More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Market participants are objecting to a proposal by Moody’s Investor Service to rate money market funds by factoring in a fund sponsor’s ability and willingness to support a “distressed fund”—that is, a fund that’s about to “break the buck” or is in financial distress.
Last September, Moody’s originally proposed that the sole determinant it would use in rating a money market fund would be based on a fund sponsor’s ability and willingness to support a distressed fund. But after receiving negative feedback on its proposal—including comments from Federal Reserve Board Chairman Ben Bernanke—Moody’s decided to revise its proposal.
In its revised proposal, released on Jan. 18, 2011, Moody’s “opted to lessen the impact that would be placed on fund sponsor support,” in determining a money market fund’s rating, says Jacob Nygren, a manager with Treasury Strategies in Chicago. Moody’s revised proposal states that, “...our expectation [is] that funds rated in the top category (Aaa-mf) would be sponsored by firms having an investment grade or equivalent credit profile.” Moody’s revised rating methodology also states that, “the quality of a fund’s sponsor will continue to be a factor in our ratings.”
John Walsh, Acting Comptroller of the Currency, wrote in a Feb. 17 letter to Rep. Gregory Meeks, D-N.Y., a member of the House Financial Services Committee, that the Comptroller’s office is “...opposed to any policy that creates an expectation that a national bank will be relied upon to provide support to a sponsored fund.”
Anthony Carfang, a partner at Treasury Strategies, says that “Moody’s recent modification of its proposed ratings methodology does not clearly and fully focus on a fund’s own characteristics separate from a fund’s sponsor.” Treasury Strategies, he said, “continue[s] to believe that Moody’s rating methodology must be consistent with current regulation and never assert pressure on fund sponsors to expressly or tacitly undertake to support their funds as a condition to receiving the highest credit rating.”