Practus Attorneys Wrap Up 2020 With Several News Features

JAN 07, 2021 | PRACTUS LLP

Practus Attorneys Wrap Up 2020 With Several News Features

Practus Partners Share Insight On Key Legal Topics

Alex Alberstadt & Bob Elwood Quoted in the Financial Times & Ignites

Article: Mutual Fund Conversions to ETFs Pose Challenge
Publications: Financial Times &Ignites
Author: David Isenberg
Published: December 22, 2020
Featured Attorney: Alex Alberstadt, Bob Elwood

Practus Partner, Alex Alberstadt,  and Practus Co-Founder, Bob Elwood, were both featured in a December 21st Ignites article pertaining to mutual fund conversions to ETFs. With the first mutual fund to ETF conversion nearing completion, the article highlights important insights and the multiple pitfalls that can arise as this continues to gain steam for other funds. 

For instance, the SEC does not require conversions to take place with a shareholder vote, should the action be in the best interest of the shareholder, Alex points out, while advising this should not pose a large issue. However, the mutual funds’ governing documents could still require a proxy vote for mergers, and disclosure of the process is key to ensure there is still transparency.

One desirable method to convert a fund, which Alex specifies, is to “create an ETF via a mutual fund merger.”  The technique includes merging the fund into a shell fund that will operate as an ETF. Making sure the two involved funds have investment strategy parity and no increased distribution costs is necessary. Lastly, Alex states, this must take place under the oversight of an independent board with shares remaining undiluted.

Firms that don’t want to go through the transition process could instead create clone ETF versions of their mutual funds, and then transfer some investors to the new product. However, cloning is a taxable event for stakeholders, while fund conversion is not. “Plus, running two identical investment vehicles side by side is costlier and does not benefit from economies of scale,” as noted by Bob Elwood.

Ignites members can find the original article, Harder Than It Looks: Potential Pitfalls for Mutual Fund to ETF Conversions, at

Karen Aspinall Discusses Intersection of SEC Valuation Rule and SEC Enforcement Action Against a Pricing Vendor

Article: Vendor Flub: Pricing Vendor to Pay $8M Over Flawed Data
Publication: Ignites
Author: David Isenberg
Published: December 10, 2020
Featured Attorney: Karen Aspinall

A December article published on Ignites, featuring insights from Practus Partner, Karen Aspinall, places a spotlight on valuation practices of pricing vendors. A large pricing vendor recently entered into a settlement with the SEC and agreed to pay an $8 million fine for providing unreliable pricing data to clients. Aspinall points out that for certain types of securities, the pricing vendor “was getting a broker quote and was using that as gospel as they sent it out to clients.” While that’s part of the problem, she highlights that asset managers should “have policies and procedures around using … single-broker quotes.”

Under the settlement order, the SEC found that in certain instances, pricing vendor data models supplied pricing information without properly evaluating the securities and in some cases, used a single-broker quote without any enhanced diligence on such prices. The settlement order notes that the pricing vendor actually had systems that were designed to create alerts on one-quote valuations but without a structure to ensure proper oversight of these pricing situations.

“As part of your valuation oversight, you need to understand the methodologies and the various ways that the [pricing] services are pricing your instruments,” Aspinall says. With the adoption of the new SEC valuation rule, funds and boards should be reconsidering their valuation practices.

Partner Ken Earley Featured in Latest “Fund Directions” Article

Article: Industry Welcomes Final Derivatives Rule Focus On Board Oversight
Publication: Fund Directions
Ben Sheng
Published: December 7, 2020
Featured Attorney: Kenneth Earley

Practus Partner and legal expert in the financial services industry, Ken Earley, provided his thoughts recently in a December Fund Directions article.

The piece focuses on the new derivatives rule adopted recently by the SEC and the implications on various fund strategies made by advisors and directors. This rule assigns boards appropriate oversight duties while providing a flexible framework for derivatives risk management, according to independent directors and industry observers. It will go into effect within 60 days of its entry into the Federal Register— which has yet to occur.

