud Requirements
[5] SEC Filing Requirements
[6] FINRA Requirements for Mutual Fund Advertising

CHAPTER 4
Board and Director Obligations

§ 4.01 Introduction
[1] Mutual Fund Boards
§ 4.02 Overall Role of Directors and Best Practices
§ 4.03 Common Law and Statutory Obligations
§ 4.04 State Law Obligations
[1] Introduction
[2] Duty of Care
[3] Duty of Loyalty
§ 4.05 Federal Obligations
[1] Federal Obligations of Independent Directors or Trustees
[2] Contractual Agreements With Affiliated Persons
§ 4.06 Obligations Imposed on Boards By Exemptive Rules
[1] Security Purchases from Affiliated Broker Dealers - Rule 10f-3
[2] Use of Fund Assets for Distribution Expenses - Rule 12b-1
[3] Interim Advisory Contracts - Rule 15a-4(b)(2)
[4] Securities Transactions with Advisor's Other Clients - Rule 17a-7
[5] Mergers of Affiliated Mutual Funds - Rule 17a-8
[6] Purchase of Joint Liability Policies - Rule 17d-1(d)(7)
[7] Affiliated Broker Commissions - Rule 17e-1
[8] Joint Insured Bonds - Rule 17g-1(j)
[9] Multiple Classes of Voting Stock - Rule 18f-3
§ 4.07 Directors and Officers Insurance
§ 4.08 Civil Liability: How Directors and Trustees May Satisfy Their Obligations
[1] Civil Liability In General
[2] State Civil Liability
[3] Federal Civil Liability
§ 4.09 Conclusion

CHAPTER 5
Reporting Requirements

§ 5.01 Introduction
§ 5.02 Rule 24f-2
[1] New Share Registration
[2] Special Conditions
§ 5.03 Prospectus: Statutory and Summary, and Statement of Additional Information
[1] Registration Statement Requirements under the Securities Act of 1933 and Investment Company Act of 1940
[2] Form N1-A
[3] Disclosure Guidance
[4] The Summary Prospectus
[5] Statement of Additional Information
[6] Part C
[7] Updating the Registration Statement
[8] Delivery Requirements
§ 5.04 On-Going Reporting to SEC and Investors
[1] Shareholder Reports
[2] Proxy Voting Requirements
[3] Fidelity Bond
§ 5.05 Mutual Fund Mergers
[1] General Considerations
[2] Proxy, Registration and Succession Issues
[3] Form N-14 Combined Registration/Proxy Statement

CHAPTER 6
Proxy Statements and Information Statements

§ 6.01 Introduction
§ 6.02 Solicitation of Proxies
[1] Information to be Furnished to Shareholders
[2] Proxy Requirements
[3] Presentation of Information in a Proxy Statement
[4] Information Required in Proxy Statements
[5] Filing Requirements
[6] Internet Availability of Proxy Materials
[7] Proxy Contests
[8] Shareholder Proposals
§ 6.03 Information Statements
[1] Information to be Furnished to Shareholders
[2] Presentation of Information in an Information Statement
[3] Information Required in Information Statements
[4] Filing Requirements
[5] Internet Availability of Information Statement

CHAPTER 7
Mutual Fund Operations

§ 7.01 The Unique Structure of a Mutual Fund
[1] Investment Advisers
[2] Investment Sub-Advisers
[3] Investment Sub-Sub-Advisers
[4] Manager of Managers Arrangements
[5] Other Service Providers
§ 7.02 Mutual Fund Fees and Expenses
[1] Management Fees
[2] Distribution and/or Service Fees: Rule 12b-1
[3] Other Expenses
[4] Expense Reimbursement or Fee Waiver Arrangements
§ 7.03 Custody
[1] Overview
[2] Bank Custody
[3] Broker-Dealer Custody
[4] Self-Custody
[5] Custodian Agreement
[6] Foreign Custody
§ 7.04 Trade Execution
[1] Overview
[2] Best Execution
[3] Use of Affiliated Broker-Dealers
[4] Soft Dollar Arrangements
[5] Prohibition on Directed Brokerage to Promote the Sale of Fund Shares
[6] Alternative Trading Systems
§ 7.05 Securities Lending
[1] Overview
[2] Fundamental Investment Policy
[3] Risks
[4] SEC Staff Conditions
[5] Affiliated Securities Lending Agents
[6] Dodd-Frank Act Provision
§ 7.06 Valuation
[1] General
[2] Suspension of Redemptions
[3] Fair Valuation and FAS 157
[4] Pricing Errors
[5] Money Market Funds
§ 7.07 Capital Structure
[1] Bank Borrowings
[2] Closed-End Funds
[3] Derivatives and Other Securities Practices Involving
[4] Rule 18f-3: Multi-Class Plans
[5] Sales Charges
§ 7.08 Limitations on Investments
[1] Diversification
[2] Concentration Policies
[3] Prohibitions on Investments in Broker-Dealers, Underwriters and Investment Advisers
[4] Limitations on Illiquid Investments
[5] Rule 144A Securities
[6] Limitations on Investments in Other Funds
§ 7.09 Conflicts of Interest
[1] Self Dealing
[2] Joint Transactions: Section 17(d)
[3] Use of Affiliated Broker-Dealers: Section 17(e)
[4] Use of Affiliated Underwriting Syndicates: Section 10(f)
§ 7.10 Compliance Programs
[1] Overview
[2] Scope of Compliance Programs
[3] Board Approval and Review
[4] Chief Compliance Officer
§ 7.11 Codes of Ethics
[1] General
[2] Board Approval
[3] Reporting Requirements
[4] Recordkeeping
[5] Sarbanes-Oxley Code of Ethics
§ 7.12 Recordkeeping Requirements
§ 7.13 Codes of Ethics
[1] Overview
[2] Anti-Money Laundering Programs
[3] Customer Identification Programs
[4] Suspicious Activity Reporting
[5] Currency Transaction Reports
[6] Integration into Mutual Fund Operations
§ 7.14 Business Continuity Plans
§ 7.15 Privacy
§ 7.16 Exemptive Orders
[1] The SEC's Exemptive Power
[2] From Exemption to Rule
[3] Staying Exemptive Requests
[4] How Exemptive Orders Differ From No-Action Letters

