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A. B. A. B. C. D. A. B. V ...... 456 ...... V I...... 409 ...... I. 417 ...... II 436 ...... III 447 ...... IV “It’s not about what it is, it’s about what it can become.” can it what about it’s is, it what about not “It’s Lorax The Seuss, Dr. ACCHIAROLA OTES TO OTES XPANDING M K ART ART ART ART ART Partner and Head of Financial Engineering, Olden Lane LLC; Adjunct Professor, St. St. Professor, Adjunct LLC; Lane Olden Engineering, Financial of Head and Partner NTRODUCTION Francis College; A.B., College of the Holy Cross, 1994; J.D., New York University School 2001. School, Business Columbia M.B.A., 1997; Law, of ** Partner and Head of Product Development, Olden Lane LLC; B.A., Article is a private publication of the authors, expresses their views only and not the views of any firm. This Article does not relate to the offering construed as of an offer to buy or sell or any as a solicitation of an offer to buy securities or sell any financial and may not be strategy. trading particular any in engage to or instrument I University of Maryland, 2004; J.D., P
P P P P E N Macchiarola C. Michael 5_M C Y 39057-ple_19-2 reissue Sheet No. 86 Side A 04/17/2017 09:23:23 04/17/2017 86 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 86 Side B 04/17/2017 09:23:23 M K see C Y The Marlon Marlon the asset asset the 1 4 (May 2013), 2013), (May 4 (Dec. 14, 2015) 2015) 14, (Dec. [Vol. 19:2 19:2 [Vol. See also (Sep. 25, 2013), 2013), 25, (Sep. 2 (Nov. 2015), 2015), (Nov. 2 ]. AW (Mar. 30, 2014), 2014), 30, (Mar. L INANCE 60 (2014) [hereinafter [hereinafter (2014) 60 Jeff Benjamin, F ORUM EWS F ELOITTE N D NLINE The Roar RIME USINESSWEEK As one commentator has P ABB See also See B .O USINESS 5 ]. ITI EG , T B At At the same time, the asset /G3QV-5TA6] (noting that “shifting R , C CC . UIRK BY 4 ON ON Q NVESTMENT J. LOOMBERG , I PERMA , B ALE Recently, asset managers have also also have managers asset Recently, :// 3 ASEY .L.J. 267 (2009) (outlining both the causes of the the of causes the both (outlining (2009) 267 .L.J. ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J US , C B NTRODUCTION HTTPS ELETE , 31 Y I D Beware of Risk Everywhere: An Important Lesson from /TB23-GL7V] (asserting that “diversifying into products Abstinence in the Face of the Mutual Fund Debt Elixir: In OT CC N . O ASTINGS /53KJ-RV7D] [hereinafter SEI, The Retail Alternatives (D H CC . Passive Revolution The Rise of Liquid Alternatives & the Changing Dynamics of PERMA , 5 The Roar of the Crowd: How Individual Investors Transform DOCX DOCX . :// ENNSYLVANIA ENNSYLVANIA P PERMA /7XDA-K3CL] [hereinafter Casey Quirk, /7A74-4K2X] (arguing that institutional accounts are struggling “to cut RINTER , Citi, :// HTTPS P CC CC OF . . TO Abstinence in the Face of Mutual Fund Debt Fund Mutual of Face the in Abstinence _ HTTPS Disintermediation: The Real Race to Zero Michael C. Macchiarola, Macchiarola, C. Michael See, e.g. PERMA PERMA Observable trends include an increasing sensitivity to fees, a a fees, to sensitivity increasing an include trends Observable 2 :// :// As As the financial crisis fades in the rear view mirror, , SEIC 2 (2013) http://www.seic.com/docs/IMS/SEI-IMS-RetailAlternatives-US- The Retail Alternatives Phenomenon: What enterprising private fund managers need to ACCHIAROLA HTTPS HTTPS Alternative Product Manufacturing and Distribution know http://www.investmentnews.com/article/20140330/REG/303309999/the-perfect-storm-why- 3. Michael C. Macchiarola, Macchiarola, C. Michael strategies.”). 3. Response to Professor John Morley dynamics in the wealth adviser market are creating a growing need for alternative growing appetite for alternative streams of return, and a pronounced desire for regulated investment vehicles. Macchiarola, Macchiarola,
[ [ alts-make-sense [ 2013.pdf [ 1. For a favorite summary of the financial crisis and its underlying causes, causes, underlying its and crisis financial the of summary favorite a For 1. generally the Current Credit Crisis ribution%20-%20May%202013.pdf [ 5_M 406 U. 5. Casey Quirk, Quirk, Casey (noting that U.S. investors allocated $365 2015). in funds managed actively from billion $147 withdrew billion to index mutual funds 5. and ETFs and Competition in Asset Management costs and recover from the turmoil of the past five years” and that “many have awakened to http://tabbforum.com/opinions/disintermediation-the-real-race-to-zero http://tabbforum.com/opinions/disintermediation-the-real-race-to-zero 2. fromlearned crisis). be the to lessons as well as crisis financial 2. management management business continues to adjust to significant shifts in investor tastes. 4. Eric Balchunas, Balchunas, Eric Phenomenon] (noting that “the liquidity and regulatory oversight of regulated retail investment vehicles has growing appeal blend of alternative clients.”). their and advisors financial to strategies with the 4. transparency, and strategies designed to hedge risk can mean that clients can sleep soundly at night.”); night.”); at soundly sleep can clients that mean can risk hedge to designed strategies and SEI, http://www.caseyquirk.com/content/whitepapers/The%20Roar%20of%20the%20Crowd.pdf http://cooconnect.com/sites/default/files/The%20rise%20of%20liquid%20alternatives%20a nd%20the%20changing%20dynamics%20of%20product%20manufacturing%20and%20dist witnessed a meaningful shift management in to more investment passive philosophy strategies. – from active management management industry is showing the signs typical of a maturing business, as it strains to maintain its operating leverage. Perfect Storm: Why Alts Make Sense Weems, Weems, 39057-ple_19-2 reissue Sheet No. 86 Side B 04/17/2017 09:23:23 04/17/2017 86 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 87 Side A 04/17/2017 09:23:23 . 11 US Unit Unit the the 7 , 43 B Emerging Section 2: , in 2016 .J., Nov. 29, 29, Nov. .J., ., T S NST .I ALL O , W .C Advances in product product in Advances NV 8 I 407 407 What “Smart Beta” Means to See 1 (Aug. 2014), 2014), (Aug. 1 LTERNATIVES Jay B. Gould and Gerald T. Lins, Lins, T. Gerald and Gould B. Jay A and alternative streams of return. of streams alternative and /9MT8-RKDM] (noting that smart beta is “in the UNDAMENTALS ) 3/1/17 11:06 AM F 10 This realignment has brought volatility to CC . note 5, at 2. (2016), https://www.ici.org/pdf/2016_factbook.pdf https://www.ici.org/pdf/2016_factbook.pdf (2016), ELETE 6 See also D OOK OT supra B PERMA , Rob Arnott and Engin Kose, N , O :// XPANDING (D ACT F HTTPS FFILIATES See, e.g. DOCX DOCX Advisers Warm Up to Unit Investment Trusts . smart beta, smart The Roar The 9 L.J. 1045 (1987) (commenting that the UIT “has experienced many /YX6S-SF2Y]. /X7CR-J3DU] [hereinafter, 2016 ICI Fact Book] (showing $12.7 million RINTER UKE P CC CC OMPANY D . . TO .A C _ ES R PERMA PERMA , 1987 :// :// Recently, a lesser known corner of the investment products universe .1177 (Aug. 1988) (observing that “the number and variety of investment products products investment of variety and number “the that (observing 1988) (Aug. .1177 ACCHIAROLA , M K AW HTTPS HTTPS NVESTMENT have evolved already “far beyond their humble origins as fixed packages of municipal bonds [and] have grown significantly in recent years,” the time-honored business model of the traditional asset manager. At the same time, it is likely to uncover opportunities for new market entrants and ArticleThis structures. structure. imaginessuch one product innovative has been garnering significant attention from investors and asset managers alike. While unit investment trusts (each, a “UIT”, and together, “UITs”) market remains far from exhausting its full potential. full its exhausting from far remains market
observed, observed, “[i]ncreasingly the same competitive dynamics that shape other financial services industries will affect asset managers: intensifying rivalry among too many players consolidation with and disruption.” similar value propositions, resulting in structuring, an aversion to high fee product, and shifting investor tastes are latticing to expand the UIT’s possible applications. The UIT is poised to emerge as a reliable, economic, and efficient conduit for investors seeking defined outcome, Investment Trusts: Structure and Regulation Under the Federal Securities Laws %20Us%20v2_pdf.pdf [ %20Us%20v2_pdf.pdf [ L [ 6. Casey Quirk, Quirk, Maxey, Casey Daisy ‘insourcing.’”). of logic the 6. 7. 5_M 2017] E Closed-End Funds, Exchange-Traded I Funds, and Unit Investment Trusts 10. The term “smart beta” is the subject of much attention and many compete to to compete many and attention much of subject the is beta” “smart term The which allow for a specific enhanced level return to of protection be put and/or in place at the time of investment and last for a fixed time. Such a process is typically the achieved use through of derivatives and allows investors to know the controlled range of the accordingly. plan and advance in outcomes investment 10. formalize its definition. 9. For purposes of this Article, “defined outcome” investments will include products products include will investments outcome” “defined Article, this of purposes For respectively). 2015, and 2003 for deposits UIT new the as million $65.9 and 9. https://www.researchaffiliates.com/documents/What%20Smart%20Beta%20Means%20To process of seeking an established meaning”). Our favorite definition is offered by Towers Us 2012, http://www.wsj.com/articles/SB10001424127887324469304578145432957312820 8. In 2015, new UIT deposits were more than four times greater than those just a a just those than greater times four than more were deposits UIT new 2015, In trust.’”). ‘fixed a as ago years sixty some inception its since changes 8. dozen years ago. In fact, product, 2015 eclipsing represented the the prior largest record year established for in new 1999. deposits into the offered to the general public has dramatically increased.”); Thomas S. Harman, Alternatives to Mutual Funds: Unit Investment Trusts and Other Fixed Portfolio Investment Vehicles C Y 39057-ple_19-2 reissue Sheet No. 87 Side A 04/17/2017 09:23:23 04/17/2017 87 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 87 Side B 04/17/2017 09:23:23 M K st C Y RIME P note 8 8 note /HL6X- ITI Regulated ](detailing Allocating CC . , C supra /E59P-CADU] in favor of of favor in (Nov. 2011), [Vol. 19:2 19:2 [Vol. CC PERMA . 13 :// AW (Feb. 2013), 2013), (Feb. L PERMA HTTPS This section of the the of section This :// 15 Equinox Funds, Funds, Equinox ICI Fact Book, Book, Fact ICI , (Dec. 6, 2013) [hereinafter, The Complete Firm ELOITTE , 3 (Apr. 11, 2016) (exploring D HTTPS , SEIC The Rise of Liquid Alternatives & USINESS B See generally See generally , 1, Aug. 2013 (explaining the purpose of Casey Quirk, ) 3/1/17 11:06 AM UIRK BY OURNAL OF OF OURNAL J Q The Complete Firm 2013: Competing for the 21 ELETE D OT N and smart beta strategies. beta smart and O 14 ASEY (D DOCX DOCX . ] (highlighting the growth of retail liquid alternatives and how asset Casey Quirk, Quirk, Casey Understanding Smart Beta ENNSYLVANIA ENNSYLVANIA , C P /973K-HHGK] [hereinafter, RINTER Retail Retail Liquid Alternatives: The Next Frontier P CC OF . TO _ Instead, it describes simply the process by which today’s today’s which by process the simply describes it Instead, 12 See generally PERMA (May 2013), http://cooconnect.com/sites/default/files/The%20rise%20of%20liquid http://cooconnect.com/sites/default/files/The%20rise%20of%20liquid 2013), (May :// This Article proceeds in five parts. Part I briefly describes the ACCHIAROLA Towers Watson, Watson, Towers INANCE HTTPS http://www.caseyquirk.com/content/whitepapers/The%20Complete%20Firm.pdf http://www.caseyquirk.com/content/whitepapers/The%20Complete%20Firm.pdf the current trends and opportunities in public funds); Citi, the Changing Dynamics of Alternative Product Manufacturing and Distribution
Offerings Offerings of bespoke trusts might not be far in possibility of solutions the tailored for retail and future, institutional investors seeking unlocking the access to certain non-traditional streams of return, or anxious to the improve transparency, credit risk, liquidity, and economic bulwark of investmentsmart allocations. alternative and beta existing evolving landscape for public funds in the United been written States. on this subject, As this much section does has not endeavor to ground. break new 13. For purposes of this Article, traditional mutual funds include those registered under under Company registered those Investment include include funds funds mutual mutual traditional alternative Article, Article, this of this of purposes For purposes trends). and factors For 13. the Investment Company Act and invested predominantly in and the equity traditional asset fixed classes. income For purposes of this Article, such funds. “private” from funds “public” registration also distinguishes 14. Act-registered funds packaging returns of illiquid assets such as real estate, venture capital, commodities, and collectibles, as well as other more liquid “hedge fund” strategies such as event-driven, global macro, and managed future. to “Liquid Alternatives”: The Importance of Correlation [ F uring%20and%20distribution%20-%20May%202013.pdf [ http://www.seic.com/IMS/SEI_IMS_NewConventional.pdf BU8P] [hereinafter SEI, Regulated Alternative Funds] investors (noting [ are looking towards how alternative strategies in various response to a segments convergence of various of 11. The relative size of the markets for open end funds, closed end funds, exchange exchange funds, end closed funds, end open for markets the of size relative The Watson: “Smart beta is simply about trying to identify good investment ideas with better . . . structure smart beta strategies should be simple, low cost, transparent and systematic.” See smart beta). 11. traded funds and unit investment trusts is instructive. Total assets for each category are by no means stagnant and have fluctuated over time. (documenting fluctuations in investments in open end funds, trusts). investment unit and funds, traded closed end funds, exchange 12. 5_M 408 U. investors are transitioning from traditional mutual funds Century Investor (using survey findings to describe Goldman the Sachs, various ways in which Goldman the Sachs, industry is evolving); %20alternatives%20and%20the%20changing%20dynamics%20of%20product%20manufact managers managers are beginning Alternative to take advantage of those Funds: opportunities); SEI, The New Conventional alternative mutual funds 39057-ple_19-2 reissue Sheet No. 87 Side B 04/17/2017 09:23:23 04/17/2017 87 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 88 Side A 04/17/2017 09:23:23 See /3W32- Harman, Harman, CC note 10. . see – designed designed – Particular Particular 18 17 supra (July 28, 2014), 2014), 28, (July PERMA :// Part III offers a a offers III Part 16 , Investopedia.com, Watson, HTTPS ESEARCH , R 409 409 note 7, at 1177 (describing key key (describing 1177 at 7, note see Towers see supra LTERNATIVES A ) 3/1/17 11:06 AM ELETE many of the return streams offered in today’s D Gould and Lins, Lins, and Gould OT Alt Mutual Funds Hit $300B Hit Funds Mutual Alt N . This Part outlines a viable framework for so- O XPANDING (D See also DOCX DOCX . I /PU6M-YV3L] (noting that “2013 marked the strongest asset flows into RINTER , Janet Levaux, P ART CC . P TO _ See, e.g. PERMA :// note 7, at 1046. In recent years, the memory of the punishing losses wrought by the ACCHIAROLA M K HTTPS 16. For an excellent, though slightly dated, history of the UIT vehicle, vehicle, UIT the of history dated, slightly though excellent, an For 16.
Article also establishes the background and proper context for the product- specific ideas that follow. Part outlining the general II structure and limitations introduces of the vehicle and the exploring unit investment its legal trust, and economic framework. This Part also builds on the efforts of several authors to examine briefly the summarizes the dynamic size and history shape of of today’s UIT the market. UIT and the Article’s main premise – structured notes or alternative mutual funds might be offered more reliably as unit investment trusts called “structured unit investment trusts” or “structured funds” emphasis is placed on defined outcome and smart beta strategies, as those lend themselves neatly to a unit investment trust product. Part IV presents to deliver defined outcome, smart beta, and alternative streams of return in a reliable, economic, and efficient fashion. advantages of This such a Part product before describing highlights briefly the several ongoing efforts of market participants and handicapping the likelihood that such a product a V Part offers Finally, alike. investors and by regulators be embraced will conclusion. brief very http://www.thinkadvisor.com/2014/07/28/alt-mutual-funds-hit-300b?slreturn=1480213404 http://www.thinkadvisor.com/2014/07/28/alt-mutual-funds-hit-300b?slreturn=1480213404 http://www.investopedia.com/terms/i/investment-fund.asp http://www.investopedia.com/terms/i/investment-fund.asp WW3X] (defining an “investment fund” as “a supply of capital belonging [ to numerous 15. Regarding a proper definition of “smart beta”, beta”, “smart of definition proper a Regarding investmentalternative strategies). 15. [ 5_M 2017] E fund” interchangeably. While the requirements product of structure a described unit herein Company investment Act, conforms it trust also to fits articulated the the common in understanding of undefined Section a in “fund”, a 4(2) the term which Investment of remains Company the themselves Act. Investment as “funds,” the Historically, generally plain several meaning UITs have of described which presumably includes trusts. What is an “Investment Fund” 18. This Article will use the terms “structured unit investment trust” and “structured “structured and trust” investment unit “structured terms the use will Article This record.”). on launches fund of number largest the and funds alternative 18. investors used to collectively purchase securities while each investor retains ownership and shares.”). own his of control supra 17. UITs). registering creating of process the as well as UITs of features 17. general discussion of two related markets: structured notes and the nascent, fast-growing category of “liquid alternative mutual funds.” C Y 39057-ple_19-2 reissue Sheet No. 88 Side A 04/17/2017 09:23:23 04/17/2017 88 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 88 Side B 04/17/2017 09:23:23 , M K C Y Liquid Retail note 3 supra 1 (July 2014), , [Vol. 19:2 19:2 [Vol. AW During that same same that During L ERNSTEIN Goldman Sachs, 21 B At the same time, time, same the At 24 Most recently, investor investor recently, Most USINESS LLIANCE 19 See also B , A 22 at 26. at ) 3/1/17 11:06 AM ., Feb. 1, 2013 (noting that the “demand for retail OURNAL OF OF OURNAL J EP Alternative Mutual Funds: How Can Hedge Fund R ELETE 23 D note 8, at 170. note 8, AW OT N L O supra supra (D Abstinence in the Face of Mutual Fund Debt UND F DOCX DOCX . ENNSYLVANIA ENNSYLVANIA P EDGE /G2UM-W44J] (“The 2008 global financial crisis marked a turning point RINTER , Jennifer Banzaca, P CC OF . TO Christopher J. Bricker, Christine M. Johnson & Sandra Testani, Testani, Sandra & Johnson M. Christine Bricker, J. Christopher _ , 6.5 H Macchiarola, Macchiarola, at 44. Mutual fund industry assets rarely decrease, with 2015 marking marking 2015 with decrease, rarely assets industry fund Mutual See, e.g. Id. See Id. PERMA 20 :// trusts (CITs) since 2007. since (CITs) trusts Despite the exponential growth and massive size of the mutual fund Some of the outflows frommutual long-term funds in 2015 reflect a broader shift, driven sponsors, toward by other pooled investment vehicles. both This trend is investors and reflected retirement in the plan outflows from actively growth managed of funds index and mutual the funds, ETFs, and collective investment Investors and their financial advisors continue to assert broadening ACCHIAROLA HTTPS Managers Organize and Operate Alternative Mutual Funds to and Organize Alternative (Part Managers Operate Access Retail Capital? One of Two) 24. 24. 22. 2016 ICI Fact Book, Book, Fact ICI 2016 22. 23. demand for mutual funds declined in 2015, with net redemptions of $102 billion. market, fundamental questions have mounted in recent years. Chief among among Chief years. recent in mounted have questions fundamental market, the concerns is the issue of whether the menu constructed of products and – sold as – currently adequately meets the needs investing public of increasingly conscious of fee a levels, skeptical of morethe value discerning of active management, and in search of a more tailored and tactical set of offered: report industry Asrecent a solutions. only the sixth time since 1975 that the total mutual fund assets measured at year-end failed to exceed those at the start of the year. (noting the Great Recessions disruptive impact on the See investment management generally industry).
