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Industry Trends: Registered funds regulatory and tax round up – Summer 2021

Each quarter, UMB’s registered fund accounting, administration and tax teams consolidate the most impactful regulatory and tax developments in the fund industry. To guide your strategic and operational planning, our fund servicing team recommends you review and consider these developments from the prior quarter.

Privacy Update: Colorado Privacy Act

On July 7, 2021, Colorado Governor Jared Polis signed the Colorado Privacy Act making Colorado the third state to implement consumer data privacy protections.

Why it matters:

The Colorado Privacy Act applies to any person, commercial entity or governmental entity that maintains, owns or licenses personally identifiable information (PII) or personal information (PI) of Colorado residents in the course of its business. The three primary requirements of the Act include:

  • Establishment of written policies governing the disposal of PII maintained in paper or electronic forms.
  • Reasonable steps to protect PII.
  • Notification of securities breaches affecting PI, including detailed notice to Colorado residents, and in some cases, Colorado’s attorney general.

Financial institutions that are subject to the Gramm-Leach-Bliley Act (GLBA) are exempted from the act’s requirements if they are in compliance with GLBA.

The Securities Exchange Commission (SEC) Proposes Enhanced Proxy Voting Disclosures

On September 29, 2021, the SEC proposed new proxy voting disclosures for asset managers.

Why it matters:

The SEC proposed new proxy voting disclosure requirements for assets managers with the goal of making funds’ proxy voting records easier for investors to analyze and understand.

The proposal includes:

  • New amendments to Form N-PX.
  • A requirement for funds to tie the description of each voting matter to the issuer’s form of proxy.
  • Categorization of each voting matter by type.
  • “Say on Pay” disclosures.
  • Disclosure of impact of securities lending activity on proxy voting.

The SEC is seeking comment on the proposed rule during a 60-day comment period. The SEC issued a press release regarding the proposal.

2021 Year-End Reporting Layouts and Target Delivery Deadlines

The Investment Company Institute (ICI) released their 2021 calendar year reporting layouts and target delivery dates. The Primary Layout has been designed to track the IRS Form 1099-DIV.  The Secondary Layout provides a means for regulated investment companies (RICs) to use to report various additional tax related items. The NRA Layout provides a means for reporting information reported on IRS Form 1042-S.

The 2021 Primary Layout has been updated to include a breakout of the internal revenue code section 897 amounts to conform with the additions of box 2e and box 2f.

The target dates for delivering 2021 calendar year tax information to brokers and banks will be as follows: Primary Layout – Tuesday, January 18, 2022; Secondary Layout – Tuesday, January 25, 2022; and NRA Layout – Tuesday, February 1, 2022. Funds are encouraged to provide their year-end tax information to brokers and banks as soon as it is available.

Why it matters:

The Primary, Secondary and NRA Layouts are used by regulated investment companies to report their 2021 calendar year tax information to brokers and banks using standardized formats and target delivery dates.

ICI Requests delay in use of new 2021 IRS Form 1099-DIV Boxes 2e and 2f

ICI has requested the IRS delay the use of the new boxes 2e and 2f included on the 2021 IRS Form 1099-DIV to be used by Regulated Investment Companies (RICs) to report section 897 gains on the sale of United States real property interests (USRPI). The ICI also requests penalty relief be provided to payors if they in good faith attempt to comply with the new reporting requirements for calendar 2021.

Any RIC which is a United States real property holding company or which would be a United States real property holding company if certain exceptions did not apply, disposes of a United States real property interest (USRPI) at a gain, any distributions made to the extent attributable to such gain shall be treated as gain recognized by the recipient from the disposition of a USRPI (that is, the look-through rule).

The instructions to Form 1099-DIV state that if any part of the ordinary dividend reported in box 1a, or capital gains distributions reported in box 2a, is attributable to section 897 gains, report that gain in box 2e and 2f, respectively.

Why it matters:

A delay in the use of the new boxes 2e and 2f and penalty relief for 2021, would enable RICs, brokers, and other intermediaries, time to adequately program systems for the reporting changes, allow for penalty relief to payors complying in good faith to the reporting requirements for 2021, and allow for time to clarify with IRS some technical and interpretative questions regarding application of the rules.

FASB Proposes Amendments to Address Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

The Financial Accounting Standards Board (FASB) proposed an amendment to ASC Topic 820, Fair Value Measurement. The proposed amendments address the fair value of equity securities that are registered for trading with regulatory authorities but are subject to contractual restrictions on resale. Under the proposal, “restricted” securities are separated into two types: one addressing a legally restricted equity security, and one addressing an equity security that is not legally restricted but is subject to a contractual restriction on resale (e.g., an underwrite lock-up agreement).