While the new rule will require some awareness of who it affects, attorney Earley adds some reassurance that the 18 month compliance window allows for the necessary adaptations to take place while advisors and directors look at the strategic planning for their funds. He mentions, “A lot of fund complexes are going to have to, in essence, dive in and rethink, how much exposure do they have to derivatives?”, mentioning the different variables to consider when potentially cutting back or getting out of derivatives and if staying in, whether compliance is even necessary. 

An important measure to take for those affected will be to stay on top of this development. A proactive and simple approach could consider adding time during any board meetings to get updates and schedule regular check-ins with management to discuss news around the program.

Learn more about Ken Earley and the expertise of our Financial Services team.

Ethan Corey Quoted on the Long Awaited 1940 Act New Rule  2a-5

Article: 50 Years In the Making SEC Finalizes Long-Awaited Valuation Rule
Publications: Ignites
Author: David Isenberg
Published: December 4, 2020
Featured Attorney: Ethan Corey

The Securities and Exchange Commission (SEC) unanimously voted to adopt a new rule in early December that allows directors to delegate the task of assigning fair values to funds. The new rule, Rule 2a-5, applies to all registered investment companies including mutual funds, exchange-traded funds (ETFs), registered closed-end funds and unit investment trusts, as well as to business development companies. It replaces 50 years of various accounting releases, SEC and staff guidance, no-action letters, and enforcement actions that have governed registered investment company valuation practices.

Rule 2a-5 will permit boards to designate advisors, fund officers or other parties to make fair valuation determinations as “valuation designees.” The article notes, “The board can also choose to handle the duty itself. However, if they decide to hand off the task, the board is responsible for oversight and reporting. Whoever assigns the fair value must periodically assess and manage risks. They’re also responsible for selecting, applying and testing methodologies. And they must also oversee and evaluate any pricing services they use.”

The  new rule was applauded by the ICI and the Independent Director’s Council in a statement because it shows that the SEC acknowledges the daily practicalities of valuation and the role of accounting standards in the process. Practus Partner, Ethan Corey adds that the SEC’s anticipated number of 71.25% of mutual funds to be impacted by the fair value rule is likely a low figure. “Because a fund never knows in advance when a market quotation may be deemed to be not reliable, all funds will need to have in place fair value procedures of one form or another,” Corey says.

Rule 2a-5 will be effective 60 days after publication in the Federal Register, with a compliance date 18 months after the effective date, which represents an extension of the proposed 12-month compliance date.

Alex Alberstadt Offers Insight to First Mutual Fund Conversion to an ETF

Article: They’re Converts: DFA, Guinness Boards OK Switch to ETFs (Member Access Link)
Publication: Board IQ
Author: Greg Saitz
Published: December 1, 2020
Featured Attorney: Alex Alberstadt

Practus Partner, Alex Alberstadt, shared her some insight in BoardIQ’s article regarding the emerging trend of converting open-end mutual funds into ETFs. Though not necessarily a new idea, it’s one that’s trending as Alberstadt points out “for certain types of funds, especially funds with an innovation component to them, this is going to be very attractive.” 

The draw, experts say, for investors and advisers, is not just that ETFs can have lower expenses and better tax efficiency but also that they have intra-day liquidity and other benefits. With those positives come some key areas for directors to consider when looking at conversion, like learning about the intricacies of how ETFs operate and assessing whether the adviser has adequately tackled an array of operational and shareholder issues. 

Alex noted the SEC mentioned a couple of these intricacies relating to shareholders like whether a conversion may happen without a shareholder vote. The SEC was open to the concept of us doing this without a proxy because shareholders have the opportunity to redeem out,” she says, who notes a trust’s organizational documents also play an important role in determining whether a shareholder vote is required. 

In addition, a solution for non-responding direct shareholders, many who do not have brokerage accounts – the entities that must hold the ETFs would need to be thought of. To address these “straggler shareholders” she advises the conversion take place with the funds then held by a transfer agent for further instructions, a similar method having been used when open-end funds were converted to closed-end funds. 

To learn more about Alex Alberstadt’s knowledge on this industry and her background, check out her profile on

Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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