financial crisis, increased correlation among asset illiquidity, and classes, celebrated scandals unanticipated have combined to leave the traditional investment management industry bewildered. 19. 19. [ 5_M 410 U. 21. 21. period, a developing industry that counted only 426 funds with $45 billion in assets, has ballooned to a mature business with greater than 8,000 funds management.under trillion $15.6 and http://supplements.pionline.com/uploads/supplements/AB_Final_ALT-7125-0714.pdf http://supplements.pionline.com/uploads/supplements/AB_Final_ALT-7125-0714.pdf alternative products is growing because of retail investors’ desires for innovative investment strategies, diversification and uncorrelated returns.”). control over their investment portfolios – favoring product solutions which offer both absolute return and non-correlation. 20. 2016 ICI Fact Book, Book, Fact ICI 2016 options.”). 20. for investors, bringing new focus to the search for diversifying and transparent investment Alternatives: The Next Dimension in Asset Allocation 39057-ple_19-2 reissue Sheet No. 88 Side B 04/17/2017 09:23:23 04/17/2017 88 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 89 Side A 04/17/2017 09:23:23 , note note note 19, 19, note supra supra ,no. 2, 2013, at at 2013, 2, ,no. 26 Citi Prime Finance, Finance, Prime Citi Banzaca, Banzaca, BSERVER .10, Oct. 2008, at 1 1 at 2008, Oct. .10, .O See also see also 411 411 NO ., NVS with financial advisors advisors financial with .I 30 AW note 12 (“Investors are re-risking, re-risking, are (“Investors 12 note LT .L note1. at 12, 5 A 5 supra NV I , note 12, at 7. 7. at 12, note note 12, at 7; 7; at 12, note note 12, at 7. So-called “alternative” strategies strategies “alternative” So-called Bricker, Johnson & Testani, Testani, & Johnson Bricker, 28 HE LTERNATIVES Retail A supra supra supra , , , ) 3/1/17 11:06 AM See also , 15 T Those asset managers catering successfully successfully catering managers asset Those ELETE D 27 note 24 (highlighting that evolving investor preferences preferences investor evolving that (highlighting 24 note OT N The mass affluent and high-net-worth investors investors high-net-worth and affluent mass The O Today, however, there is a demonstrable demonstrable a is there however, Today, XPANDING 31 supra (D 29 Offering Alternative Investment Strategies in a Mutual Fund Goldman Sachs, Sachs, Goldman Demand is accelerating for investment products that that products investment for accelerating is Demand Making Sense of Alternative Investments in the ‘40 Act Space DOCX DOCX . 25 The Complete Firm The Complete Firm The Complete Firm Complete The (“In what is beginning to seem like the distant past, a clear line had had line clear a past, distant the like seem to beginning is what (“In 1 (Jul. 22, 2013). 2013). 22, (Jul. 1 id. /2XXY-H2NZ] (“The recent drift into alternative investments can be See also RINTER Regulated Alternative Funds, supra Funds, Alternative Regulated , Banzaca, , P CC . TO Exotic to Mainstream: Growth of Alternative Mutual Funds in the U.S. and _ DVISOR SEI, A Alternative Investments, All Grown Up, in See See, e.g. See, e.g. PERMA 32 2 (2010). (2010). 2 :// note 12 (describing a more discerning investing public). public). investing discerning more a (describing 12 note Investors Investors “increasingly regard ‘alternative’ investments – including As As a matter of portfolio theory, the introduction of a non-traditional note 12, at 47 (suggesting that “[g]rowth in liquid alternatives is expected to come come to expected is alternatives liquid in “[g]rowth that (suggesting 47 at 12, note ACCHIAROLA M K INANCIAL HTTPS 31. Jeff Schlegel, Schlegel, Jeff products.”). investment alternative and traditional separated once 31. F 28. Casey Quirk, Quirk, Casey movingmainstreamquickly the into are alternatives that market).(noting retail 3 at 24, 28. 29. 30. 30. 27. Casey Quirk, Quirk, Casey (“[A]lternative investment products appeal to investors seeking to directly.”). them in invest to qualify not may who invest in hedge funds, 27.
investors investors expect neatly tailored offerings that emphasize transparency and optimize liquidity. movement movement to “democratize” these strategies, unlisted securities, structuring – as mainstream.” hedging strategies, derivatives and innovative “combine access to non-correlated strategies investmentregistered of products.” transparency and liquidity and asset classes with the increasingly turning to alternative investments to assist clients in achieving low correlation to traditional stocks and bonds, reduced portfolio volatility, and appropriate returns. have accounted for the majority of the assets. growth in alternative investment 26. SEI, SEI, 26. Europe but with an eye for Charney, yield, uncorrelated asset classes and risk-adjusted returns.”); Josh [ 25. supra 25. funds.). mutual alternative to look should managers asset reason primary one are 5_M 2017] E to the growing demand for such products are likely to gain share an of increasing incremental industry dollars. 32. Casey Quirk, Quirk, Casey at 2 (“Adding a liquid alternative allocation to a enhance long-term portfolio returns and reduce traditional risk – and it may lower portfolio sensitivity to market has the potential to fluctuations.”). interest-rate and 32. supra investors.”). retail of set broadening a from traced to the challenges created by the post-2008 investment climate.”); Diane M. Sulzbach and Philip T. Masterson, Structure: Practical Considerations 4 http://advisor.morningstar.com/uploaded/pdf/AIO_QuarterlyQ22013_nonACC.PDF institutional investors. were once an exclusive corner of the investment world accessible only to C Y 39057-ple_19-2 reissue Sheet No. 89 Side A 04/17/2017 09:23:23 04/17/2017 89 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 89 Side B 04/17/2017 09:23:23 M K see C Y The The 34 Sarah Max, Max, Sarah [Vol. 19:2 19:2 [Vol. note 19, at 2. See also AW The Legacy of Modern L (Oct. 24, 2015) 2015) 24, (Oct. S ’ supra ARRON USINESS B , B 36 et seq. et ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J Bricker, Johnson &Johnson Bricker, Testani, ELETE In finance, efficiency is achieved by by achieved is efficiency finance, In D 33 See OT N 7 (Fall 2002) (Fall 7 O (D DOCX DOCX . ENNSYLVANIA ENNSYLVANIA NVESTING P I /5QRQ-SSHQ] (identifying Modern Portfolio Theory as the philosophy Some observers have suggested that many of the last spate spate last the of many that suggested have observers Some RINTER , Jon Danielsson, The Emperor has no Clothes: Limits to Risk Modelling, P , J. , 37 CC OF . The observable diversification benefit has been been has benefit diversification observable The TO _ 35 at 8. Frank J. Fabozzi, Francis Gupta and Harry M. Markowitz, Markowitz, M. Harry and Gupta Francis Fabozzi, J. Frank See, e.g. Id. PERMA :// In addition to the dual benefits of portfolio diversification and ACCHIAROLA HTTPS (June 2000), at 5 (describing how, for example, “the presence of VaR based risk limits led to the execution of similar trading strategies, escalating the crisis.”). Alternative Investments: Surfing the Market 35. 35. absolute return, the desire of investors to realize investment returns through more regulated conduits represents a natural response to the various high- profile scandals that have beset several years. the investment industry over the past fixed income and equities in a generic portfolio exposed leaves than is an optimal as investor correlations converge more during periods of market turbulence. application of Modern Portfolio Theory growth of the liquid alternatives category to date, as the traditional blend of alone validates the impressive
stream of return into the traditional 60/40 portfolio effect can on have the efficient a frontier – profound offering more expected return per unit of risk expended. This concept lays at the demarks heart an of “efficient” modern portfolio finance, as which one seeking to reduce without its overall risk sacrificing return. 33. For a thoughtful reflection on the developments of Modern Portfolio Theory, Theory, Portfolio Modern of developments the on reflection thoughtful a For 33. generally [ 5_M 412 U. than half the volatility of stocks.” of volatility the half than 36. According to a study by the traditional asset manager AllianceBernstein, “Over the the “Over AllianceBernstein, manager asset traditional the by study a to According funds). mutual alternative liquid underpinning 36. last 20 years, alternatives have provided better returns than stocks, bonds or cash, with less http://www.barrons.com/articles/alternative-investments-surfing-the-market-1445664165 http://www.barrons.com/articles/alternative-investments-surfing-the-market-1445664165 37. The number and breadth of recent scandals is impressive indeed. While each each While indeed. impressive is scandals recent of breadth and number The 37. scandal is proceeding through the legal and judgment regulatory is made systems on at these pages its with respect own to pace any individual’s (and spate guilt or no of innocence), the scandals have included alleged Générale, Bruno Iksil “rogue at JP Morgan traders” and Kweku Adoboli (i.e. at UBS), “rigged exchanges” Jerome (i.e. Kerviel high at frequency trading, LIBOR Société fixing, gold fixing), fraudulent funds (i.e. Madoff), greedy executives (i.e. Angelo Mozillo at Countrywide, Joseph Nacchio at Qwest), insider trading (i.e. Rajat Gupta, Raj Rajaratnam), corrupted counselors (i.e. Marc Dreier) and trades). dollar illicit Paribas BNP deal, “Abacus” Sachs Goldman (i.e. bad banks 34. 34. complemented by the fact that, basis. performedabsolute wellan on in recent years, alternative assets have combining assets with returns that are less than perfectly correlated; that is achieved by adding to an existing portfolio an asset whose returns do not move in lock-step, thereby reducing the risk of the original portfolio. of financial scandals might have been averted by the increased Portfolio Theory Portfolio 39057-ple_19-2 reissue Sheet No. 89 Side B 04/17/2017 09:23:23 04/17/2017 89 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 90 Side A 04/17/2017 09:23:23 , 38 FOR FOR . /US4P- TR C ; see also CC . .J., Jun. 3, 3, Jun. .J., T S 1, Sep. 2014 2014 Sep. 1, PERMA Even when when Even ALL Developments in . 343, 344 (2013) ERKELEY 39 :// EG , B , W R 42 HTTPS ON ON ETTLEMENTS note 12, at 1 (describing J. S 413 413 ALE , 30 Y NTERNATIONAL I LTERNATIVES A ) 3/1/17 11:06 AM One expression of the emphasis on on emphasis the of expression One 40 The New ABCs of Mutual Funds ELETE ANK FOR D The Regulatory Response to Madoff , B OT N O XPANDING This trend signals a rational response for any any for response rational a signals trend This (D 41 Regulated Alternative Funds, supra DOCX DOCX Comm. Payments & Mkt. Infrastructures, Infrastructures, Mkt. & Payments Comm. . Why Didn’t the SEC Catch Madoff? It Might Have Been Policy Not To . (Mar. 2009): (Mar. . /RF67-DSS9] (commenting that the institutional share class of mutual RINTER Paul Roye, Division Director of Div. of Inv. Mgmt., U.S., Sec. & Exch. Exch. & Sec. U.S., Mgmt., Inv. of Div. of Director Division Roye, Paul , SEI, , Corrie Driebusch, , Anita K. Krug, P , May 31, 2013, http://www.rollingstone.com/politics/news/why-didnt-the- CC . CON TO The Regulation of Mutual Fund Debt _ TONE .&E S See generally See, e.g. See, e.g. See, e.g. See, e.g., PERMA US :// If the goal arising from the Madoff fraud is to better protect investors in hedge information evince operations funds’ hedge if and funds, private other and funds dispersion problems similar to those leading to the enactment of the Investment Company Act, then looking to step. first appropriate an be may Act Company Investment the model of regulation established by the . Matt Taibbi, ,B ACCHIAROLA M K OLLING AW HTTPS 40. generally various new alternative investment vehicles, both on abroad). the domestic frontier and 40. Collateral Management Services Comm’n, Keynote Address at the EEESI General Membership Meeting 2000: Regulation of Mutual Funds in the United (noting States: that the Investment Company Act “has proved to be A remarkably resilient”) Successful Regulatory Regime John (Sept. Morley, 22, 2000)
transparency and regulation that today’s transparency investors and moreregulation that today’s regularly demand. For example, today’s more requires routinely that investment exposures be bundled in highly regulated discerning and skeptical investment vehicles, with investing detailed specifications around risk measurement public and management, liquidity, diversification, and leverage. regulated structures is the willingness of institutional accounts to invest in mutual fund holdings. 41. 41. (describing an emphasis on the best practices of collateral management and observing that “market participants that provide large-scale lending have shown an transactions.”). lending unsecured over transactions lending secured for increased preference [ But cf sec-catch-madoff-it-might-have-been-policy-not-to-20130531 PG2W] (observing that, during [ the period from January 1, 2002 through January 20, 2009, cohort for whom a regulation justifies the higher fee structure quantifiable generally attributable to mutual improvement in fund shares, product as the design Investment and Company Company Act Act”) of provides 1940 the (the comfort “Investment of free. scandal virtually century a of quarters three enjoyed a regulated vehicle which has 38. L 5_M 2017] E 2013, http://www.wsj.com/articles/SB10001424127887324063304578523154145807688 39. the SEC failed to file a single case under the Act). Company Investment Advisers Act or the Investment 39. 42. funds had grown its assets from $766 billion in 2003 to $3.4 trillion tracks.”). Morningstar class in share of type any of growth “biggest 2013, marking the 42. more more sophisticated investors transact in less regulated product, deliberate attention is paid and care taken custodied to and ensure that valued assets properly. and collateral are R C Y 39057-ple_19-2 reissue Sheet No. 90 Side A 04/17/2017 09:23:23 04/17/2017 90 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 90 Side B 04/17/2017 09:23:23 M K 44 C Y In In Going 46 /HY59- /4HMK- , 2016, CC see List of . CC . LTS , 2, (2012) Moreover, Moreover, at 13-14 (Apr. A 47 [Vol. 19:2 19:2 [Vol. PERMA PERMA (U of St. Thomas :// AILY :// AW L ARCLAYS HTTPS , D HTTPS The Emergence of Liquid , B Recent changes to the the to changes Recent 45 USINESS B Going Mainstream: Developments and /6JCL-HLD2] [hereinafter, Barclays, CC . ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J PERMA ELETE D :// OT N O Confluence of Private and Mutual Funds HTTPS (D Barclays Prime Services, DOCX DOCX . William Marr and Alexander Rubin, Rubin, Alexander and Marr William ENNSYLVANIA ENNSYLVANIA P /A2XR-VLED] (describing the growth of liquid alternatives and managed RINTER Generally, this term describes investments offering access access offering investments describes term this Generally, P 43 CC OF . TO _ Wulf A. Kaal, Kaal, A. Wulf ] (describing the reaction of hedge fund managers to the reality of a far different See generally See See generally PERMA :// Spurred by the dual demands of an alternative asset return profile and ACCHIAROLA HTTPS real estate, merger arbitrage, and commodities. Private fund managers and their trading programs often provide the content of these liquid alternative funds, as historically such firms have dominated the management of the investor pools in alternative asset categories which include long/short equity, global macro, managed futures, private equity, capital markets precipitated by interest-rate the environment and financial the enormous crisis growth of coupled private encouraged funds, with has the a demand low for these alternatives by retail investors.
