Ropes & Gray's Investment Management Update – February – March 2019

The following summarizes recent legal developments of note affecting the registered fund/investment management industry:

No-Action Letter Enhances Flexibility with Respect to In-Person Board Voting

In a February 28, 2019 no-action letter to the Independent Directors Council, the SEC staff agreed that it would not recommend enforcement action against fund boards that, in some instances, do not adhere to certain in-person voting requirements under the 1940 Act or the rules thereunder. Currently, an in-person board meeting is required by (i) Section 15(c) for the initial approval and annual renewal of an investment management agreement and an agreement with a fund's principal underwriter, (ii) Rule 12b-1 under the 1940 Act for the initial approval or annual renewal of a Rule 12b-1 plan, (iii) Section 32(a) for the selection of a fund's auditor and (iv) Rule 15a-4(b)(2) for the approval of an interim investment management agreement following the termination of an existing investment management agreement in certain circumstances (each a "Required Approval").

The no-action letter provides that, in two types of situations, instead of seeking a Required Approval at an in-person meeting, a board can effect a Required Approval telephonically, by video conference or by other means by which all participating directors may participate and communicate with each other simultaneously during the meeting. The two types of situations are:

The directors necessary for the Required Approval are unable to meet in person due to unforeseen or emergency circumstances, provided that (i) no material changes to the relevant contract, plan and/or arrangement are proposed to be approved, or approved, at the meeting and (ii) the directors ratify the Required Approval at the next in-person board meeting ("Situation 1"). The directors necessary for the Required Approval previously fully discussed and considered all material aspects of the proposed matter at an in-person meeting, but did not vote on the matter at that time, provided that no trustee requests another in-person meeting ("Situation 2"). The SEC staff's no-action position is available only with respect to the following Required Approvals, occurring in the specified situations:

Renewal (or approval or renewal in the case of Situation 2) of an investment management agreement or principal underwriting agreement pursuant to Section 15(c) of the 1940 Act. Renewal (or approval or renewal in the case of Situation 2) of a fund's 12b-1 plan. Selection of a fund's independent public accountant pursuant to Section 32(a) of the 1940 Act (in the case of Situation 1, such accountant must be the same accountant as selected in the immediately preceding fiscal year). Approval of an interim investment management agreement pursuant to Rule 15a-4(b)(2) following the termination of an existing investment management agreement (in the case of Situation 2, only). Note that the ratification requirement in Situation 1 means that the in-person requirement for a Required Approval is deferred, but not eliminated.

The no-action letter is another tangible outcome of the Division of Investment Management's "Board Outreach Initiative," announced in December 2017. Previously, the SEC staff issued a no-action letter to the Independent Directors Council permitting a fund's board to rely on quarterly written representations from the chief compliance officer that fund transactions effected pursuant to Rules 10f-3, 17a-7 and 17e-1 complied with written procedures adopted by the board, instead of the board itself making that determination.

SEC Changes Timing of Form N-PORT Filings

In a February 27, 2019 interim rule release, the SEC adopted an interim rule that changes the timing and frequency of filings of Form N-PORT reports. In the release, the SEC cited concerns about potential cybersecurity risks arising from its proposed monthly collection and maintenance of sensitive non-public data regarding fund holdings on Form N-PORT. Based on these concerns, the SEC amended Rule 30b1-9 and Form N-PORT to require funds to file Form N-PORT reports for each of the three months in a fund's fiscal quarter no later than 60 days after the end of that quarter. Prior to these amendments, funds would have been required to file their first Form N-PORT report by April 30, 2019, containing March 31 data, with subsequent monthly Form N-PORT reports, each due no later than 30 days after a month end.

Pursuant to amended Rule 30b1-9, a fund's reports on Form N-PORT for the first two months of each quarter will remain non-public, and the Form N-PORT report for the last month of each quarter will become publicly available immediately upon filing. In the release, the SEC stated that, by delaying the filing deadline for each fund's non-public first and second month Form N-PORT reports for each fiscal quarter to coincide with the fund's quarter-end report, the sensitivity of the non-public data filed with the SEC will be significantly reduced.

The SEC also recognized that requiring a full quarter's data could present compliance difficulties for some funds (e.g., those with fiscal quarters ending in March or April 2019) and, therefore, provided for a phase-in of quarterly filings of Form N-PORT reports, as shown in this table:1

Fund Fiscal Quarter End First Report on Form N-PORT must be filed on EDGAR by: Required Monthly Data March 31, 2019 May 30, 2019 March 2019 April 30, 2019 July 1, 2019 March, April 2019 May 31, 2019 July 30, 2019 March, April, May 2019 Excessive Fee Claims Rejected After Bench Trial

Following a bench trial, on February 8, 2019, a federal district court held that the plaintiffs in In re BlackRock Mutual Funds Advisory Fee Litigation had failed to establish their claims under Section 36(b) of the 1940 Act. BlackRock falls within a group of excessive fee cases in which the plaintiffs have alleged, among other things, that advisers are charging their proprietary funds higher advisory fees than they charge when serving as subadvisers managing external funds with a similar strategy. To date, only two of these cases pursuing the so-called "subadviser" theory have been dismissed before trial. BlackRock is the first case from this group of cases to have resulted in a decision following trial.

Background. In June 2018, Judge Freda Wolfson of the U.S. District Court for the District of New Jersey denied the BlackRock defendants' motion for summary judgment with respect to plaintiffs' excessive fees under Section 36(b) regarding two BlackRock proprietary funds (the "Funds") advised by BlackRock Advisors LLC ("BRA"). The subadvised funds at issue were subadvised by Blackrock Investment Management LLC ("BRIM"). The plaintiffs primarily argued that the Funds relied on third-party service providers, not the adviser, for substantial work, that BlackRock's internal processes and systems supported all of its products without distinguishing between...