Why it matters:

What this means is that when valuing a security that is legally restricted for resale, you would need to consider the inability to resell the restricted security in a national securities exchange when pricing that security. In the second type, a fund should measure the fair value of the restricted security on the basis of the market price of the similar unrestricted equity security without an adjustment to reflect the effect of the restriction.

The proposal includes transition guidance specific to investment companies intended to ensure that any change in fair value attributable to the proposed amendments does not affect net asset value at adoption. Comments on the exposure draft were due to the FASB by November 14, 2021.

SEC Issues Follow-Up Risk Alert on Prohibited Fixed Income Transactions

In July 2021, the SEC issued a follow-up risk alert on prohibited fixed income transactions to include observations gathered from a recent targeted examination initiative.

Why it matters:

The SEC conducted more than 20 examinations of registered investment advisers that engaged in certain fixed income security transactions (the FIX Initiative). The FIX Initiative specifically examined cross-trades and/or principal trades in fixed income securities along with the advisers’ related compliance policies and procedures. The transactions at the center of the FIX Initiative trigger an adviser’s fiduciary duty to its client and therefore should command every adviser’s attention.

The most common deficiencies noted during the FIX Initiative included inconsistencies between advisers’ operations and compliance programs; inadequate testing of compliance programs; and inadequate written disclosures of potential or actual conflicts of interest. The risk alert provides advisers with tangible action items to improve their compliance program, testing and disclosure.

SEC Sanctions Brokers and Advisers for Email Security and Breach Notice Insufficiencies.

On August 30, 2021, the SEC issued a press release announcing the sanction of eight firms relating to failures of their cybersecurity policies and procedures resulting in email account takeovers and the exposure of customers’ personal information. The failures related to the takeover of the firms’ cloud-based email accounts, resulting in the exposure of personally identifying information of at least 4,388 customers and clients.

Why it matters:

In the press release, the SEC notes that the protections in place to secure the affected email accounts were not consistent with the firms’ policies. Further, when providing the required notice of the breach to affected customers and clients, the firms provided notices that were misleading and, in particular, suggested that such notification were made much sooner than they were actually provided after the discovery of the email account takeovers. The chief of the SEC Enforcement Division’s Cyber Unit noted that, “it is not enough to write a policy requiring enhanced security measures if those requirements are not implemented or are only partially implemented, especially in the face of known attacks.” These sanctions serve as a reminder for brokers and advisers to ensure that their cybersecurity programs not only be adequately designed to protect against threats, but that such programs actually execute on the policies and procedures in place.

27 Financial Firms Settle with SEC for Form CRS Filing and Delivery Failures

In July 2021 the SEC announced the settlement of charges with 21 investment advisers and six broker-dealers for failures to timely file and deliver their customer relationship summaries (Form CRS) to retail investors.

Why it matters:

Form CRS was adopted by the SEC in 2019. The applicable rules require that SEC registered investment advisers and broker-dealers file their Form CRS with the SEC and deliver these Form CRS reports to their retail clients. Form CRS is intended to provide retail investors with a summary about the services a firm offers, its fees, conflicts of interest, and other information that can help investors make more informed choices. None of the 27 firms noted in the SEC’s release filed or delivered the Form CRS until being twice reminded of the missed deadlines by the applicable regulator. A majority of the fees for each firm totaled $25,000 although some penalties were just under $100,000.

SEC Approves Nasdaq’s Board Diversity Disclosure Listing Rule

In August 2021, the SEC approved the Nasdaq stock market’s proposed rules which will require Nasdaq-listed companies to have at least two diverse board members or explain why it does not.

Why it matters:

Under the rules, certain Nasdaq-listed companies are required to:

  • Annually disclose aggregated statistical information about the board’s voluntary self-identified gender and racial characteristics and LGBTQ+ status in substantially the format set forth in new Nasdaq Rule 5606 for the current year and (after the first year of disclosure) the prior year
  • Either include on their board of directors, or publicly disclose why their board does not include, a certain number of “diverse” directors.

The compliance period for the disclosure requirements begin in 2022. There is a tiered approach for the compliance period for having a minimum of two diverse directors beginning in 2023.

The rules also provide for Nasdaq to offer certain listed companies access to a complimentary board recruiting service to help advance diversity on company boards.


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When you click links marked with the “‡” symbol, you will leave UMB’s Web site and go to Web sites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.
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