a more regulated product emergence wrapper, of the a past new few supply alternatives.” years of have funds seen broadly characterized the as “liquid (Minnesota) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2715083 Legal JWP5] (noting that the net assets into liquid alternative funds “increased almost 200% from [ Studies Research Paper Going_Mainstream_A4.pdf [ Mainstream No. space). Act ‘40 the in model expenses and fee at 16-06) 4, 43. For a list of the liquid alternative mutual funds launched in 2014 alone, alone, used be 2014 in will fund” launched “hedge funds and mutual fund” “private alternative terms liquid the the of stated, list a For otherwise (observing the “almost complete absence of bankruptcies among mutual funds in the last 70 years.”). 43. New http://dailyalts.com/new-liquid-alternative-fund-launches-2014/ Liquid [ Y3BJ]. Alternative 44. Funds Unless Alternatives Launched and https://www.umbfs.com/groups/public/documents/web_content/039761.pdf in the [ Case 2014 for funds). investment as funds mutual futures Managed 45. Futures Mutual interchangeably throughout this Article. In each case, the term describes a fund exempt from Funds 3(c)(7). or 3(c)(1) Section of terms the by 1940 of Act Company Investment the 46. 5_M 414 U. embracing liquid alternatives, private managers must adjust to the reality, however, that fees charged for products Company Act regulated are lower than those for the typical hedge under fund. the Investment 47. 2014.”). to 2009 47. Opportunities for Hedge Fund Managers in the ‘40 Act Space 2014) http://www.barclayscommunications.com/CapSol_Publications/492282/ registered investment performance companies fee common to are most distribution costs add additional pressure to the economics for new advisors private prohibited funds and infrastructure from and charging a to alternative investment strategies via more traditional structures such as mutual funds, closed-end funds, UCITS, or exchange traded funds. 39057-ple_19-2 reissue Sheet No. 90 Side B 04/17/2017 09:23:23 04/17/2017 90 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 91 Side A 04/17/2017 09:23:23 1 See /98A4- USSELL CC . R for a 1, 3, 5 5 3, 1, a for /LZ8A-P842] ® CC . PERMA (May 14, 2014) 2014) 14, (May , FTSE :// PERMA The Retail Alternatives HTTPS :// 50 415 415 ORNINGSTAR HTTPS note 10 (describing the appeal appeal the (describing 10 note SEI, SEI, note 47, at 13-14 (describing the the (describing 13-14 at 47, note , M See supra supra , LTERNATIVES ‘Smart Beta’ Investing Lets the Yardstick Pick A ) 3/1/17 11:06 AM This relative underperformance and the the and underperformance relative This 49 These strategies attempt to improve or or improve to attempt strategies These 51 ELETE . Towers Watson, D Reflections on the Efficient Market Hypothesis: 30 Years Cf OT Going Mainstream N O XPANDING (D note 51. 51. note DOCX DOCX , Jun. 28, 2014, at B5 (describing the exponential growth of smart . 1, 1-3 (2005) (suggesting that “a blindfolded chimpanzee throwing throwing chimpanzee blindfolded “a that (suggesting (2005) 1-3 1, Barclays, Barclays, 48 note 3, at 21 (observing that “many private funds have chosen to be A Sensible Approach to ‘Smart Beta’ IMES supra RINTER , Some Thoughts on the Evolution of the Design of Financial Products, T , Burton Malkiel, Smart beta architects seek to (i) distill investment returns returns investment distill (i) to seek architects beta Smart P EVIEW 52 TO .R _ IN , N.Y. See generally See, e.g. See Smart Beta: 2015 global survey findings from asset owners See, e.g. Alternative Alternative streams of return are also accessible through various In recent years, that search has resulted in a burgeoning group of so- , 40 F Ben Johnson, Johnson, Ben ACCHIAROLA M K into their individual component parts and (ii) build transparent, rules-based strategies reliably providing exposure to those market segments, factors, or
and sub-advisors. and alter the return profile of an investment relative to more-traditional market benchmarks. darts at the stock pages could select a portfolio that would do as well observing as that large cap the equity funds experts,” are outperformed and by the S&P 500 Index (2016), http://www.ftserussell.com/sites/default/files/research/smart_beta_2015_ called “smart beta” strategies. also http://news.morningstar.com/articlenet/article.aspx?id=647771 SNKC] [ (observing 59% growth “leading edge year-over-year of the most recent wave of product and proliferation within the global exchange– describing “smart traded products beta” landscape.”); Paul Sullivan, as at the the Stocks global_survey_findings_from_asset_owners_final.pdf global_survey_findings_from_asset_owners_final.pdf (“Strategy-based exposures have gained a lot in popularity over the past few years.”). [ 48. 48. reaction of hedge fund managers to the reality of a far different fee and expenses model in the ‘40 Act space). In addition, the popularity of expense caps and 12b-1 fees coupled with the investor preference for institutional products share very classes thin make when the compared margins to for hedge registered funds. 5_M 2017] E passive strategies, which have proliferated in have grown concerned recent about the years, efficacy of active as management. investors Despite the commercial success of active managers, it has long academic been circles that accepted these in managers rarely outperform a benchmark over any meaningful interval of time. higher transaction costs of actively managed funds have energized a search moremarketfor meansaccessing efficient returns. of 50. 90%time). and the 63 of between period 10-year and 50. Olden Lane Whitepaper No. 2 (June 2016) at 3 [hereinafter Olden Lane No. 2] (“Economy, efficiency and exposure in the time.”). the of watchwords form of betas, both 51. traditional and alternative, are the 52. Johnson, Johnson, investing). beta 52. of smart beta strategies as a realization that certain hedge fund strategies “can be reproduced cost.”). lower a at strategies accessible easily simple, with Later 49. sub-advisors, allowing them to focus on investment management while the sponsoring firm functions.”) back-office and administration distribution, handles 49. Phenomenon, supra C Y 39057-ple_19-2 reissue Sheet No. 91 Side A 04/17/2017 09:23:23 04/17/2017 91 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 91 Side B 04/17/2017 09:23:23 M K 57 C Y USSELL , R /R4PJ-4Z69] CC . (May 4, 2014), 2014), 4, (May [Vol. 19:2 19:2 [Vol. IMES AW PERMA L .T :// IN , F HTTPS 5 (July 2015), http://leeds- 2015), (July 5 USINESS B ORNINGSTAR , M note 10, at 2 (“We believe we are still at the the at still are we believe (“We 2 at 10, note ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J others have declared it a fad, questioning questioning fad, a it declared have others 54 ELETE supra D http://www.cfasociety.org/orlando/Lists/EventsCalendar/ http://www.cfasociety.org/orlando/Lists/EventsCalendar/ OT N O (D To date, smart beta strategies have been accessed accessed been have strategies beta smart date, To 55 DOCX DOCX . Market divided over smart-beta success ENNSYLVANIA ENNSYLVANIA P Morningstar and Barron’s 2014-2015 Alternative Investment Survey of /25Q7-28UX]. /8SFM-KEE]. The strategies developed by the global banks suffer from a a from suffer banks global the by developed strategies The RINTER , Towers Watson, , P 56 CC CC OF . . TO _ 4 (Sep. 2013), 2013), (Sep. 4 While some commentators have proclaimed the smart beta beta smart the proclaimed have commentators some While 53 See generally Smart Beta: Implications for Active Management See, e.g. See, e.g. PERMA PERMA :// :// Non-traditional strategies continue to creep into the fund space. In smart beta, the nation’s leading banks have developed a ACCHIAROLA HTTPS HTTPS NVESTMENTS 55. Chris Flood, Flood, Chris beta”). smart of evolution the in stage ‘pioneer’ 55. https://www.ft.com/content/fc6feaa8-c497-11e3-b2fb-00144feabdc0 https://www.ft.com/content/fc6feaa8-c497-11e3-b2fb-00144feabdc0 whether it is anything more than “another example of marketing hype product by providers.” faculty.colorado.edu/grossd/MBAX%206220%20Fall%202016/Readings/Morningstar%20 are derived more systematically. a In construct, such the fund sponsor adds value by identifying desirable streams of return or optimizing the delivery of those trading returns to investors. As a result, traditional programs and asset managers looking to run an alternative sleeve of their business in a They represent a challenge to the traditional top-down asset management firm structure where managers are grown organically and decided allocations are subjectively by internal toward staff. a “sourcing and structuring” model in Instead, which investment decisions alternative funds tend
concepts. [ Alternative%20Investment%20Survey%202014-2015.pdf [ 53. 53. I [ low value structure investors of with the delivery, financial or manage ISDA withwilling a number of agreements investors other shrinking and distribution personnel resources confined to to buy a bank to issued conclude structured note. and those remainmuchtoday very odds. In at smart beta, content and structure 5_M 416 U. [hereinafter Morningstar and Barron’s] (suggesting that “[e]ven as flows have clip”). record a at funds launch to continue companies fund moderated, 56. This number was offered privately to the authors in a presentation not for onward onward for not presentation a in authors the to privately offered was number This 56. presentation. the retained have authors The distribution. 57. U.S. Institutions and Financial Advisors 54. 54. if not thousands, management. account for only $100 billion in assets under primarily through over-the-counter derivatives or structured notes, and, in counterparty. as bank a with typically case, either considerable inventory of systematic investment content to growing capitalize investor on demand for passive together all and the bank proprietary systematic strategies, which number investment. in the hundreds Yet, movement movement to be in its infancy, Attachments/1/Russell%20Smart%20Beta%20Indexes_IAM_Agather_Final.pdf 39057-ple_19-2 reissue Sheet No. 91 Side B 04/17/2017 09:23:23 04/17/2017 91 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 92 Side A 04/17/2017 09:23:23 , SEC, See also , U.S. 417 417 /KSA5-73Y9] (setting out the traditional SEI, The Retail Alternatives Phenomenon CC . LTERNATIVES See also Unit Investment Trusts The trust indenture sets forth the the forth sets indenture trust The See A 60 ) 3/1/17 11:06 AM PERMA :// ELETE note 7, at 1180 (noting the essential parts of a trust trust a of parts essential the (noting 1180 at 7, note D OT N HTTPS supra O XPANDING The Investment Company Act distinguishes UITs UITs distinguishes Act Company Investment The (D 61 note 7, at 1178 (“Because a unit investment trust both issues issues both trust investment unit a (“Because 1178 at 7, note DOCX DOCX . II US Securities and Exchange Commission, Div. of Inv. Mgmt., Mgmt., Inv. of Div. Commission, Exchange and Securities US The transition to liquid alternative funds will more likely likely more will funds alternative liquid to transition The Typically organized under a trust indenture, UITs issue issue UITs indenture, trust a under organized Typically 58 supra 59 RINTER P ART P TO _ Gould and Lins, Lins, and Gould Investment Company Act § 4(2)(a)-(c), 15 U.S.C. § 80a-4 (describing the Investment Company Act § 4(2)(a)-(c), 15 U.S.C. § 80a-4 (defining a unit unit a (defining 80a-4 § U.S.C. 15 4(2)(a)-(c), § Act Company Investment See also See See See note 3, at 3 (cautioning private fund managers that “[t]he distribution of retail A unit investment trust is an investment vehicle which qualifies as an ACCHIAROLA M K “only redeemable securities, each of which represents an undivided interest in a unit of specified securities.”
manner manner similar to their existing business are likely to find confusion and disappointment. 61. UIT). a of traits 61. indenture). “investment company” pursuant to the Company Act. requirements of the Investment Memorandum on the Reg. and Operation of Regulation and Operation Memo] Unit (recognizing that a unit Inv. investment trust is managed Trs., by a (Sept. 1988), directors). of board a than rather indenture, trust 5 [hereinafter from management investment companies by requiring that UITs have a www.sec.gov/answers/uit.htm www.sec.gov/answers/uit.htm [ 58. In large measure, we think far too many of today’s asset managers are content to sit sit to content are managers asset today’s of many too far think we measure, large In 58. on an annuity earned for their organization by Moreover, those if who alternatives are blazed more a fully embraced trail by investors, many many years asset managers ago. are going to be targeted for disintermediation. 5_M 2017] E reward those nimble and enterprising firms best able to (1) source reliably coveted alternative streams of return adroitly and or consistently those streams in the smartmost desirable and economic beta indices, (2) wrapper deliver for investors, and (3) effectively and educate consistently the the resulting product into marketplace the appropriate and sales channel. As the remainder of this Article hopes to highlight, the UIT offers distribute tremendouspromise regard. and this flexibility in important provisions of the UIT, which it including may be its terminated early, term, and the responsibilities the of its evaluator, sponsor, conditions and trustee. by 60. company”). investment 60. characteristics of a unit investment trust). 59. supra alternatives is complex, involving a maze of intermediaryplatforms.”). sales channels, specialized consultants and 59. investment trust as “an investment company which (A) is organized under a trust indenture, contract of custodianship or agency, or similar instrument, directors, (B) and (C) issues does only redeemable not securities, each of have which represents an a undivided board of interest in a unit of specified securities; Gould but does and not Lins, include a voting trust.”). securities and uses the proceeds to purchase securities, it comes within the definition of an C Y 39057-ple_19-2 reissue Sheet No. 92 Side A 04/17/2017 09:23:23 04/17/2017 92 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 92 Side B 04/17/2017 09:23:23 . M K 66 O C Y .N OC RODUCT P XCHANGE E RUSTS AND T , H.R. D [Vol. 19:2 19:2 [Vol. INANCIAL F AW in L , SEC] (“The investor was NVESTMENT OMPANIES I Concurrent with the the with Concurrent ECURITIES AND C S 64 note 7, at 1047 (“Because (“Because 1047 at 7, note /6BE7-TAUH] (granting no- USINESS supra CC . B EPORT ON NVESTMENT I PERMA HAIRMAN OF THE ,AR note 61, at 2 (“Unlike the more prevalent prevalent more the (“Unlike 2 at 61, note C :// Harman, Harman, AW HAIRMAN OF THE Unit Investment Trusts Investment Unit L 65 supra C HTTPS ) 3/1/17 11:06 AM OURNAL OF OF OURNAL RUSTS AND J 76th Cong. 3 at 184 (1940) (testimony of David David of (testimony (1940) 184 at 3 Cong. 76th T See also ELETE D OT N URSUANT TO ETTER FROM THE O P (D NVESTMENT ETTER FROM THE , I DOCX DOCX . L Investment Company Act § 4(2)(a)-(c), 15 U.S.C. § 80a-4(2)(a)-(c) ENNSYLVANIA ENNSYLVANIA P RINTER , PaineWebber Equity Trs., SEC Division of Investment Management No- P ,8-29 (Clifford E. Kirsch, ed. 2016) (noting that “the fixed trust concept has has concept trust fixed “the that (noting 2016) ed. Kirsch, E. (Clifford ,8-29 OF RANSMITTING Laurin Blumenthal Kleiman, OMPANIES TO _ Because UITs lack a board of directors, corporate officers, or or officers, corporate directors, of board a lack UITs Because C ,T 62 As a result, UITs are more constrained than other available fund fund available other than constrained more are UITs result, a As 63 But cf. But See generally See generally See, e.g. See A Bill to Provide for the Registration and Regulation of Investment Companies Regulation and Operation Memo, Memo, Operation and Regulation The absence of management in UITs has traditionally referred to a ACCHIAROLA OMMISSION UNDAMENTALS NVESTMENT 64. (defining a “unit investment trust”). UITs, unlike mutual funds, them.”). to have irrelevant are clearly Act 1940 the of provisions no investment adviser or 64. board of directors, certain 63. See also type of investment company such as the mutual fund, a UIT does portfolio.”). its manages that adviser not have an investment 63. This feature provides an important protection against any conflict of self-dealing interest of or an investment manager. In the unit investment trust, management is ordinarily reduced to document, the trust a agreement, usually specifies minimum, not only the as securities in “the which the controlling funds may be invested but also the specific number of each except under certain circumstances.”certain under except structures structures (i.e. actively managed open-end funds) portfolios sometimes and described as are static or “fixed.” comprised of creation of the unit investment trust structure, Investment Trust the Study Chief described the Counsel vehicle of to the Congress as “[a] whereby they sell an an individual in interest device, a package a of securities, list of which is made known,” adding that “they cannot change the package, action relief where equity holdings of a UIT will be sold in the event that their ratings below fall a predetermined level and the “proceeds from disposition will securities.”). substitute not be reinvested in
fixed portfolio, essentially no management, and maintain a simple capital structure. noaction/1993/painewebber071993.pdf noaction/1993/painewebber071993.pdf [ C I F 62. 62. 5_M 418 U. assured, therefore, that both changes in his investment and manipulation were impossible.”). an investment advisor, vehicle. active management is prohibited within the prohibition against the substitution of investments that are not specified in the UIT’s prospectus and governing documents on its inception date. 66. Committee on Banking and Currency Schenker, Chief Counsel of the Investment Trust Study of concept). UIT developmentthe the of with connection in trust” the SEC) (describing a “fixed 66. Action Letter, No. 811-3722 (Jul. 19, 1993) https://www.sec.gov/divisions/investment/ and Investment Advisors, and for Other Purposes: Hearings Before a Subcommittee of the 65. time.”). over significantly evolved 65. 567 at 15 (1940) [hereinafter L 39057-ple_19-2 reissue Sheet No. 92 Side B 04/17/2017 09:23:23 04/17/2017 92 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 93 Side A 04/17/2017 09:23:23 70 Regulation and and Regulation see also A Bill to See also Regulation and Operation Operation and Regulation note 64, at 8-2 (noting that that (noting 8-2 at 64, note note 61, at 21 (“The trust trust (“The 21 at 61, note The affordability in in affordability The 419 419 73 note 62 (noting that the trust trust the that (noting 62 note supra supra 72 See also supra For example, Section 26 of the the of 26 Section example, For and requires the UIT sponsor to to sponsor UIT the requires and 68 71 Kleiman, SEC, LTERNATIVES A 67 ) 3/1/17 11:06 AM See also enforces limitations on the fees chargeable chargeable fees the on limitations enforces ELETE 69 D (describing the workings of Section 26(a)(2)). OT N note 7, at 1180. O HAIRMAN OF THE XPANDING (D C et seq. et supra note 61, at 21 (“substitution of portfolio securities should only only should securities portfolio of (“substitution 21 at 61, note DOCX DOCX note 7, at 1046. 1046. at 7, note . 76th Cong. 3 at 300 (1940)(testimony of John H. Hollands, SEC SEC Hollands, H. John of (1940)(testimony 300 at 3 Cong. 76th Regulation and Operation Memo, Memo, Operation and Regulation supra supra RINTER P TO See also _ note 61, at 19 Investment Company Act § 26(a)(4), 15 U.S.C. § 80a-26(a)(4) (“[A] record record (“[A] 80a-26(a)(4) § U.S.C. 15 26(a)(4), § Act Company Investment Investment Company Act § 26(a)(3), 15 U.S.C. § 80a-26(a)(3) of Investment Investment of 80a-26(a)(3) § U.S.C. 15 26(a)(3), § Act Company Investment Investment Company Act § 26(a)(2), 15 U.S.C. § 80a-26(a)(2) (noting the the (noting 80a-26(a)(2) § U.S.C. 15 26(a)(2), (setting § Section 80a-26(a)(1) § Act U.S.C. 15 26(a)(1), § Act Company Investment Company Investment ETTER FROM THE See See See See supra Concerned Concerned about abuses that had taken place in “fixed trust” In a thorough analysis of the structure, the SEC’s former chief counsel ACCHIAROLA M K
security which maypurchased.” which be security These requirements prohibit a trustee from resigning before a successor is appointed or trust assets are liquidated, predecessors predecessors of the UIT vehicle, Congress included a special section of the Investment Company Act setting minimum requirements for a UIT’s trust indenture and addressing certain abuses. UITs “provide a unique opportunity for the investor who seeks the diversification and 67. L 67. 5_M 2017] E to unitholders, and sets certain requirements with respect to UIT assets. Investment Company Act imposes a banks chosen as UIT trustees, minimum capital requirement for maintain maintain unitholder records and to inform unitholders in the event that a withinportfolio. replaced UIT’s is the security concluded that UITs offer liquidity “attractive and diversity investments at because an they affordable offer price.” 73. Harman, holders of the trust, or designated”). been has (1), paragraph in prescribed (B) a successor trustee 72. or custodian, having the qualifications will be kept or by an agent the depositor of the depositor of the name and address of, and the Harman, shares issued by the trust and held by, every holder of any security issued pursuant to such instrument”). indenture must provide that whenever a portfolio security is substituted substitution.”). the the after days five depositor within must unitholders to substitution the of notice a mail 73. 71. Memo, 71. Company Act of 1940 (“[T]he trustee or custodian shall not resign until either (A) the trust has been completely liquidated and the proceeds of the liquidation distributed to the security agreement plays a managerial role Operation in Memo, unit investment trusts). occur under unusual circumstances, for example, when the viability creditworthiness of or the economic issuer of the portfolio security is seriously in doubt.”); 68. Gould and Lins, Lins, and Advisors, and for Other Purposes: Hearings Before a Subcommittee of Banking the and Committee on Currency Gould staff attorney) (adding that “[t]he investor really exercises his own judgment, because he is ordinarily shown the list of securities in which under his funds very will special be circumstances invested, and that it the is eliminatedsubstituted.”). others and only portfolio can be changed and those 68. securities 69. $500,000). at requirement capital minimum the 70. conditions where a unit investment trust can be sold). Provide for the Registration and Regulation of Investment Companies and Investment C Y 39057-ple_19-2 reissue Sheet No. 93 Side A 04/17/2017 09:23:23 04/17/2017 93 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 93 Side B 04/17/2017 09:23:23 M K ee C Y [Vol. 19:2 19:2 [Vol. . (Nov. 17, 2004), Aside from from Aside 75 AW L OMMENT .C ES USINESS /3XNZ-DYH2] (describing the Brian Reid and Kimberlee Millar, Millar, Kimberlee and Reid Brian B .R CC . NST .I O PERMA note 61, at 2 (“Because a UIT is unmanaged, unmanaged, is UIT a (“Because 2 at 61, note An illustration comparing the main main the comparing illustration An :// .C 76 See generally NV ) 3/1/17 11:06 AM OURNAL OF OF OURNAL supra J , I HTTPS ELETE D OT N note 7, at 1181. O note 7, at 1177 (observing that “a UIT permits the average average the permits UIT “a that (observing 1177 at 7, note (D supra note 7, at 1046. 1046. at 7, note DOCX DOCX note 7, at 1046. . supra ENNSYLVANIA ENNSYLVANIA P supra supra RINTER P OF TO _ Instead, a trust’s assets will theoretically remain in the trust for its its for trust the in remain theoretically will assets trust’s a Instead, 74 Gould and Lins, Lins, and Gould ACCHIAROLA importance of understanding the trading activities incur). they costs of fund managers and the transaction entire term, allowing the investor “to make the investment decisions rather than an investment advisor or manager” and, at the same “fears time, allay any of portfolio manipulation or mismanagement.”