CHAPTER 8
Independent Accountants and Related Topics

§ 8.01 Introduction
§ 8.02 Net Asset Value
[1] Generally
[2] Changes to Portfolio and Change in Number of Fund Shares
[3] Expenses, Dividends and Other Income
§ 8.03 The Independent Registered Public Accounting Firm
[1] Responsibilities and Duties
[2] Selection of Independent Auditors
[3] Independent Audit Committees
[4] Independence Standard
§ 8.04 Sarbanes-Oxley and Related Requirements
[1] Prohibited Non-Audit Services
[2] Pre-Approval of Audit and Permissible Non-Audit Services
[3] Disclosure of Fees Paid to Independent Auditors
[4] Other Required Disclosures
[5] Audit Partner Rotation Requirements
[6] One-Year Cooling Off Period
[7] Communications with Audit Committees
[8] Retention of Audit Records
[9] Standards of Professional Conduct for Attorneys
[10] Audit Committee Financial Expert
§ 8.05 Books and Records
[1] Introduction
[2] Rule 31a-1: Records to be Maintained
[3] Rule 31a-2: Preservation Requirements
[4] Rule 31a-3: Records Kept by Third Parties
[5] SEC Inspection of Records
[6] Destruction and Falsification of Records

CHAPTER 9
Federal Income Taxation of Mutual Funds and Shareholders

§ 9.01 General
§ 9.02 Qualification Requirements
[1] Domestic Corporation
[2] Registered Under the ICA
[3] Election
[4] Source of income
[5] Diversification
§ 9.03 Taxation of a RIC
[1] Calculating the Ordinary Income of a RIC
[2] Calculating Net Tax Exempt Income of a RIC
[3] Always a RIC
[4] Preferential Dividends
[5] Capital Gains
[6] Timing of Dividends
[7] Reporting Requirements
§ 9.04 Taxation of Shareholders
[1] Ordinary Dividends
[2] Capital gain dividends
[3] Undistributed capital gains
[4] Exempt interest dividends
[5] Foreign Tax Credits
[6] Dividends Paid in Shares of RIC Stock
[7] Gains and Losses On Sale or Redemption of RIC Stock
§ 9.05 Formation and Liquidation of a Mutual Fund; Mutual Fund Mergers
[1] Formation of a New Mutual Fund from Scratch
[2] Converting a Partnership Into a Mutual Fund
[3] Converting a Personal Holding Company Into a Mutual Fund
[4] Liquidating a Mutual Fund
[5] Merging Mutual Funds
§ 9.06 Curing Problems Found in Later Years
[1] Failure to Pay Out
[2] Other Failures to Qualify As a RIC

CHAPTER 10
SEC Examinations, Investigations,and Enforcement Actions

§ 10.01 Overview
§ 10.02 Routine Examinations
[1] Authority
[2] Books and Records Required to Be Maintained and Subject to Inspection
[3] Notice of Examination
[4] Initial Information Request Letter
[5] Examination Preparation
[6] On-Site Examination
[7] Deficiency Letters
§ 10.03 Cause Examinations
§ 10.04 Sweep Examinations
§ 10.05 SEC Investigations
[1] General
[2] Informal Investigation
[3] Formal Investigations
[4] Document Preservation Obligations
[5] Document Production
[6] Investigation Testimony
[7] Wells Notices
[8] Wells Submissions
§ 10.06 SEC Enforcement Actions
[1] General
[2] Enforcement Authority
[3] Available Remedies
[4] Types of Actions Brought Against Fund Companies, Investment Advisers, and Independent Trustees
[5] Discovery in Enforcement Actions
[6] Cooperation
[7] Settlement Considerations
[8] Settlement Procedures

CHAPTER 11
Variable Insurance Products

§ 11.01 Introduction
[1] History
[2] Definition of Variable Insurance Products
[3] Statutory Framework
§ 11.02 Substitutions of Investment Options
[1] Authorization for Substitutions
[2] Substitutions Involving Mutual Funds and their Affiliated Persons
§ 11.03 Taxes
[1] Introduction
[2] Diversification Requirements
[3] Investor Control
[4] Limitation on Public Availability