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House Passes the Financial CHOICE Act of 2017: Implications for Exemptive Relief Process

Another section of the Financial CHOICE Act of relevance to the fund industry is Section 848, “Streamlining of Applications for an Exemption from the Investment Company Act of 1940,” which would significantly change the process for applying for exemptive relief from the SEC.  

The 1940 Act provides the SEC with significant discretionary authority over the application of the statute.  Section 6(c) of the 1940 Act authorizes the SEC to conditionally or unconditionally exempt any person, security or transaction from one or more provisions of the Act or SEC rules.  To grant an exemption, the SEC must find that the exemption is “necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policies and provisions of [the 1940 Act].”   

Applicants seeking exemptive relief under section 6(c) must file an application with the SEC presenting a basis for the relief requested, and identifying any benefits expected for investors and any conditions imposed to protect investors.  On many issues, the SEC has delegated the task of handling exemptive applications under the 1940 Act to its Division of Investment Management (IM), where applications are assigned to staff in the Office of Investment Company Regulation.  Once the staff has reviewed an application, it will provide written comments on the application and may request clarifications or adjustments to the contents and/or structure of the application to ensure that the requested relief is consistent with statutory standards.1  The applicant will then revise its application and file the amended application with the SEC.  Depending on the complexity of the matter(s) at issue in the application, the comment process may be repeated multiple times.

Once the SEC staff has reviewed the application and has resolved its comments, the application is submitted by IM to the SEC with a recommendation that it be set down for a hearing.  A notice, including a summary of the application, is then published in the Federal Register to give interested persons an opportunity to request a hearing on the proposed relief.  Following a notice period of approximately 25 days, and unless a hearing is requested by an interested party or by the SEC on its own motion, an order granting the requested relief is issued.2  

Section 848 of the Financial CHOICE Act would amend Section 6(c) of the 1940 Act to provide for the following application process: A party seeking exemptive relief would file an application with the SEC and, within 5 days of receipt of the application, the SEC must either: (1) publish the application, including on the SEC’s website; or (2) if the SEC determines that the application does not comply with the proper form, manner or information requirements (as established by the SEC), reject such application and notify the applicant of the specific reasons the application was rejected.  If the SEC does not reject an application but fails to publish it by the end of the 5-day period, such application will be “deemed to have been published” as of the end of the 5-day period.  

Section 848 of the Financial CHOICE Act would require the SEC to act on the application within 45 days after publication.  The SEC would have to take one of the following actions: (1) approve the application; (2) if the SEC determines that the application “would have been approved had the applicant provided additional supporting documentation or made certain amendments to the application,” then the SEC must (i) provide the applicant with the specific additional supporting documentation or amendments that the SEC believes are necessary for the applicant to provide in order for the application to be approved; and (ii) request that the applicant withdraw the application and re-submit it with such additional supporting documentation and amendments; or (3) deny the application.  Section 848 would permit the SEC to extend the 45 time period by an additional 45 days if the SEC determines that a longer period is appropriate and publishes the reasons for such determination, or if the applicant consents to the longer period.
Notably, if the SEC fails to approve, request the withdrawal of, or deny the application within the maximum 90 day period, the application will be “deemed to have been approved” by the SEC.

1   The IM staff may recommend that an application be withdrawn if it believes that the requested relief is not justified.

2   According to a 1985 SEC release, “Commission Policy and Guidelines for Filing of Applications for Exemption,” (1940 Act Release No. 14492), IM guidelines require that (1) initial comments on an exemptive application be given at one time and within 45 days or receipt of the application (novel or complex applications may require a longer review period); (2) notices of routine applications which require no amendment be published within 60 days; and (3) orders under delegated authority be issued within two business days after the expiration of the notice period, if no hearing request is filed. The exemptive application process typically exceeds the foregoing time periods.  In a June 6, 2017 article discussing the Financial CHOICE Act’s impact on the exemptive application process, BoardIQ cited the SEC’s latest budget proposal which notes that IM has a target of providing initial comments to applicants within 120 days and “has met that goal 100% or 99% of the time since its 2011 fiscal year.”

© 2017 Vedder Price


About this Author

Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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