comparison to the typical mutual fund has two main drivers. First, the UIT lacks an investment adviser “to whom it must pay an annual management fee.” https://www.ici.org/pdf/rc_v1n2.pdf https://www.ici.org/pdf/rc_v1n2.pdf [ liquidity of a mutual fund without the costs associated with also portfolio management.”); s 5_M 420 U. attributes of the mutual fund and the UIT structures is provided in Figure 1 below. protecting against style drift that often nature of the UIT besets portfolio also ensures that brokerage commissions will be managed funds, the fixed smaller than those of the typical mutual fund, which pays to turn portfolio over on its a more frequent basis. 75. Gould and Lins, Lins, and Harman, Gould UIT); Regulation and Operation Memo, Harman, it also permits an investor – unlike a mutual fund – to obtain diversification without paying fee.”). management annual an 74. 75. 76. investor to diversify investment at management and an economies of scale affordable in transaction cost” costs” as attributes and of the listing “diversification, professional Mutual Funds and Portfolio Turnover 39057-ple_19-2 reissue Sheet No. 93 Side B 04/17/2017 09:23:23 04/17/2017 93 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 94 Side A 04/17/2017 09:23:23 et k ndicate y Fixed life 1 to 99 to 1 life Fixed years MSub-chapter Trust Grantor firmSingle commitmenta of a through size fixed s and charge Sales ongoing minimal sponsor and trustee fees UIT UIT portfolio Static Trust Minimally a by supervised trustee of board No directors marSecondary liquidity Redeemableat daily NAV 421 421 note 64, at App. 8A-1. supra LTERNATIVES A ) 3/1/17 11:06 AM ELETE D OT N O XPANDING Continuously on a “best a on Continuously through basis effort” distributor custody fee, Management fees, agency transfer fees, cost, servicing shareholder ongoing and charges sales fees distribution Redeemable daily at NAV at daily Redeemable Indefinite MSub-chapter MUTUAL FUND MUTUAL Active Business or Corporation Trust by overseen Actively or directors of board trustees (D DOCX DOCX . 77 RINTER P 1. TO _ IGURE As an investment company, the UIT is required to adhere to the strict F ACCHIAROLA M K registration and disclosure regime of the federal securities sponsor laws. must A navigate UIT both the Securities Act”) and the Act Investment Company Act, of as UITs register their 1933 units under (the “Securities the Securities Act after registering the trust entity itself under the
77. Adapted from a chart appearing at Kleiman, at appearing chart a from Adapted 77. DISTRIBUTION DISTRIBUTION CHARGES & FEES REDEEMABILITY REDEEMABILITY TERM TAX PORTFOLIO MANAGEMENT STRUCTURE GOVERNANCE 5_M 2017] E C Y 39057-ple_19-2 reissue Sheet No. 94 Side A 04/17/2017 09:23:23 04/17/2017 94 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 94 Side B 04/17/2017 09:23:23 M K 83 79 81 C Y supra [Vol. 19:2 19:2 [Vol. EGISTRATION AW R L CT Regulation and Operation Operation and Regulation A uses the proceeds to to proceeds the uses Investment Company Act § § Act Company Investment and USINESS B See also See also Regulation and Operation Memo, Memo, Operation and Regulation ECURITIES note 61, at 12-13 (noting the registration registration the (noting 12-13 at 61, note S By contrast, the trust itself – and not not and – itself trust the contrast, By 80 supra See also ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J CT AND CT note 7, at 1061: ELETE A D A UIT is typically comprised of multiple multiple of comprised typically is UIT A OT 78 note 7, at 1178. 1178. at 7, note note 7, at 1194-95. 1194-95. at 7, note supra N O (D supra supra OMPANY note 64, at 8-16. note 7, at 1061. 1061. at 7, note DOCX DOCX . Securities Offering Reform, Securities Act Release No. 8591, 8591, No. Release Act Securities Reform, Offering Securities C Harman, ENNSYLVANIA ENNSYLVANIA P supra supra RINTER P OF 82 TO _ note 61, at 13 (describing the Form N-8B-2 disclosures). Automatic Effectiveness of Registration Statements Filed By Certain Unit Unit Certain By Filed Statements Registration of Effectiveness Automatic see also See See generally See Regulation and Operation Memo, Memo, Operation and Regulation supra NVESTMENT Because a UIT “both issues securities In 1982, the SEC adopted Rule 487 of the Securities Act, granting I ACCHIAROLA purchase securities,” it fits within the statutory definition of an investment company described in Section 3(a)(1) of the Investment Company Act. UITs registration relief not previously granted to any other type of issuer. The regulation of a UIT under tailored, however, to account for the vehicle’s unique characteristics the versus Investment Company Act is other investment company types. highly Form N-8B-2 describes the trust and the units that it will regarding the sponsor, offer various workings of the trust, its to fees, expenses and the public. sales loads and provisions for the purchase, The sale, creation and form redemption securities. of requires disclosures And And because each series Securities Act, filing a is separate registration statement to gain effectiveness considered a under distinct Section 8(a) and with its assets and liabilities ring-fenced offering from those under the of any other series of the same trust. 81. Gould and Lins, Lins, Lins, and and Gould Gould 81. 3(a)(1), 15 U.S.C.A. § 80a-3(a)(1) (defining investment company as a securities issuer that securities). reinvests and invests 82. Memo, 83. (May 6401 1982) No. 7, Release Act InvestmentSecurities Trusts, [hereinafter Securities Act Release No. 6401] (describing the registration requirements for
Investment Company Act. UITs); Release Act Exchange No. 52,056, Investment No. Release Act Company 70 26,993, Fed. 78. 78. 5_M 422 U. each series – registers under the Investmentthe Companyunder Act.registers – series each series, with each series referring individual to a unitholder, distinct therefore, portfolio of particular looks series’ portfolio of assets. underlying assets for only her investment return. An to the performance of a 79. Harman, Harman, trusts). investment unit for requirements 79. Each series is considered a separate offering under the 1933 Act registration and statement must that file becomes a effective separate under section 8(a) of that Act. 1940 the under register need – series each not and – however itself, act. Only the trust See also 80. Kleiman, note 61, at 3 (“Each series is, essentially, a separate investment company, and return.”). investment his for invested has he which in series the to solely looks an investor 80. 39057-ple_19-2 reissue Sheet No. 94 Side B 04/17/2017 09:23:23 04/17/2017 94 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 95 Side A 04/17/2017 09:23:23 85 88 86 423 423 Regulation and Operation Memo, Memo, Operation and Regulation note 83, at 2. note 83, at 1. See also LTERNATIVES review of registration statements could A supra supra ) 3/1/17 11:06 AM ELETE D OT de novo N O XPANDING (D note 7, at 1063 (observing that adoption of the Rule made UIT UIT made Rule the of adoption that (observing 1063 at 7, note note 7, at 1063 (expounding on the impact of rule 487). As a commercial matter, the Rule shortens the UIT UIT the shortens Rule the matter, commercial a As Rule 487 represented a concession by the SEC that that SEC the by concession a represented 487 Rule 87 84 DOCX DOCX . supra supra RINTER , Statement of John S.R. Shad to the Subcommittee on Securities of the P TO _ Harman, Harman, Harman, See See, e.g. See [D]o not differ in any material respect from those contained in the registration statements of one previous series of or the trust, except to more the extent such specifically differences are necessary to identify the specific portfolio identified securities of, and to registered. being series informationthe essential for, provide Aside from streamlining the review process for the regulator, Rule 487 Rule regulator, fromthe Aside for streamliningprocess review the note 61, at 15-16 (offering that “subsequent series of a UIT rarely present new new present rarely UIT a of series “subsequent that (offering 15-16 at 61, note ACCHIAROLA M K closely aligning it with the typical selling cycle for structured notes. structured for cycle selling typical the with it aligning closely selling cycle – from conception to actual sale – distinguishing it from any other product regulated under the Investment Company Act and more
After After a trust’s registration pursuant to Form effectiveness N-8B-2 and of following the a registration trust’s statements first filed series, automatically on by a date and at a time designated by the registrant, if certain Rule the same 487 conditions trust are met.” permits to subsequent “become effective respect of a new trust new a of respect Following the effectiveness Rule’s if the sponsor adoption, can represent the that the disclosures SEC made in grants UITs automatic 86. Securities Act Release No. 6401, 6401, No. Release Act Securities supra issues.”). substantive 86. 87. brings a significant advantage for UIT issuers, as it enables UIT issuers to bring product to Commission review. market whenever they choose, unconstrained by portfolio . . . . . portfolio do not present disclosure issues that require staff review and comment prior to effectiveness of the registration statement.”). 84. Securities Act Release No. 6401, 6401, No. Release Act Securities Reg. 44,722, (Aug. 44,722 3, 2005) (codified in scattered sections of 17 C.F.R.) (adopting subsequent rule related to a similar concept embedded in the shelf registration rules ushered Reform).Offering Securities by in 84. 85. Senate Committee on Banking, (commenting that UITs Housing that differ and “only with Urban respect to Affairs the specific (Mar. composition of the 25, 1983) at 86 5_M 2017] E there are often substantial similarities in the series issued by UITs and an acknowledgement that the become both “routine” and “burdensome” for Commission staff. 88. 88. sponsors “the first issuers to gain the sort of control over the registration process that some corporate issuers would later gain adopted.”). when rule 415 – the ‘shelf-registration’ rule – was C Y 39057-ple_19-2 reissue Sheet No. 95 Side A 04/17/2017 09:23:23 04/17/2017 95 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 95 Side B 04/17/2017 09:23:23 , M K 90 C Y See, e.g. [Vol. 19:2 19:2 [Vol. AW 91 L /S3N7-U7QF] (making units CC . USINESS B During the initial offering offering initial the During 89 PERMA /G9TS-7HBP] (making units available at :// CC . HTTPS ) 3/1/17 11:06 AM PERMA OURNAL OF OF OURNAL J :// ELETE note 8, at 185. This categorization, however, can be be can however, categorization, This 185. at 8, note D note 8, at 185. OT HTTPS N supra O supra (D DOCX DOCX . ENNSYLVANIA ENNSYLVANIA Taxable debt UITs include portfolios comprised of some some of comprised portfolios include UITs debt Taxable P 93 RINTER , Prospectus, Capital Strength Portfolio, Series 24, FT 4727, (Apr. 11, P OF TO _ Creation and Liquidity of a Unit Investment Trust Investment Unit a of Liquidity and Creation See, e.g. Tax-exempt UITs invest in portfolios of municipal bonds and pass pass and bonds municipal of portfolios in invest UITs Tax-exempt 92 While the structure of a particular series of a unit investment trust will will trust investment unit a of series particular a of structure the While A UIT’s portfolio is selected by its sponsor to reflect a specific A. ACCHIAROLA statement), units are offered to the public through broker the sponsor dealers and at other a public offering price. differ depending on the nature of mechanics of its each underlying offering portfolio, will the remain quite essential similar. process of creation is initiated by the sponsor’s acquisition of a portfolio of In all cases, the securities satisfying the deposits the series’ securities with the trustee in exchange investment for the receipt of units objectives. representing fractional undivided The interests (“units”) sponsor created of (and, the in trust. all cases, Once following the effectiveness of a registration 2014), http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID= period, the public offering price will be based upon the aggregate sales charge. underlying securities plus a front-end value of the portfolio’s market Today, the sales charge for the typical UIT offering ranges from 1.95% to 5.5% of the public offering price, depending upon the offering’s term and comprisingportfolio. securities underlying of the type the 90. Most offerings also include a deferred sales charge. However, specific exemptive exemptive specific However, charge. sales deferred a include also offerings Most price). offering public $10.00 a at available 90. relief must be granted by the SEC before a deferred sales charge can be collected. 91. Presumably, the market could support a premium for a UIT requiring complex complex requiring UIT a for premium a support could market the Book, Book, Fact Fact ICI Presumably, ICI price). offering public $10.00 a 2016 91. structuring. The maximum circumstances, including volume discounts, which typically depend on the type charge and 2016 term of is vary. can which series, the typically subject 92. to reduction misleading. under The equity category, for example, serves as a catch-all certain and includes trusts with companies. development business to funds end closed from varying underlyings 93.
db18-4715-901c-75836595882a [ combination of U.S. and/or international corporate bonds, government 89. 1c5c93aa-48ed-4125-a862-38a0132a2741 [ 5_M 424 U. investment theme. UIT products have been traditionally categorized into three main styles: (i) tax-exempt debt, (ii) UITs. taxable debt, and (iii) equity Prospectus, Capital https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=8d88cbf2- Strength Portfolio, Series 35, Ft. 6241 (Sep. 16, 2016), into tax-exempt UITs totaled just $875 million in 2015, down 2014. fromin million $915 through tax-exempt interest income to unitholders. New assets deposited 39057-ple_19-2 reissue Sheet No. 95 Side B 04/17/2017 09:23:23 04/17/2017 95 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 96 Side A 04/17/2017 09:23:23 Other Other 100 425 425 Overall, 1,619 new trusts trusts new 1,619 Overall, New assets deposited into into deposited assets New 97 /WN4T-ARQT] (providing that 96 The sales charge imposed by New assets deposited into into deposited assets New CC 94 . 101 PERMA LTERNATIVES :// A ) 3/1/17 11:06 AM HTTPS ELETE D note 8, at 20. note 8, at 185. note 8, at 185. OT N O XPANDING supra supra supra (D 98 DOCX DOCX . While under no obligation to do so, sponsors regularly regularly sponsors so, do to obligation no under While 99 RINTER , Prospectus, Capital Strength Portfolio, Series 25, FT 4874, (Jun. 25, ,Prospectus, Nuveen Unit Investment Trust, Series 166, Nuveen Argus Argus Nuveen 166, Series Trust, Investment Unit Nuveen ,Prospectus, P (stating that secondary market transactions for units will be “at the current TO _ See Id. See, e.g. See, e.g. Equity-related UITs comprise the significant majority of the the of majority significant the comprise UITs Equity-related 95 Unit holders are provided liquidity through the secondary market and ACCHIAROLA M K taxable debt UITs totaled $492 million in 2015, down from $624 million in 2014.
maintain maintain a market secondary for units of each series. outstanding bonds, or government agency certificates. equity-related UITs totaled $64.5 billion in 2015, $63.9 slightly billion exceeding of issuance the from a year earlier. “Nuveen intends to, but is not obligated cautioning that to, “[i]f the Sponsor decides maintain to maintain a secondary market, a it may suspend or secondary market for units” discontinue and purchases of units of the Trust if the reasons.”). business other supply of units exceeds demand, or for 101. value.”). asset net the on based is which price broker-dealers may also maintain a secondary market for units. In such a secondary market, investor purchases are executed charge. sales front-end a plus price offering at the current public via redemption. 100. 100. Modern https://www.incapnet.com/Pages/Public/PublicWebsiteDocumentFetch.aspx?FileId=45499c Innovators 1b-6adb-41e8-a9ed-888a17881b0e Portfolio, [ 4Q 2016, (Oct. 20, 2016) at B-8 99. Presumably, both the UIT sponsor and its unitholders benefit from a secondary secondary and a from Institute benefit Company unitholders Investment its the and by sponsor compiled UIT data Book, the Fact both monthly ICI on 2014) (comprised of companies with the following qualities: well-capitalized balance sheets; skilled management; with high liquidity; ability strong to generate earnings growth; and a record of financial strength and profit growth); Prospectus, Incapital Unit Trust, Series 44, 2016 Incapital Morningstar Wide Moat Portfolio, Based (Form 2Q) (Apr. 10, 2014) (describing a comprised UIT of portfolio of equity securities Investment of Services, companies Presumably, recommended Inc. by Morningstar life). its over appreciation that the Sponsor 97. believes has the 98. best chance of authors. the by maintained capital 99. market. The sponsor typically receives a market. Unitholders sales benefit from charge the fact on that units the trust resold fixed the that meaning does redemptions, meet to - circumstances disadvantageous under possibly in not have the to sell secondary its assets - investors. of pool larger a by absorbed are trust the of costs 94. 2016 ICI Fact Book, Book, Book, Fact Fact ICI ICI 2016 2016 94. 95. 96. were created in 2015, with the average million. new $40 than more trust taking deposits of just 5_M 2017] E a series on a secondary market transaction varies because of, among other things, the type of portfolio securities held and the term of the series. The may in market also be imposed a subject charge secondary maximum sales market’s market’s assets today. These trusts often particular construct investment theme portfolios or market around sector. a C Y 39057-ple_19-2 reissue Sheet No. 96 Side A 04/17/2017 09:23:23 04/17/2017 96 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 96 Side B 04/17/2017 09:23:23 M K 6 6 C Y These These In the the In 106 102 Also, for for Also, NVESTMENTS I 108 [Vol. 19:2 19:2 [Vol. AW L UGGENHEIM note 61, at 7 (describing the the (describing 7 at 61, note , G USINESS supra Regulation and Operation Memo, Memo, Operation and Regulation B Target 5 4Q ‘16 - Term 1/9/18, First Trust Trust First 1/9/18, Term - ‘16 4Q 5 Target See also ® ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J ELETE D OT N For its services, the depositor typically earns a a earns typically depositor the services, its For O (D 107 note 64, at 8-10. In 1995, however, the Commission allowed for for allowed Commission the however, 1995, In 105 DOCX DOCX . supra As a general matter, the sponsor bears all of the trust’s trust’s the of all bears sponsor the matter, general a As Regulation and Operation Memo, Memo, Operation and Regulation ENNSYLVANIA ENNSYLVANIA P 104 RINTER ,Prospectus, First Trust Dow Trust First ,Prospectus, (“open-end and closed-end management investment companies currently P OF TO _ . Prospectus, Business Development Company Opportunities Portfolio, Series Letter to Pierre de St. Phalle, Esq., SEC Interpretive Letter (May 9, 1995) 1995) 9, (May Letter Interpretive SEC Esq., Phalle, St. de Pierre Kleiman, to Letter Investment Company Act, § 22(e), 15 U.S.C. § 80a-22 (“No registered registered (“No 80a-22 § U.S.C. 15 22(e), § Act, Company Investment 103 Cf Participants in a UIT Offering UIT a in Participants See, e.g. See See See id. See An Investor’s Guide to Unit Investment Trusts See See generally note 61, at 25 (“When investors liquidate or redeem their units, they must receive the A UIT’s sponsor, often referred to as the depositor, organizes the trust There are several important participants in a successful UIT offering. B. ACCHIAROLA below. below. and launches each series with the deposit of the initial portfolio with the trustee. of assets The function of the sponsor, trustee, supervisor and evaluator are described one-time creation and development fee at a series’ inception. charges included the costs statement and organizational trust of documents, the registration of preparing units and and the trust’s printing initial audit. the registration
to volume discounts based on the amount of units purchased. 102. 102. 5_M 426 U. organizational costs. event that a secondary market advantage is of the not UIT’s liquidity maintained, requirement by unitholders redeeming mayunits through the take trustee at prices generally based upon the evaluation of the underlying securities. 105. trust). the organizing when sponsor the of duties 105. 106. [hereinafter Letter to Pierre de St. Phalle] (concluding expenses). organizational own its that bearing from UTI a prohibit not does the Investment Company Act 107. bear their own organizational expenses, and we see no reason to impose a different standard UITs.”) on 108. 6350, at 70 (Oct. 7, 2016) program (describing to generally units not the eligible volume for discounts a separate and discount). rollover, limiting redemption the or termination proceeds 2016-3 REIT Portfolio, Series 2016-3 (“HIMCO”) - Portfolio, Advisors A Disciplined Trust Hartford 1718 (Jul. Investment 29, 2016) Management at 38 concessions”).volume these of purposes for excluded are trusts unit all of sales market Company (“Secondary 103. investment company shall suspend the right of redemption, or postpone the date of payment or satisfaction upon redemption of any redeemable security in accordance with its terms for more than seven days designated after for the that purpose tender for redemption”). of supra such security to the them.”). for value asset net current company or its agent 104. (Feb. 2013), http://uit.guggenheiminvestments.com/Libraries/Literature_en/ certain organizational expenses to be charged to the trust itself. 39057-ple_19-2 reissue Sheet No. 96 Side B 04/17/2017 09:23:23 04/17/2017 96 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 97 Side A 04/17/2017 09:23:23 , 113 109 For providing providing For 111 427 427 /D69C-7S89] (describing the 112 CC . note 108, at 5. /V5FG-G642] (detailing the two CC . PERMA supra , :// PERMA LTERNATIVES The supervisor also identifies specific specific identifies also supervisor The :// A HTTPS ) 3/1/17 11:06 AM 110 HTTPS ELETE D note 7, at 1190 (noting that while sponsors and trustees trustees and sponsors while that (noting 1190 at 7, note OT N O XPANDING supra note 7, at 1050 (providing that “for the purpose of meeting meeting of purpose the “for that (providing 1050 at 7, note (D DOCX DOCX supra . (Oct. 2016), https://www.morganstanley.com/assets/pdfs/wealth- 2016), (Oct. RINTER P TO Harman, _ TANLEY Investment Company Act, § 26(a)(2)(C), 15 U.S.C. § 80a-26 (providing that that (providing 80a-26 § U.S.C. 15 26(a)(2)(C), § Act, Company Investment Lins, and Gould Investment Company Act, § 26(a)(2)(C), 15 U.S.C. § 80a-26 (providing S See generallyUnit Investment Trusts – Features, Costs and Compensation and Costs Features, – Trusts Investment generallyUnit See See See See, See Securities in a UIT portfolio are generally monitored or supervised by analysts who are watchful retention for in the portfolio detrimental to unanticipated investors. A security may only developments be sold under that limited circumstances could in the make case creditin change severe a rating. or bankruptcy fraud, as such of their a significant adverse occurrence, The UIT’s supervisor oversees the portfolio. A supervisor is typically Although the sponsor or trustee may perform evaluation services for ACCHIAROLA ORGAN M K empowered to remove a security from a trust, but only in the event that it is determined to be (i) unitholders detrimental or to the (ii) diminishment of creditworthiness. trust it and the has interest suffered of a the material decline in value or can perform evaluation services, a UIT typically has a separate evaluator). evaluator). separate a has typically UIT a services, evaluation perform can the UIT, trusts typically employ an investment firm to act as evaluator. redemptions, the evaluator consideration may of a designate variety the value.”). of factors portfolio such securities as 112. interest to rates, be marketability, and sold the market administration of after the UIT should be carried documents). creating out pursuant to the specifications in the 113. 111. SeeTrusts Investment Unit to Guide Investor’s An 111. 110. One UIT sponsor describes this role as follows: follows: as role this describes sponsor UIT partners). distribution its and sponsor UIT’s a One to available fees 109. UITs). of administration the for guidelines 110.
providing providing bookkeeping and administrative services to a costs. actual its trust, exceed to not fee, the annual additional sponsor an receive may securities to be sold by the trust in required the to event raise that proceeds a in non-pro support rata sale of is a redemption. The evaluator values the portfolio as provided in the trust indenture and management-disclosures/uit_features.pdf management-disclosures/uit_features.pdf [ An_Investor_s_Guide_to_UITs.pdf [ 5_M 2017] E elements comprising the sale charge for a typical UIT). As there is no ongoing management provided it is set forth in the relevant prospectus. relevant the in forth set is it provided these supervisory services, the supervisor customarily receives a fee, depositor may realize additional profits or losses during the initial offering period on unsold units as a result of changes portfolio. in the daily evaluation of the assets included in the UIT’s of a UIT, the creation and ongoing). development In fee addition, the is depositor paid may at realize difference the a between UIT’s profit the purchase or inception prices a (and of loss the is resulting securities not to from such the (i) securities depositor the and to the a costs of series, which securities may and be (ii) based any on market the offering making side activities evaluation with of respect the to the units. Finally, the M C Y 39057-ple_19-2 reissue Sheet No. 97 Side A 04/17/2017 09:23:23 04/17/2017 97 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 97 Side B 04/17/2017 09:23:23 M K 120 119 C Y 116 See also See [Vol. 19:2 19:2 [Vol. AW L In exchange for its its for exchange In 117 The evaluator may also also may evaluator The note 61, at 8-9 (noting that that (noting 8-9 at 61, note USINESS 114 note 61, at 5-6 (laying out the the out (laying 5-6 at 61, note B The evaluator normally earns earns normally evaluator The note 61, at 7-8 (outlining the structure structure the (outlining 7-8 at 61, note supra 115 supra supra ) 3/1/17 11:06 AM To ensure solvency and protect against against protect and solvency ensure To OURNAL OF OF OURNAL J 118 ELETE D OT N O (D DOCX DOCX . ENNSYLVANIA ENNSYLVANIA P RINTER P OF TO _ Regulation and Operation Memo, Memo, Operation and Regulation Investment Company Act,§ 26(a)(1) and 26(a)(3). § Regulation and Operation Memo, Memo, Operation and Regulation Regulation and Operation Memo, Memo, Operation and Regulation (proposed n.13 21283, 21282, Reg. Fed. 50 Release, Act Company Investment (proposed n.13 21283, 21282, Reg. Fed. 50 Release, Act Company Investment at 8. at 6. Fees and Charges and Fees See See Id. See Id. See See See 121 UIT units are sold by an underwriter or a syndicate of underwriters. The trustee (i) maintains trust assets, (ii) distributes interest and/or While each individual offering must be judged on its own merits, it on must be is its own judged merits, offering individual each While C. ACCHIAROLA 120. 120. 119. 119. services, the trustee is typically paid an assets-based ranges fee from 10-12 which basis points. typically dividends paid by the trust’s portfolio, (iii) reporting requirements, performs (iv) recordkeeping provides and an annual report to (v) unitholders ensures that and all trust expenses are properly paid. quite possible for the fee structure to offer a commercial advantage for the UIT versus other of investmentprincipally consisting low, be generally will expenses ongoing managed, vehicles. Because UITs are not actively In the most typical number offering, of trust units the on a underwriter certain date certain will in return which generally for represents purchase a a percentage concession, of the a public offering price of specific the units. 121. underwriters usually become owners of units before reselling investors). other to them reoffer and investors from units purchase may sponsors while them to the general public 121.
according according to a written asset valuation policy. 117. Investment Company Act § 26(a)(2)(C), 15 U.S.C. § 80a-26 (highlighting that individuals fee). a paid be may services administrative perform who 117. structure). UIT the in trustee a of responsibilities 118. 114. 114. evaluator). the of role the specifying and UIT a of 115. May 14, 1985) (to be codified at 17 C.F.R. pt. 230, 239, 270, 274) (“Instead the structure of a unit investment trust is set forth in the trust indenture which designates a sponsor, trustee trust.”) the of operations the conduct to evaluator and 116. May 14, 1985) (to be codified at 17 C.F.R. pt. 230, 239, 270, 274) basis). monthly a on paid usually fee continuing a including fee, a paid typically are (noting that evaluators 5_M 428 U. collaborate collaborate with the evaluation providers and pricing sponsor vendors. and the trustee to select independent abandonment of the trust, the Investment trustee Company Act to (i) maintain requires aggregate the capital of successor. appointmenta the of or liquidation from until trustee resigning $500,000 and (ii) prohibits the a fee for these services, provided it is set forth in the relevant prospectus. relevant forththe set in is it provided services, these for fee a 39057-ple_19-2 reissue Sheet No. 97 Side B 04/17/2017 09:23:23 04/17/2017 97 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 98 Side A 04/17/2017 09:23:23 122 (2016), (2016), AMES J This fee is a a is fee This 123 AYMOND , R 429 429 Understanding unit investment /672B-U2YF] (observing that creation note 106 (agreeing with the requestor that that requestor the with (agreeing 106 note CC . LTERNATIVES A supra ) 3/1/17 11:06 AM PERMA :// ELETE D HTTPS OT N O XPANDING 125 (D DOCX DOCX . https://onlineservices.ubs.com/staticfiles/pws/adobe/uit_disclosure.pdf Such fees include, but are not limited to, the cost of the the of cost the to, limited not are but include, fees Such 124 /RAA6-F6YJ] (“Most UITs charge a creation and development (C&D) A Guide to Investing in Unit Investment Trusts RINTER , P CC . TO _ Letter to Pierre de St. Phalle, Phalle, St. de Pierre to Letter at n.6 (noting such expenses do not include the printing of preliminary preliminary of printing the include not do expenses such (noting n.6 at at 7 (explaining the makeup of the sales charge received by the sponsor which which sponsor the by received charge sales the of makeup the (explaining 7 at (2011) See, e.g. See Id. Id. PERMA :// A UIT sponsor typically collects a transactional sales fee in varying Certain organizational expenses incurred by the sponsor in Individual series may incur additional charges in the formthe of: in charges mayadditional series incur Individual (a) expenses and disbursements for services provided, including license fees, legal, tax accounting and reporting and auditing ACCHIAROLA M K HTTPS follows. amounts which are levied on both primary and secondary market sales. prospectuses and prospectuses, expenses expenses). selling other any and materials advertising other and brochures incurred in the preparation and printing of 123. cover, among other things, distribution expenses, sales series.) particular a developing and creating commissions and the expense of 123.
regular annual charges by the Trustee and the evaluator’s fee for ongoing evaluations, administration, supervisory services. A brief summary of the typical fee structure of a UIT bookkeeping and continuing portfolio trust and organizing and offering trusts the portfolio.”); UBS, and development fees are paid to the sponsor “from the trust for creating and developing the 124. trust.”). the building of costs the for sponsor the compensate to fee 124. the Investment Company Act does not prohibit a UIT expenses). from bearing its own organization 125. The transactional sales fee is established in consultation group and, in with most instances, is not the retained by the sponsor. selling In addition to the transactional sales fee, development fee a for designing and structuring each depositor series. typically earns a creation and fixed amount per unit and is paid to the depositor at the close of the initial basis. daily a on accrued or period offering establishing a UIT may reimbursement. be paid by the trust itself in the form of a [ 122. 122. solutions/unit-investment-trusts [ 5_M 2017] E https://raymondjames.com/wealth-management/advice-products-and-services/investment- expenses related thereto. related expenses initial preparation prospectuses and and other trust documents, the typesetting preparation cost of of various the trust of agreements, negotiation the and fees of commodities regulators and securities the state registration regulators, fees, the initial valuation and registration audit of the statement, particular series, the licensing fees, the initial fees and expenses of the costs trustee, the custodian, the of any portfolio consultant, transfer any agent and the administrator, and legal and other out-of-pocket C Y 39057-ple_19-2 reissue Sheet No. 98 Side A 04/17/2017 09:23:23 04/17/2017 98 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 98 Side B 04/17/2017 09:23:23 M K C Y !
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4 – A Disciplined Hartford Investment Management https://www.aamlive.com/FISDocuments/FISDocuments/SecurityMaster/52481878/ADT% Company (“HIMCO”) Portfolio, Advisors Trust 1727 at 29, (July 29, 2016) mean mean that the annual reasonable operating expenses when of size the as scale of economies enjoy a will expenses compared these of some Moreover, UIT tend to to other be of the underlying portfolio grows fixed and costs certain can be spread over quite investment company base. asset larger a products. below. 2 Figure as provided is table expense hypothetical
126. 126. 201727%20Prospectus%20(002).pdf [ 5_M 430 U. 127. This table is offered for illustrative purposes only and does not reflect the actual actual the reflect not does and only purposes illustrative for offered is table created. This series). UIT typical a to applicable expenses various Author 127. offering. product particular any of expenses and fees 128. 39057-ple_19-2 reissue Sheet No. 98 Side B 04/17/2017 09:23:23 04/17/2017 98 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 99 Side A 04/17/2017 09:23:23 ROM :F The The INANCIAL 131 The trust TATES 135 EGULATION OF S ,AF Catalyzed by by Catalyzed III, R 133 NITED U ARKHAM MITH 431 431 A. S note 61, at 24-25 (summarizing the the (summarizing 24-25 at 61, note ISTORY OF THE note 61, at 3. HOMAS H note 134. supra &T supra LTERNATIVES supra A INS , ) 3/1/17 11:06 AM INANCIAL T. L 238 (2002) [hereinafter M [hereinafter (2002) 238 ELETE ISTORY D , A F H OT N ARONS ERALD O B XPANDING (D note 7, at 1051 (noting that “[f]ixed trusts capitalized on the the on capitalized trusts “[f]ixed that (noting 1051 at 7, note ,G ARKHAM 1 (rev. ed. 1997). INANCIAL .76-567(1940) (discussing the rapid growth and development of of development and growth rapid the (discussing .76-567(1940) DOCX DOCX note 7, at 1047. . 129 O supra OBBER EMKE R W. M ,AF .N supra RINTER P. L 132 P OC Following the market’s crash in the wake of Black Tuesday, Tuesday, Black of wake the in crash market’s the Following D OMPANIES TO ERRY Abuses continued to plague unitized trusts of the early 1930s, 1930s, early the of trusts unitized plague to continued Abuses 130 _ Harman, C Regulation and Operation Memo, J Regulation and Operation Memo, Memo, Operation and Regulation at 1-2. 136 ARKHAM These early predecessors of the unit investment trust “essentially “essentially trust investment unit the of predecessors early These The CommercialThe Unitthe HistoryInvestmentof Trust HOMAS See See Id. See ] (discussing confederate finance and confederate debt from the mid-to-late 1800s). H.R. See 134 A UIT’s sponsor and principal underwriter are also subject to the Fixed trusts flourished in the early 1930s, largely as a “reaction The first true U.S. investment companies of any size or consequence D. ACCHIAROLA M K ISTORY OLUMBUS TO THE NVESTMENT 133. 133. 134. investors focused attention on products with features of safety. 132. investments.”). 132. public’s distrust of management by emphasizing the what trusts’ they “fixed” saw and nature: could rest investors assured that got no management would later or tinker with their vehicle enabled investors to pool monies slices. and Yet, these buy trusts quickly met portfolios controversy, with in excessive fees smaller and inappropriate advertising threatening structure. the viability of the fixed trust
standards standards of Section 36 of the Investment Company Act, which establishes a fiduciary duty with respect payments. material to the compensation for services and for against the excesses of managed investment companies.” See also 135. Harman, Harman, factors). contributory the and States United the in trusts fixed 135. served as vehicles through which Newthe on listed securities particularly Exchange.” Stock York one could invest in common stocks, one a day.” appeared in the 1920s, with new funds being created “at the rate of almost C H 129. 129. I 5_M 2017] E 131. 131. 136. M 136. open-end fund’s redeem-ability daily at its net asset value, trust’s and elimination the of fixed management, held particular appeal class. investor for a skeptical pervasive newspaper, magazine, mail and radio advertisements, over $600 in were issued the two first of years in that million certificates decade trust alone. 130. T relief). granted be may plaintiff a which by process the and standard fiduciary 130. C Y 39057-ple_19-2 reissue Sheet No. 99 Side A 04/17/2017 09:23:23 04/17/2017 99 Side A Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 99 Side B 04/17/2017 09:23:23 , M K 143 AX AX C Y , T Philip Philip ORPORATE , Olden Lane See also [Vol. 19:2 19:2 [Vol. U.S. C AW L With the marginal marginal the With Creation of the MSRB ODERN These trusts issued issued trusts These 141 M 139 (2012) (describing the regulatory regulatory the (describing (2012) USINESS B ISTORY OF et seq. H The UIT had become a funding funding a become had UIT The 138 137 ) 3/1/17 11:06 AM OURNAL OF OF OURNAL INANCIAL .237, 248 248 .237, J 422 (2006) (describing one commentator referring to ELETE EGIS D ,AF L 140 note 139, at 5 (noting that municipal bond related UITs UITs related bond municipal that (noting 5 at 139, note OT N EFORM O R supra (D , 38 J. ARKHAM In addition to the tax benefits, municipal bond UIT UIT bond municipal benefits, tax the to addition In note 7, at 1052 (noting that by 1964, over seventy-five percent of of percent seventy-five over 1964, by that (noting 1052 at 7, note DOCX DOCX note 7, at 1052. . Municipal Securities Rulemaking Board, Board, Rulemaking Securities Municipal ENNSYLVANIA ENNSYLVANIA 142 W. M P NRON TO , http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=543 /LQR2-RJ3E] (featuring a chart laying out the tax statistics for the /3C8Q-GTDK] (outlining the history of the MSRB). E supra supra RINTER P CC CC OF . . TO ERRY _ ROM ENTER J A Call for Action: An Analysis of the Impending Regulatory Crisis in the C :F See generally U.S. Individual Income Tax: Personal Exemptions and Lowest and See The Unit Investment Trust: Maintaining Integrity Through Time See See generally PERMA PERMA :// :// The 1960s brought the next incarnation for the UIT vehicle, with the With With the adoption of the Company Investment Act, “unit investment ACCHIAROLA OLICY CANDALS HTTPS HTTPS trusts employed to obtaining provide a diversified portfolio of investors municipal bonds. the only tax-exempt means of vehicle utilized to purchase industrial corporation interests or a in particular either mutual fund. the stock of a single investors enjoyed the protections afforded by the Investment Company Act – as the municipal bond market remained virtually unregulated prior to the creation of the Municipal Securities Rulemaking Board (MSRB) in 1975. trusts” were classified as one of three forms These of trusts an investment gained company. in popularity over raison the d’être had next completely changed.” two decades, but “their Grommet, Market Securities Municipal 142. 142. Highest Tax Bracket Tax Rates and Tax Base for Regular Tax, Tax Years 1913-2015 138. Harman, 1, Harman, the Investment Company Act of 1940 as “the most intrusive financial legislation known to No. beast.”). or man 138. 139. Lane Harman, Whitepaper No. 1, 5 (Jan. 2016) become [hereinafter a Olden funding vehicle Lane for purchasing No. interests in 1] stock or (noting single funds). the companies or UIT mutual had 140. Olden the $2.9 million active UIT assets were invested in investment companies other than UITs, funds). mutual were which of most 141. enjoyed a preferred status in the marketplace clarified that until mutual the funds could Tax pass through Reform income from Act municipal of bonds trusts). as organized companies investment as basis tax-free on 1976 the same finally
and their popularity diminished until a new regulatory regime was ushered within Investmentthe Company Act. P [ [ S 137. 137. 5_M 432 U. 143. period). time relevant 143. http://www.msrb.org/About-MSRB/About-the-MSRB/Creation-of-the-MSRB.aspx “periodic payment“periodic mechanism“a as certificates” plan somethingbuying for installmentan basis.” on else tax rate on the wealthiest Americans topping 90% for most of the decade, the UIT business relished a prosperous momentum as the preferred vehicle of tax efficiency. 39057-ple_19-2 reissue Sheet No. 99 Side B 04/17/2017 09:23:23 04/17/2017 99 Side B Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 100 Side A 04/17/2017 09:23:23 , 2016 ICI ICI 2016 , Aug. 15, IMES /RW6Y-HYEU] T See also CC . 149 PERMA The first UIT with with UIT first The :// ETERSBURG 146 433 433 .P CPI Inflation Calculator T HTTPS , S 147 LTERNATIVES A ) 3/1/17 11:06 AM ELETE D 144 ‘Phone Funds’ Created to Cope with AT&T Stock and OT note 139. note 139. note 139. N O XPANDING (D note 7, at 1053 (noting that by 1986, over ninety percent of the the of percent ninety over 1986, by that (noting 1053 at 7, note supra supra supra DOCX DOCX . supra Uncertain Times Ahead for AT&T ., Aug. 2, 1983, §3, at 3 (discussing the dissolution of AT&T and the RINTER , Bill Barnhart, note 8, at 20. P The product raised more than $1 billion. RIB TO 148 _ .T In an effort to meet this market need, the first corporate bond bond corporate first the need, market this meet to effort an In Bureau of Labor Statistics, Statistics, Labor of Bureau Harman, Harman, supra HI 145 See See See, e.g. , C UIT UIT sponsors pivoted again in the 1980s, embracing equities and The first “Dogs of the Dow” UIT provided unitholders exposure to a A combination of historically high interest rates, changing perceptions ACCHIAROLA M K division of shares);
The pooling effect of UITs, stuffed with offered portfolios investors of municipal protection bonds, from the positions and again provided access idiosyncratic to a market that would have otherwise risk of single reach. their remained beyond bond companies. equity-related strategies in response to evolving investor tastes. One of the most successful and creative trusts followed AT&T’s 1982 agreement to relinquish control of the Bell operating companies telephone which provided service local throughout the United AT&T States. shares, investors in these “Humpty Dumpty” trusts In received when exchange for issued shares in the seven their regional phone companies being spun out of Ma Bell. The Merrill Lynch Equity Income Fund First Exchange Series AT&T Shares offered these existing AT&T investors their economic exposure by exchanging AT&T shares for a unit investment the opportunity to retain trust constructed to hold a portfolio comprised of (i) shares of AT&T the “new” and (ii) shares of each of the newly created regional operating and preferred stock UIT came to market in 1972. government securities followed in 1978. governmentfollowedin securities basket of the poorest Average over performing the prior year. stocks This strategy also in found great success, and the Dow Jones Industrial 7,900 UIT series were invested predominantly in municipal securities). 144. municipalmarket). the securities of regulation the involving challenges ongoing and history 144. http://www.bls.gov/data/inflation_calculator.htm [ 5_M 2017] E 146. Olden Lane No. 1, 1, No. Lane Olden 146. 147. Book, Fact Spinoffs 145. Olden Lane No. 1, 1, No. Lane Olden (providing data that municipal bonds typically trade in $100,000 round lots, virtually making inaccessible them to most individual investors and $100,000 in 1961 has the equivalent today). $808,458.19 of power buying 145. 149. Olden Lane No. 1, 1, No. Lane Olden 1983 (noting that the Merrill Lynch fund has been nicknamed the “Humpty Dumpty Fund” convenience”). and simplicity offers route this “[g]oing that commenting and 149. in sources of retirement funding and an uninspiring equity 1970s market in the motivated individual income. investors to seek high levels of current 148. 148. C Y 39057-ple_19-2 reissue Sheet No. 100 Side A 04/17/2017 09:23:23 A 04/17/2017 100 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 100 Side B 04/17/2017 09:23:23 M K C Y /78PJ- CC . ., Fact Sheet /R9W3-RPB9] PERMA and SPDR Dow Dow SPDR and [Vol. 19:2 19:2 [Vol. CC ® . :// See, e.g With the much- the With AW Later that year, year, that Later L 153 HTTPS PERMA 154 :// Buy-write structures structures Buy-write 150 HTTPS USINESS B ETF (SPY), the oldest, largest, and and largest, oldest, the (SPY), ETF /H449-CSX2]. ® CC . 20 http://www.ftportfolios.com/retail/ http://www.ftportfolios.com/retail/ 20 RUST PERMA T :// ) 3/1/17 11:06 AM OURNAL OF OF OURNAL The Pitch for the Berkshire Trust: ‘Mutual Funds, J ELETE HTTPS IRST D OT N O (D .J., Apr. 28, 2016, http://blogs.wsj.com/moneybeat/2016/04/28/ http://blogs.wsj.com/moneybeat/2016/04/28/ 2016, 28, Apr. .J., T S DOCX DOCX . ENNSYLVANIA ENNSYLVANIA ALL P , W RINTER P OF TO _ 151 Berkshire Hathaway Inc., Chairman’s Letter (Feb. 28, 1997) 1997) 28, (Feb. Letter Chairman’s Inc., Hathaway Berkshire Over time, however, the ETF market evolved away from the UIT UIT the from away evolved market ETF the however, time, Over See Id. 152 One One of the most high-profile and creative attempts to incorporate the For the UIT business, the 1990s was highlighted by the birth of the ACCHIAROLA Capital Strength Buy-Write, F most traded ETF in the world. Other examples include SPDR MidCap 400 152. An example of a UIT is the SPDR S&P 500 S&P SPDR the is Das, UIT a of Anupreeta and example An Holm Erik 152. Average. Industrial Jones 153. Schmutual Funds’ two years. two represented the next UIT comprised of innovation; a offering basket unitholders generated of from a the long sale of package stock long term positions LEAPs) out-of-the-money on call plus the options premium (i.e. same stock. income baskets of underlying stocks with These maturities ranging from one and a half to strategies remain popular today for Warren Buffett’s much celebrated Berkshire Hathaway. Berkshire celebrated much Buffett’s Warren structure, finding its requirement that the investment manager replicate attempt fully to the underlying index by owning every constituent overly security inflexible. securities. additional in proceeds dividend reinvesting against prohibition Product structures also balked at unit the investment structure’s trust structure to occurred in meet 1996. One an determined financial professional identifiable set out to investor utilize demand the UIT to “allow small investors to own just a sliver of a single share” of celebrated stock trading for more than $30,000 per share, drawn Saul Katz to was the pooling benefits of the shares UIT of Berkshire structure. Hathaway in a UIT and He sell slices planned of the UIT to to retail buy investors. Buffett resisted the plan, suggesting that the trust was against the long-term interest of existing Berkshire shareholders. (asserting that the UIT would likely cause a speculative bubble in Berkshire shares and
marked a significant pivot by marked a to UIT significant based on trusts sponsors well-defined strategies with back-tested results. Strategies applying screens to re-weight established indices based on specific attributes or factors soon within flourished the UIT wrapper. In a sense, these techniques amounted to a crude predecessor to today’s “Smart-Beta” strategies. 154. the-pitch-for-the-berkshire-trust-mutual-funds-schmutual-funds/ [ 6TFY]. 154. http://www.berkshirehathaway.com/letters/1996.html [ 151. In 2015 alone, First Trust registered six trusts under its “Capital Strength Buy- Strength “Capital its under trusts six registered Trust First alone, 2015 In 150. 151. Write Portfolio” banner and raised almost $900 million in deposits. [ dp/dpsummary.aspx?fundid=10695 5_M 434 U. exchange traded fund (“ETF”). Notably, the first ETFs were structured as UITs. 39057-ple_19-2 reissue Sheet No. 100 Side B 04/17/2017 09:23:23 B 04/17/2017 100 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 101 Side A 04/17/2017 09:23:23 157 IRST /BG9V- CC , 4Q 2015, . /XEG7-T29J] /6TV3-JNRK] /7R3H-SX2U] CC . CC CC . . PERMA of the existing existing the of :// and income income and NCAPITAL th Quarter 2015 Series, Series, 2015 Quarter , I th 160 PERMA PERMA PERMA :// HTTPS :// :// /us/investors/contentdetail? 435 435 HTTPS HTTPS HTTPS A chart of the UIT flows (by (by flows UIT the of chart A lic/PublicWebsiteDocumentFetch.aspx? lic/PublicWebsiteDocumentFetch.aspx? com/Common/ContentFileLoader.aspx? com/Common/ContentFileLoader.aspx? 162 LTERNATIVES A thematic sectors, thematic ) 3/1/17 11:06 AM 159 and quantitative analyses). analyses). quantitative and UITs comprised of equity portfolios have have portfolios equity of comprised UITs ELETE D note 8, at 20. note 8, at 185. 156 Global Technology Leaders Portfolio – Morgan Stanley, 155 OT N Nuveen Large Cap Dividend Portfolio O XPANDING supra supra https://www.invesco.com/static Berkshire Hathaway Shareholders: Have You Thanked Samuel (D https://www.ftportfolios. https://www.ftportfolios. DOCX DOCX . /5VQT-2ACZ] (showing a capital appreciation portfolio). .J., Apr. 28, 2016, http://www.wsj.com/articles/berkshire-hathaway- 2016, 28, Apr. .J., RINTER , Fact Sheet The Dow Target 10 Portfolio, October 2015 Series, F , Product Detail, , Fact Sheet, , Fact Sheet, 60/40 Strategic Allocation Portfolio, 4 T P Unfortunately, existing product continues to be categorized categorized be to continues product existing Unfortunately, CC S . asset allocation, asset TO available at available at _ 161 https://www.incapnet.com/Pages/Pub , Anupreeta Das, Das, Anupreeta 2016 FactBook, 158 ALL available at See, e.g. See, e.g. See See, e.g. See See, e.g. PERMA , RUST :// , T Equity portfolios first surpassed fixed income assets (including , W ACCHIAROLA M K RUST IRST HTTPS NVESCO
Berkshire Berkshire frustrated the UIT scheme by announcing plans for a new class of B shares, which were initially the equivalent of 1/30 159. 159. generation. Class A shares of Berkshire. Aof Class shares The large majority of today’s UIT strategies, products are focused on quantitative I Katz? F 160. (showing an example of and UIT seeking to invest 60% of assets into common stocks and 40%funds). exchange-traded into 160. 162. Regrettably, precision has suffered as the equity category typically includes trusts trusts includes typically category equity the as suffered has precision [ Regrettably, FileId=da7a23eb-5b33-4651-97d1-7813e059a601 Nuveen). for portfolio dividend the (discussing 162. with [ portfolios comprised of companies. development exchange traded funds, closed-end funds and business shareholders-have-you-thanked-samuel-katz-1461835801 shareholders-have-you-thanked-samuel-katz-1461835801 [ T ContentGUID=4c30f941-b1c1-48d6-815e-08e02b473a34 DWPB]strategies portfolio (revealing [ ContentGUID=cbf39986-c7a5-4511-9dd0-ad4b3913e96e [ 155. offering that “they would have used our past, and definitely non-repeatable, record to entice investors”). small naïve 155. 5_M 2017] E 161. 161. 156. 2016 ICI Fact Book, Book, Fact ICI 2016 1996). in shares B of class new a create to decision the (describing 156. 157. 158. taxable and tax-free unit investment portfolios trusts) accounted in for 85% 1998. of the assets By highest in share 2014, unit ever recorded. investment equity trusts, the available at rather crudely as “equity trusts” or “fixed income trusts,” with equity trusts focused on domestic or international further categorized as taxable equities or tax-free. and, fixed income trusts new deposits) from 1995 through year-end 2015 is below: provided in Figure 3 contentId=870f7f14b6dcf410VgnVCM100000c2f1bf0aRCRD&dnsName=us now accounted for the majority of trusts over the past several decades. C Y 39057-ple_19-2 reissue Sheet No. 101 Side A 04/17/2017 09:23:23 A 04/17/2017 101 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 101 Side B 04/17/2017 09:23:23 M K C Y A brief brief A 165 /QHP8-ANJT] CC [Vol. 19:2 19:2 [Vol. . AW L PERMA ://www.wsj.com/articles/ ://www.wsj.com/articles/ Advisers Gain Access to :// HTTPS USINESS B ,Daisy Maxey, Maxey, ,Daisy ) 3/1/17 11:06 AM .J., Mar. 13, 2013, http 2013, 13, Mar. .J., OURNAL OF OF OURNAL and its growth potential might remain remain might potential growth its and T J See, e.g. S 164 . ELETE D Taxable debt Tax-free debt debt Tax-free debt Taxable y ALL ‘Alternative’ or ‘Hedged’ Mutual Funds: What are They, OT infra N W uit O , q (D DOCX DOCX . III ENNSYLVANIA ENNSYLVANIA P osits p 163 RINTER , Sam Diedrich, P ART 3. OF P TO _ discussion at 165, New de New annual dollars, of Millions See Id. See, e.g. IGURE This Part offers a general discussion of two related markets; the F ACCHIAROLA 164. 164. Complex Structured Products structured notes market and the burgeoning markets for “alternative mutual funds”. As a general matter, certain tradeoffs for an investor. each Most recently, the structured notes market of these product structures provides has struggled to attract flows, accompanied the explosive growth of alternative mutual funds. constrained by inherent limitations. By contrast, great excitement has
163. 163. SB10001424127887323393304578358413092621452 [ 2014 65,529 2015 65,949 63,991 64,582 624 492 915 875 2002 11,600 2003 12,731 2004 17,125 2005 9,131 22,598 2006 10,071 29,057 2007 862 14,559 35,836 931 2008 21,526 23,590 981 2009 28,185 22,293 289 2010 35,101 30,936 294 2011 22,335 36,026 298 2012 1,607 16,159 43,404 1,729 557 2013 25,003 55,628 1,585 2,201 31,900 782 928 40,012 578 765 53,719 438 1,236 698 916 3,933 5,006 3,361 2,157 993 Year Year trusts Total 1995 E 11,264 1996 21,662 1997 38,546 1998 6,743 47,675 1999 18,316 52,046 2000 1,154 35,855 43,649 800 2001 45,947 19,049 771 50,629 562 42,570 343 16,927 3,367 196 572 2,546 1,919 1,166 1,074 883 1,550 5_M 436 U. 165. Bear the following bore investors losses the from recovering still is that market a (describing collapses). Brothers Lehman and Stearns 165. 39057-ple_19-2 reissue Sheet No. 101 Side B 04/17/2017 09:23:23 B 04/17/2017 101 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 102 Side A 04/17/2017 09:23:23 , (2006) Yet, Yet, The The /9CCW- 166 168 CC . ROUP G PERMA :// , Feb 28, 2014, ., Sept. 2005, at 8 n.1. HTTPS UTH ORBES 437 437 ITIGATION .A L EG , F Today, the structured note note structured the Today, .R Are Structured Products Suitable for 170 NDUS .I IN Policy issues Raised By Structured Products LTERNATIVES , F Structured Products: NASD Provides Guidance A ) 3/1/17 11:06 AM ONSULTING AND A “structured note” simply describes a a describes simply note” “structured A C ELETE D 169 OT note 166, at 1 (defining a structured product as “a security security “a as product structured a (defining 1 at 166, note N O XPANDING (D Investors seek rules-based indexes to beat stock gains, diversify supra ECURITIES DOCX DOCX . Investor Alert, Structured Notes with Principal Protection: Note the A “structured product” is generally understood to be an an be to understood generally is product” “structured A , S /B93Z-6KSU] (noting that “[b]anks create structured notes by packaging /N6F2-6Y2P] (crediting these funds with “unleashing a new gold rush of 167 RINTER , Craig McCann and Dengpan Luo, P CC CC . . TO _ , Dec. 12, 2013, http://www.bloomberg.com/news/articles/2013-12- Jennifer Bethel and Allen Ferrel, Ferrel, Allen and Bethel Jennifer Kevin Dugan, Dugan, Kevin FINRA, FINRA, The MarketNotes The Structured for See, e.g. See See See PERMA PERMA Bethel and Ferrel, Ferrel, and Bethel :// :// There exists no standardized definition of structured notes in the A. ACCHIAROLA M K LOOMBERG HTTPS HTTPS business or regulatory context, or in the federal securities laws. product’s fixed income portion specified rates and intervals, while the derivative may provides for the payment, provide for interest if any, due to the investor at the payments product’s maturity. The underlying assets at in a structured investment are “securities derived from or based on a single security, a basket of securities, an index, and/or a a commodity, foreign a debt currency.” issuance
structured product issued in note form, where the requirement to return is pay the the obligation of the note’s issuer. examination of each follows. examinationeach of Retail Investors? 12/investors-seek-rule-based-indexes-to-beat-stock-gains-diversify 12/investors-seek-rule-based-indexes-to-beat-stock-gains-diversify 169. NASD Notice to Members 05-59, 05-59, Members to Notice NASD debt with derivatives to offer customized bets money.”). raising to retail investors while earning fees 169. and Concerning the Sale of Structured Products 1, (Harv. Law Sch., Discussion Paper No. 560, 2007) (“A structured product has no precise definition, either in a business or a regulatory context.”). qualifies Certainly, as the typical a structure security for prescribed classes of assets purposes named within the “security” definition of in Section 2(a)(1) of the the act, Act.Securities as “notes” are one 167. of the particularly 166. managers.”).asset alternative for sorts 166. [ [ http://www.slcg.com/pdf/workingpapers/StructuredProducts.pdf [ J4HU] (“Sales of structured products have soared in recent years as brokerage firms have How Do They Work, and Should You Invest 5_M 2017] E structured notes are today found in the portfolios of a significant share of U.S. investors. 168. investors.”). sophisticated to only sold once products for market retail a found 168. See also derived from or based on another security (including a bond), currency.”). foreign or commodity basket of securities, index, 170. http://www.forbes.com/sites/samdiedrich/2014/02/28/alternative-or-hedged-mutual-funds- what-are-they-how-do-they-work-and-should-you-invest/#1c4edadd6200t investment package comprised of a fixed income security and an exposure to an underlying asset usually achieved through a derivative. B C Y 39057-ple_19-2 reissue Sheet No. 102 Side A 04/17/2017 09:23:23 A 04/17/2017 102 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 102 Side B 04/17/2017 09:23:23 . M K HE C Y UPP In In :T (Nov. (Nov. 173 .L.J.S ARKET Bloomberg Bloomberg ORBES M ND See , F [Vol. 19:2 19:2 [Vol. OTE , 85 I N AW L general do not represent 171 /93FT-KPGE] (“A structured TRUCTURED S CC USINESS . 302 (1995). B HE , T PERMA SSUERS (2009) at 76 [hereinafter, Sidley Austin, :// I . 29, 52-53 (2009) [hereinafter, Macchiarola, Particular offerings can be designed designed be can offerings Particular Rethinking Sports Wagering EV Structured Notes Buyers Beware HTTPS 174 ) 3/1/17 11:06 AM OURNAL OF OF OURNAL ATTATREYA J L. R ELETE 7 (Jan. 14, 2016) (“[B]anks sold $43.5 billion of SEC- of billion $43.5 sold (“[B]anks 2016) 14, (Jan. 7 E. D RADERS AND RADERS D Securities Linked to the Performance of Tiger Woods? OT ,T AVI N O REIGHTON &R (D , (2011), http://www.finra.org/investors/alerts/structured-notes- Accessing the U.S. Capital Markets–Securities Products: An LOOMBERG ENG DOCX DOCX NVESTORS . , B I , 42 C ENNSYLVANIA ENNSYLVANIA A structured note might be employed effectively to to effectively employed be might note structured A P Y. P /8W2N-PQDS] (“Structured products in 172 RINTER P also Frank Armstrong III, CC OF . TO also Michael C. Macchiarola, COTT _ UIDE FOR UIDE S see G at 53. see ]; ]. See Id. Sidley Austin, Austin, Sidley PERMA :// Structured Notes Structured Structured notes are regularly included within a broader investment ACCHIAROLA EFINITIVE HTTPS portfolio and are employed as a means to achieve specific asset allocation objectives. For example, investors who are confident in a particular market view,limiteda for only but willtimemightthat horizon, exposure an prefer appreciate significantly if the market view is realized, but will terminate or can be liquidated within a reasonable time if the expected result does come not to pass. to provide full or partial principal hedge protection, a market leveraged risk held exposure, elsewhere or in an to investor’s portfolio. Structured provide an investor: (i) a payout tailored to protect against a decline in the price of the underlying asset, return) to (ii) the enhanced underlying asset, exposure (iii) (i.e. yield coupon, enhancement a in or leveraged the form (iv) of a a available from bespoke buying or selling payout a position in different the underlying from asset. the standard return 172. year.”). last notes registered 172.
market market in the United States is a (yet significant source stagnant) of capital for many bank issuers, with approximately $43.5 billion in face amount of 2015. in States United the in issued notes structured D Terms of Your Investment principal-protection-note-terms-your-investment#sthash.mc8FyeEQ.dpuf [ notes-buyers-be-warned/#4504a81d210c [ 5_M 438 U. Brief, 174. Securities 174. 171. This represents a significant decline from a market that regularly enjoyed more more enjoyed regularly that market a from decline significant a represents This 171. than $100 million of annual issuance prior to the financial crisis of 2008. Not Such a Long Shot note is an IOU from an investment bank using derivatives to create the desired exposure to investments.”). more or one fact, structured notes allow investors the exposures to a flexibility market view, or to to employ a tactical strategy tailor in response to investment challenging market environments. ownership of any portfolio of assets but rather are issuers.”); promises to pay made by the product 30, 2012, 5:14 PM), http://www.forbes.com/sites/greatspeculations/2012/11/30/structured- 173. Michael C. Macchiarola, Macchiarola, C. Michael 173. Introduction to United States Securities Accessing Laws 1, 10 (2010) (“In the typical case, a structured note investment in exchange for an issuer’s obligation to pay an allows amount at maturity. The amount an investor to make an initial due at maturity will usually depend upon certain contingent events and their magnitudes.”); see also 39057-ple_19-2 reissue Sheet No. 102 Side B 04/17/2017 09:23:23 B 04/17/2017 102 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 103 Side A 04/17/2017 09:23:23 5 5 Kevin Buehler et et Buehler Kevin (2015) [hereinafter [hereinafter (2015) Structured Products OTES N 439 439 See generally note 170, at 76-77 (naming tax tax (naming 76-77 at 170, note (July 1, 2015, 10:36 AM), AM), 10:36 2015, 1, (July Michael Watt, Watt, Michael TRUCTURED supra :S , ANKER Others have pointed to “perceived “perceived to pointed have Others B LTERNATIVES See also 179 A HE Head of Structured Bond Trading at Citigroup Citigroup at Trading Bond Structured of Head ) 3/1/17 11:06 AM ULLETIN /7QEX-MY4C]. B Accessing note 173, at 53. CC . , T ELETE D quoting OT supra Biggest Banks to Gain Flexibility in FSB Too-Big-to-Fail- , N 178 PERMA O NVESTOR In recent years, however, this flow’s desirability desirability flow’s this however, years, recent In XPANDING :// (D 177 175 In addition to meeting the demand for tactical point- tactical for demand the meeting to addition In DOCX DOCX . HTTPS Sidley Austin, Austin, Sidley SEC, I SEC, 176 Securities ]. /V4HY-9G4J] ( RINTER , John Glover, (Sept. 8, 2015, 8:07 AM), http://www.bloomberg.com/news/articles/2015- AM), 8:07 2015, 8, (Sept. P CC . TO _ See, e.g. Id. See generally Id. See also PERMA :// LOOMBERG A structured note requires an initial investment in exchange for the The market for structured notes has not been without controversy. In Investor Bulletin Investor Between Deluge and Drought: The Future of US Bank Liquidity and Funding ACCHIAROLA , B M K HTTPS Fix 178. 178. 176. Macchiarola, Macchiarola, 176. 177. simplification and overall portfolio diversification as purchaser). notes structured additional potential benefits to the of the note’s issuance. to-point investing, these products have had great allure for whom an an investor’s initial investment represents a issuer, cash inflow at for the time
Inc., London, Bhaavit Agrawal) (“[I]f structured bonds are not going to be TLAC eligible, part of their funding and need to raise TLAC banks that rely on structured notes for a sizable will have to change their funding Market mix.”). Wary of TLAC Threat notes are also employed as access products to “provide investors with opportunity an to access asset currencies, classes, which such have as been commodities past.” the in investors primarily and available foreign solely to institutional obligation of an issuer to pay an amountan pay to issuer an of maturity.obligation at amountthe Generally, due at a note’s maturity is “dependent upon certain contingent events and their magnitudes.” http://www.thebanker.com/Markets/Capital-Mkts/Structured-products-market-wary-of- market pressures). On October 30, 2015, the Federal proposed Reserve rulemaking Board issued relating its to notice of certain United other things, States United States’ bank “systemically important holding banks” will companies. be required Among to maintain minimum amount of unsecured long-term debt a and a minimum about of total loss-absorbing capital (“TLAC”). If calculation when structured the final notes rule remain is qualify adopted, ineligible as either something the more for notes TLAC-friendly will or inclusion a have place. their in issued different to in unsecured be debt the reshaped will to have TLAC to be 179. [ TLAC-threat?ct=true [ 175. 175. 5_M 2017] E SEC, al., (McKinsey Working Papers on Risk, No. reliance 48, on 2013) short-term funding (noting following the a financial crisis dramatic in decline response to in regulatory and bank recent years, criticism has focused on several attributes which might make the structured note wrapper less desirable than have it charged that structured notes first have shortcomings in appeared. the areas of credit Critics risk, liquidity and price transparency. 09-08/biggest-banks-to-gain-flexibility-in-fsb-s-too-big-to-fail-fix 09-08/biggest-banks-to-gain-flexibility-in-fsb-s-too-big-to-fail-fix has been less certain as treatmentissuers. bank for large balances can lead to undesirable capital C Y 39057-ple_19-2 reissue Sheet No. 103 Side A 04/17/2017 09:23:23 A 04/17/2017 103 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 103 Side B 04/17/2017 09:23:23 M K C Y Banks XCEED , E In such such In 182 [Vol. 19:2 19:2 [Vol. UBS to Pay $120 AW L /V3VV-JXLM] (noting that Deconstructed Notes CC . (Aug. 9, 2013, 11:18 AM), AM), 11:18 2013, 9, (Aug. USINESS B Accordingly, investors should should investors Accordingly, PERMA Jonathan Stempel, Stempel, Jonathan EUTERS 181 :// (Feb. 3, 2012), https://www.ft.com/content/ https://www.ft.com/content/ 2012), 3, (Feb. , R HTTPS See also IMES ) 3/1/17 11:06 AM OURNAL OF OF OURNAL .T J /S88B-JPDG] (finding additional advisor demand IN CC ELETE . D , F OT Each criticism is described briefly, in turn, turn, in briefly, described is criticism Each N note 170. 170. note O PERMA 180 note 170. (D :// supra DOCX DOCX supra . HTTPS ENNSYLVANIA ENNSYLVANIA P /5BQY-AYEJ] (describing an arrangement in which UBS agreed to pay RINTER P CC OF . TO _ (Jun. 19, 2014), http://exceedinvestments.com/exceed-investments-survey- 2014), 19, (Jun. Joseph Halpern & Lawrence Solomon, Solomon, Lawrence & Halpern Joseph See PERMA :// Structured Structured note investors assume the credit risk of the issuing bank. A structured notes issuer often commits to provide secondary market ACCHIAROLA HTTPS NVESTMENTS circumstances, a selling noteholder is subject to the non-transparent pricing of an unreliable secondary market established by the note’s issuer, finds-additional-advisor-demand-for-structured-investments-provided-inefficiencies-are- below. below. Since structured notes place the holder in the position of general unsecured creditor of the issuer, investors bear the risk should an issuer fail to repay the debt when due. derivatives This could means have that a Brother’s to investors in worthless Lehman which is exactly what happened a positive structured return note’s but “underlying notes sold the by UBS prior to notes its collapse.” could still be 182. Armstrong III, III, Armstrong awareness since collapsed of Lehman in Brothers 2008, counterparty risk and “has increased pay-outs.”). products structured its on defaulted 182.
and structural inefficiencies” that are structured “holding investments.” back latent demand for [ bc3c3ab4-4c34-11e1-bd09-00144feabdc0 [ 181. Armstrong III, III, 180. I Armstrong addressed/#forward. [ addressed). are inefficiencies provided investments structured for 181. 5_M 440 U. Million Million in Settlement Over Lehman Notes http://www.reuters.com/article/us-ubs-lehman-settlement-idUSBRE9780KP20130809 investors expect to circumstances do arise and “personal emergencies do hold happen.” structured notes to maturity, unforeseen consider that a structured note derivatives. adds underlying the in a embedded risk market layer of credit risk on top of the liquidity during the note’s term.investors some assurance of liquidity, such a provision is far from ensuring While a the secondary ability to sell notes prior to maturity at a particular price. As a practical market provides matter, noteholders are more frequently provided something less than an express promise of a secondary market and, therefore, should be prepared to hold a structured note to market its is provided, noteholders risk selling at maturity a steep discount to date. a note’s Even when value a at secondary the time of sale. In practice, after since structured issuance, notes rarely trade their liquidity is far from reliable. And, while most $120 million to settle claims that it misled investors about the financial condition of Lehman Brothers Holdings Inc. in Elaine Moore, connection with the sale of structured notes); Increase Structured Product Offers 39057-ple_19-2 reissue Sheet No. 103 Side B 04/17/2017 09:23:23 B 04/17/2017 103 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 104 Side A 04/17/2017 09:23:23 183 (May 14, , SEC While the SEC While 185 441 441 Id. LTERNATIVES A note 179. ) 3/1/17 11:06 AM ELETE supra D , OT In May 2015, the Chief of the SEC’s Office of of Office SEC’s the of Chief the 2015, May In N O XPANDING 184 (D UBS to Pay $19.5 Million Settlement Involving Notes Linked to Structured Products – Complexity and Disclosure – Do Retail DOCX DOCX . In June 2016, the SEC agreed to a settlement whereby whereby settlement a to agreed SEC the 2016, June In 187 186 Investor Bulletin Investor /MF8Q-DNAH]. RINTER P CC , SEC (Oct. 13, 2015) (on file with author). with file (on 2015) 13, (Oct. SEC , . TO _ SEC, Press Release, Release, Press See Id. See PERMA :// In addition to the aforementioned structural challenges confronting the In October 2015, the SEC brought its first case against an issuer of ACCHIAROLA M K HTTPS 185. Amy M. Starr, Starr, M. Amy 185. Investors Really Understand What They are Buying and What the Risks Are? 184. 184. Merrill Lynch agreed to pay a $10 million penalty in connection with false with false in connection to pay penalty a agreed $10 Lynch million Merrill and misleading statements in the offering materials provided to retail
“assuming they are willing or interesting in making an offer at all.” prominent potential risks of a structured note identified specifically market investment. risk, complexity, valuation, payoff structure, The Bulletin liquidity and credit risk. Finally, adding to the notes opacity valued are of by often pricing, a pricing matrix or proprietary pricing formula which can result different in than a the value net quite asset value calculated pursuant fund. registered requirementa valuation of to the more robust notes market, the regulatory environment for structured notes decidedly has challenging turned in recent years, requiring satisfy today’s mistrustful bank regulators. issuers to In Office of a Investor Education and Advocacy highlighted several of the most recent Investor Bulletin, the SEC’s [ 183. 183. 5_M 2017] E 186. In her speech, Ms. Starr also noted the growth in the use of proprietary indices in in indices proprietary of use the in growth the noted also Starr Ms. speech, her In 186. certain structured notes, and challenged market participants to ensure that (i) disclosure of the key features of the index, including retail embedded investors, (ii) fees the and brokers and costs, advisors are selling the understandable products to understand product, the and nature its of risks and (iii) broker-dealer policies relating practices. sales proper that ensure to implemented properly to sales and supervision are 187. 2015), https://www.sec.gov/news/speech/speech-amy-starr-structured-products-.html principally regulates prospectus disclosures, SEC staff has gone further in recent years, encouraging issuers to consider whether each new product (i) “make[s] sense” for retail investors who investors, are (ii) not sophisticated, can (iii) is or could be replaced with a lower priced investors at all and (iv) is correctly be appropriate for readily sale to explained retail to alternative. cost Capital Markets Trends delivered a speech addressing to a variety of issues an involving structured notes. industry group further retail structured notes. UBS, one of the agreed largest structured to notes issuers, pay $19.5 misleading statements million and to omissions in settle investors offering charges materials in provided that structured to notes it trading linked strategy. made to false a or proprietary foreign exchange Currency Index Currency C Y 39057-ple_19-2 reissue Sheet No. 104 Side A 04/17/2017 09:23:23 A 04/17/2017 104 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 104 Side B 04/17/2017 09:23:23 M K 188 C Y See SSET , Citi A /7LPV- LLP 5 5 LLP E.g. CC . 189 LOBAL , (Morrison & [Vol. 19:2 19:2 [Vol. PERMA ALLAGHER :// AW &G L , BMO G HTTPS ARR F USINESS The Rise of Liquid Alternatives: B ILLKIE , W ) 3/1/17 11:06 AM 191 OURNAL OF OF OURNAL J , 4 (May 21, 2014), http://dailyalts.com/wp- The Department of Labor Re-Proposes Fiduciary ELETE D note 47 (noting strong growth related to these assets). In In assets). these to related growth strong (noting 47 note Moreover, the combination of increasing increasing of combination the Moreover, OT N 190 O Merrill Merrill Lynch Paying $10 Million Penalty for Misleading , SEC (June 23, 2016) (on file with author). with file (on 2016) 23, (June SEC , supra (D note 190, at 26 (anticipating assets in these funds to increase to to increase to funds these in assets (anticipating 26 at 190, note DOCX DOCX . ENNSYLVANIA ENNSYLVANIA P supra /3YVG-TA55] (observing that liquid alternative funds grew from $50 /E9WC-CWBS]. RINTER , Barclays, P CC CC OF . . TO 1 (Apr. 2016), http://bmogamviewpoints.com/wp- 2016), (Apr. 1 _ Press Release, Release, Press Peter E. Haller et al., See also Finding a New Balance with Alternatives The MarketMutualThe Alternative for Funds See See, e.g. See The SEC, Structured Products, Disclosure, and Retail Investors PERMA PERMA :// :// The recent growth of alternative mutual funds has been impressive by It is notable that the growth of these funds accelerated in the years B. ACCHIAROLA ANAGEMENT HTTPS HTTPS Investor Services, trillion). $1.2 any measure. From a base of less than $40 billion around the time of 2008 the financial crisis, alternative investment mutual funds have now grown to nearly $300 billion, with a compounded annual growth rate of more than 40% during the period. (May The_Department_of_Labor_Re_Proposes_Fiduciary_Rulemaking.pdf 8, 2015), http://www.willkie.com/~/media/Files/Publications/2015/05/ Together, Together, the two enforcement actions highlight the fact and that hedging the activities issuing performed by banks in connection notes present withmany opportunities for manipulation and conflicts structured of interest. As a result, at least one market observer expects “regulatory attention to notes. structured of distribution and creation the around continue” content/uploads/2016/04/BMO-Finding-a-New-Balance-Whitepaper-2016_R6.pdf content/uploads/2016/04/BMO-Finding-a-New-Balance-Whitepaper-2016_R6.pdf fact, some speculate that assets in these funds will exceed $1 trillion in 2018.
investors investors for the structured notes linked to a proprietary volatility index. content/uploads/2014/08/Citi-Rise-of-Liquid-Alternatives.pdf content/uploads/2014/08/Citi-Rise-of-Liquid-Alternatives.pdf 5BCC]. [ M [ 188. 188. [ 5_M 442 U. 191. AUMin 2015). billion in $310 to 2006 in billion 191. 190. Citi Investor Services: Business Advisory, Advisory, Business Services: Investor Citi 190. Presentation to CAIA in Chicago following the financial crisis. Much of their appeal can be attributed to the relative performance of several particular alternative strategies versus the investor awareness improvement in and available offerings, is likely to ensure that appetite, growth of this future. the into continues category and the continued variety and 189. Notes Structured in Investors 189. Foerster, Structured Thoughts News Bulletin, Vol. 6, Issue 4), June 23, beyond 2015, the scope of at this Article, additional 5. pressure on the structured While notes market is likely to come from the recently proposed regulations of the Department of Labor concerning the fiduciary duty owed to employee benefit plans. It is likely that these proposals will result in an unfavorable treatment for structured products generally purchased with retirement monies. Rulemaking for Employee Benefit Plans and IRAs 39057-ple_19-2 reissue Sheet No. 104 Side B 04/17/2017 09:23:23 B 04/17/2017 104 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 105 Side A 04/17/2017 09:23:23 . , IN , F Stephen Stephen See To a certain certain a To In this regard, regard, this In 192 193 194 443 443 /P2CA-7JSZ] (reporting average CC . 4-5 (2016), (2016), 4-5 note 50, at 5 (observing that, even even that, (observing 5 at 50, note note 57, at 37 (“Once again, again, (“Once 37 at 57, note UNDS supra PERMA F note 57, at 4 (observing the disappointing disappointing the (observing 4 at 57, note supra :// note 26, at 1 (explaining that “although “although that (explaining 1 at 26, note LTERNATIVES A , “the average fund [in the category] lost money, ) 3/1/17 11:06 AM supra HTTPS supra Alternative Mutual Funds: Are They Worth It? The strong equity performance has also also has performance equity strong The note 50, at 5. ELETE 195 D /FQQ2-GRE2]. OT N supra CC . O XPANDING as part of an overall portfolio”. overall an of part as (D QUINOX QUINOX Olden Lane No. 2, 2, No. Lane Olden Financial Times PERMA DOCX DOCX . Liquid Alternative Mutual Funds Leave Investors Disappointed :// The high cost of the delivery vehicle has also frustrated frustrated also has vehicle delivery the of cost high The 196 /2TYP-NLWJ] (comparing the performance of various asset classes over See Managed Futures: The Potential Benefits of a Short and Long Term RINTER P ; see also bona fides CC HTTPS . Despite their impressive growth, many perceptive observers observers perceptive many growth, impressive their Despite TO _ Morningstar and Barron’s, Barron’s, and Morningstar Olden Lane No. 2, Sulzbach & Masterson, Barron’s, and Masterson, & Morningstar Sulzbach 197 , E (Oct. 16, 2014), http://www.bankrate.com/finance/investing/are-liquid- 2014), 16, (Oct. See See See See PERMA :// 1 (May 22, 2016), https://www.ft.com/content/a485f82e-1d18-11e6-a7bc- 2016), 22, (May 1 Given the robust and sustained performance of the equity markets ACCHIAROLA M K ANKRATE IMES HTTPS
outsized losses in the equity markets during the crisis. http://equinoxfunds.com/sites/default/files/Insights_MF%20Potential%20Benefits.pdf http://equinoxfunds.com/sites/default/files/Insights_MF%20Potential%20Benefits.pdf Foley & Mary Childs, the return expectations for the liquid alternative funds category, as mutual funds provide an expensive “wrapper” for relatively expensive alternative strategies. deemphasized the need for protection within a portfolio many investors. in the minds of must evaluate.”) allowing for the general prohibition on most forms of incentive combination fees in of mutual funds, fees the in these funds entering inevitably a period compromise of returns, lower global especially growth if and further we observing correspondingly that “[e]fficiency lower are in content market and structure returns, then become the and contemporary investment imperative.”); Dan Weil, alternative-mutual-funds-worth-it.aspx [ T [ ee846770ec15 alternative mutual funds offer volatility, as such risks unique pose and expenses and fees high have generally they benefits, investors potential portfolio the use of leverage, and diversification potentially less liquidity that investors and and their financial advisers return 192. In 2008, for example, the S&P500 Total Return Index lost 37.00% of its value value its of 37.00% lost Index Return Total S&P500 the example, for 2008, In 192. while the Barclays BTOP 50 Index, representing the largest returned 13.58%. commodity trading advisors, Perspective [ 5_M 2017] E 194. 194. since 2008, however, alternative performance disappointments. asset classes have confronted some 196. 196. fund). “average” the of performance 197. 193. years). 15 past the 193. expense ratio of 1.78 percent for liquid alternative funds funds). equity managed versus 1.31 percent for actively have begun to question whether flows into the space are beginning to extent, the financial crisis catalyzed this newline of business and validated its defensive the category’s acceleration represents tangible the manifestation of the non- requisite. becomingportfolio today a is that correlation regardless of whether the sector is measured over one, three, five or 10 years.” 195. According to the the to According alternatives.”). in investing for remainsdriver correlation top diversification/low the 195. B C Y 39057-ple_19-2 reissue Sheet No. 105 Side A 04/17/2017 09:23:23 A 04/17/2017 105 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 105 Side B 04/17/2017 09:23:23 M K C Y ACHS ARKET S available PIMCO, PIMCO, ; see also see (Dec. 14-20, 14-20, (Dec. U.S. M OLDMAN [Vol. 19:2 19:2 [Vol. (2012), (2012), , G EAR AW /3LWY-PKWK]. L CC . These funds mean to to mean funds These USINESSWEEK ROSPECTUS ™2Y B 202 P Finally, the flow trends trends flow the Finally, PERMA :// USINESS NITS 200 U B E OWNSIDE HTTPS Liquid alternative mutual funds funds mutual alternative Liquid D LOOMBERG 199 instead preferring a more tactical tactical more a preferring instead , B 201 note 57, at 5 (“Even as flows have moderated, moderated, have flows as (“Even 5 at 57, note ) 3/1/17 11:06 AM note 57, at 16 (“While this sudden deceleration is is deceleration sudden this (“While 16 at 57, note note 57, at 4. UFFERED OURNAL OF OF OURNAL J /B .333-163101, ELETE /664J-VUZS]. supra O supra D supra AP N CC . C OT N O ILE Offered in a closed-end fund wrapper, the the wrapper, fund closed-end a in Offered F (D PERMA 203 Passive Revolution :// PSIDE TO CT DOCX DOCX . :U ENNSYLVANIA ENNSYLVANIA P HTTPS RINTER RUST P 1933 A OF T TO . 1 (2015 Year End) (“After the turbulent markets of 2015, many liquid _ Yet, new market entrants continue to be drawn to the category category the to drawn be to continue entrants market new Yet, GMT 198 M In January 2012, Eaton Vance successfully raised $26 million for the “Fixed income plus derivative” style products, resembling the ACCHIAROLA , https://www.sec.gov/Archives/edgar/data/1476721/000119312512024829/ SSET ARTICIPATION at 199. Morningstar and Barron’s, Barron’s, and Morningstar alternative fund investors, especially those work.”). vehicles investment these whether new to the asset 199. class, may be wondering 202. Today, PIMCO offers several equity-related strategy funds. For a comprehensive comprehensive a For funds. strategy equity-related several Barron’s, and offers PIMCO Morningstar Today, 2015). 201. 202. listing of the PIMCO family of funds and the related fund documents, Buffered Buffered Downside.” blend active and passage management through the ownership of a package of assets comprised of (i) fixed income market benchmark. the Generally, goal of these funds is plus to offer investors (ii) derivatives linked to a benchmark.relevant the exceeds that return total a “eUnits™ 2 Year U.S. Market Participation Trust: Upside to Cap / eUnits™ represented . . . investment seek[ing] to “a enable holders to participate in the returns of a new specified market type benchmark over a defined of term, typically up exchange-traded to a cap, structured and fund creation progresses in earnest.
plateau. suggest that certain liquid alternatives investors long-term “aren’t approach always to taking alternatives,” a https://www.pimco.com/investments/mutual-funds [ https://www.pimco.com/investments/mutual-funds P [ d288219dn2a.htm 198. Morningstar and Barron’s, Barron’s, and Morningstar 198. significant, alts still grew at the fastest clip relative Liquid Alternative Investments Market Analysis & Performance Summary to all other asset classes.”) A 5_M 444 U. have also been forced to confront a growing wave in favor of passive over active management. By one report, in calendar year 2015 index mutual alone, funds and passive ETFs brought in $365 billion of new money while actively managed funds suffered net outflows. their underlying fee schedule. fee underlying their attributes of a structured note, have already been sold successfully in both open-end and closed end fund wrappers. The giant asset manager, PIMCO, for example, has offered open-end “IndexPLUS” banners for more than twenty funds years. under its “StocksPLUS” and approach. Such a strategy might be at odds with the perpetual nature of the current set of available offerings, the rhythm of the offering calendar and 203. SEC, 203. 200. Eric Balchunas, Balchunas, Eric 200. fund companies continue to launch funds at a record clip.”). clip.”). record a at funds launch to continue companies fund 39057-ple_19-2 reissue Sheet No. 105 Side B 04/17/2017 09:23:23 B 04/17/2017 105 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 106 Side A 04/17/2017 09:23:23 See 206 Index. Index. ® Index up to a ® (Jan. 27, 2012), 2012), 27, (Jan. 445 445 EWSWIRE note 200 (explaining the eUnits™ trust trust eUnits™ the (explaining 200 note LTERNATIVES A ) 3/1/17 11:06 AM supra ELETE GEARED Fund Inc. (Oct. 27, 2004), 2004), 27, (Oct. Inc. Fund GEARED note 204. D ® OT N O supra XPANDING (D DOCX DOCX . /F2WG-5PW4]. Repeating the familiar structured investment of fixed fixed of investment structured familiar the Repeating RINTER P CC 204 . TO GEARED Fund,” which offered a three times levered return to to return levered times three a offered which Fund,” GEARED _ ® Together, the eUnits™ product line attracted a variety of of variety a attracted line product eUnits™ the Together, 207 205 PERMA :// In November 2013, DoubleLine Capital employed the fixed income Eaton Vance’s eUnits™ offerings did not represent the first closed- 1933 Act File No. 333-163101, 333-163101, No. File Act 1933 ACCHIAROLA M K HTTPS
while reducing exposure benchmark.” to loss in the event of a decline in the the index, subject to million. a maximum return. That offering raised $135 Almost Almost a Merrill decade Lynch earlier, led the sale highly of successful an “S&P 500 plus derivative structure to import the smart-beta strategy incorporated in a bank developed proprietary index in its DoubleLine Shiller Enhanced purchasers, including (i) regular structured notes buyers, who (ii) had individuals never bought structured issues. credit-related marketof notes because structured the abandoned notes, and (iii) individuals who had fixed-term instrument with substantially fixed holdings. Care was taken to within arbitrage by facilitating discounts trading market secondary mitigate the structure versus a disclosed hedge portfolio. Eaton Vance completed a second eUnits™ offering in million. May, 2012, which raised just over $20 income plus derivative, combination of third-party dealer contracts and a portfolio of term-matched market exposures were U.S. Treasuries. Because of achieved their closed-end fund structure, the through eUnits™ were a able to avoid structured the notes concentrated in credit recent exposure years transactions that by has among diversifying plagued the multiple fund’s counterparty post derivatives counterparties collateral to secure and mark-to-market fund. obligations requiring Unlike to more the traditional that closed-end funds, eUnits™ each represented a end fund product with a structured return linked to the S&P 500 207. Prospectus, S&P 500 S&P Prospectus, distribution of these products confirms this to be the case. All discussions were conducted confidentiality. protect to withheld Namesare confidentiality. professionals in of 207. [ 204. Eaton Vance Launches First eUnits™, PRN eUnits™, First Launches Vance Eaton 204. 5_M 2017] E https://www.sec.gov/Archives/edgar/data/1299506/000119312504180131/d497.htm https://www.sec.gov/Archives/edgar/data/1299506/000119312504180131/d497.htm 206. Discussions that the authors have had with various professionals involved in the the in involved professionals various with had have authors the Release that Vance Eaton decline that did not exceed 15 percent of the index’ level at the portfolio’s also Discussions inception. program). investment 205. 206. maximum return of 17 to 23 percent. In the event that the index declined over the the term offering, of investors would not experience any loss in respect of any portion of such a http://www.prnewswire.com/news-releases/eaton-vance-launches-first-eunits- 138196254.html [https://perma.cc/L2T4-YD3K] [hereinafter Eaton Vance offering Release]. allowed This investors to participate in the upside of the S&P500 C Y 39057-ple_19-2 reissue Sheet No. 106 Side A 04/17/2017 09:23:23 A 04/17/2017 106 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 106 Side B 04/17/2017 09:23:23 M K 210 C Y US ® /Y648- CC . LOOMBERG ARKETWATCH , B In the end, end, the In /38XK-VQDN] PERMA , M [Vol. 19:2 19:2 [Vol. 211 CC . :// AW see Short Bio, L HTTPS PERMA :// Index and the managed managed the and Index /LK3J-X2FQ]. For a colorful ® CC HTTPS . USINESS com/story/9-dumbest-mutual-fund- B In fact, if the style of returns returns of style the if fact, In Press Release, PR Newswire, Equinox Equinox Newswire, PR Release, Press PERMA 213 ,http://doubleline.com/shiller-enhanced- :// See INE Jeffrey Gundlach, Bond Savant /55BT-UMF5]. L CC HTTPS . ) 3/1/17 11:06 AM OURNAL OF OF OURNAL /R4LQ-HFFU]. J OUBLE CC /KT8V-46QB]. Interestingly, the product was not the . ELETE PERMA CC D . , D :// OT N PERMA 212 Nine Dumbest Mutual Fund Moves of 2013 O http://www.marketwatch. , :// HTTPS PERMA (D :// /SR9W-UB7H] [hereinafter Shiller]. /SR9W-UB7H]Shiller]. [hereinafter DOCX DOCX . HTTPS note 209. note CC ENNSYLVANIA ENNSYLVANIA . HTTPS , https://www.sec.gov/investment [ P The open end fund’s strategy employs an “index overlay” overlay” “index an employs strategy fund’s end open The RINTER P Chuck Jaffe, Jaffe, Chuck supra 208 OF , PERMA TO _ :// The remaining assets of the fund are invested in a fixed income income fixed a in invested are fund the of assets remaining The Shiller Enhanced Cape Id. See generally US Securities and Exchange Commission, Investment Management, Shiller See also 209 HTTPS As these offerings of structured products in open end and closed end ACCHIAROLA 212. 212. 213. technique technique to offer “exposure to equity the markets” as determined ‘cheapest by a proprietary sectors’ index developed by of Nobel the Laureate large and cap Yale Professor Robert Shiller in consultation with Barclays Bank. portfolio managed by the celebrated manager, Jeffrey Gundlach. first to import a bank-developed proprietary index into an open-end seems structure. That to honor belong to the Equinox Commodity structured Strategy and closed unceremoniously in Fund, 2013. which was subsequently re- 209. 209. Sector Index strives to outperform the S&P 500 According to DoubleLine’s website, “[b]oth segments of the portfolio offer CAPEShiller markets,”Barclays the respective their as in play value a fixed income portion of the fund strives to outperform cash.
CAPE Fund. cape/ [ cape/ http://www.econ.yale.edu/~shiller/bio.htm [ (May 10, 2012, 8:15 [ gundlach-bond-savant PM), http://www.bloomberg.com/news/articles/2012-05-10/jeffrey- About the Office 208. Summary Prospectus, Doubleline Funds, Doubleline Shiller Enhanced Cape, (Jul. (Jul. Cape, Enhanced Shiller Doubleline Funds, Doubleline Prospectus, Summary 208. 31, d892910d497k.htm [ 2015), https://www.sec.gov/Archives/edgar/data/1480207/000119312515272421/ launch-of-equinox-commodity-strategy-fund-123748514.html V47F]. [ [ moves-of-2013-2013-12-13 5_M 446 U. (Dec. 16, 2013, 9:22 AM) the product hopes to offer “one diversified value product with two unique value.” possible of source profile of Jeffrey Gundlach, see Roben Farzad, 210. For a biography of Robert Shiller, Shiller, Robert of a biography For 210. 211. 211. formats have highlighted, in certain circumstances, the fund structure can offer significant improvement over notably, a structured fund offers the the possibility for (i) decreased credit risk, typical structured note. (ii) enhanced Most transparency, process, and (iii) (iv) tighter secondary market pricing and a liquidity versus the more typical structured investor-friendly note. investment regime, Such which a includes structure the full also Investment participation Management, embraces the of professionals an the charged with oversight SEC’s the Division oversight registered of investment of company products. Fund Management Announces Launch of Equinox 2011), Commodity Strategy Fund (June 13, http://www.prnewswire.com/news-releases/equinox-fund-management-announces- 39057-ple_19-2 reissue Sheet No. 106 Side B 04/17/2017 09:23:23 B 04/17/2017 106 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 107 Side A 04/17/2017 09:23:23 214 447 447 ]. many of the return streams offered note 5, at 10 (explaining that “In highly highly “In that (explaining 10 at 5, note LTERNATIVES A ) 3/1/17 11:06 AM – is not necessarily novel. In the first first the In novel. necessarily not is – supra , ELETE D OT N O XPANDING The Roar (D DOCX DOCX . IV RINTER P ART P TO Casey Quirk, _ Investment Management, About the Office Management,Investment the About See This Article’s main proposal – that This Article’s proposal attempts to synthesize and scale ideas already Integrating structured products return types and the registered funds When compared to structured notes, the structured unit investment ACCHIAROLA M K trust presented in this Article offers potential improvement of an investors’ experience through mitigated credit risk, improved transparency, and more liquidity. reliable
offered by structured notes resulting products could would be solve many reliably offerings. notes structured today’s of packaged the in issues that UITs, typically befall the opportunity is manifestly not more of the same. Instead, today’s investors demand a renewed understanding alignment that active management with has limited marginal product utility public in the sponsors, markets, rooted especially in Comparable value might be uncovered in when an allocation to efficient vehicles the offered at to deliver a defined outcomes premium and various traditional price to alternative. sources Accomplished of responsibly, point. such products beta, might ranging from bring lower cost, and an increased transparency and liquidity. over High any fees meaningful interval of time only compromise environment.rate interest low prolonged a in pronounced returns, ever is that an effect in today’s structured notes or alternative mutual funds can be offered more reliably as unit investment trusts instance, it is born of an appreciation that the market’s burgeoning 214. [hereinafter 214. 5_M 2017] E investment trust structure might be employed more tactically – beyond the industry’s currently self-imposed undertaking limits. might steal market share from Done investment today packaged, offerings out of habit that or effectively, otherwise, as are open-end funds or structured such notes. an wrapper, in the form of unit investment trusts, addresses a substantial and marketplace.retail the in opportunity developing rapidly introduced by others. At its core, this Article argues that the unit regulated, fee-sensitive client low-tracking-errorexpensive, managers.”).active more replace to instruments segments. . . many allocators will use index-tracking C Y 39057-ple_19-2 reissue Sheet No. 107 Side A 04/17/2017 09:23:23 A 04/17/2017 107 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 107 Side B 04/17/2017 09:23:23 M K 215 217 C Y [Vol. 19:2 19:2 [Vol. AW L USINESS B and/or participation rate feature rate participation and/or ) 3/1/17 11:06 AM OURNAL OF OF OURNAL 216 J ELETE D OT N O (D DOCX DOCX . ENNSYLVANIA ENNSYLVANIA P RINTER P OF TO _ Constructing a Structured Unit Investment Trust Trust Investment Unit Structured a Constructing More specifically, a structured UIT a seek might to a achieve structured particular More specifically, Structured Structured UITs will mimic the fixed income plus derivative nature of A. ACCHIAROLA investment objective by purchasing a combination obligations maturing on of or shortly before (i) the Trust’s U.S. termination date and Treasury (ii) individually-negotiated over the counter options contracts linked to the performance of a particular shortly before underlying the Trust’s termination. reference A basic index, diagram of the UIT is provided also below as structured Figure 4. Depending on its investment objective, expiring any such trust might seek to enhanced offer return, a specific put level in of place protection investors a at and/or controlled range of the investment outcomes at time the expiration of a of limited investment term. Such and alternatives would be affording imparted in a maximum gain, a structured note and still maintain fidelity to the traditional fixed UIT structure. trust natureEach structured of UIT the will be a fixed package of U.S. Treasuries (or negotiated options contracts. other The portfolio’s composition will be specified fixed income in each trust’s governing documents securities) and described in detail in the relevant and individually prospectus, which includes a summary of terms. the option contract’s material contingent principal protection
217. Certain structured UITs may employ a participation rate feature, allowing allowing feature, rate participation a employ may UITs structured Certain will receive $1,000 per unit at the product’s termination if 70%).- 30%than 100%greater (i.e. not is period relevant the during the loss of the reference asset 217. unitholders to participate in a proportion of excess of 100%, the as specified in a relevant positive prospectus and often quoted as a return percentage (i.e., of the reference 120%). asset For in a structured UIT with a participation rate greater than 100%, the return to unitholder the is calculated as the product of (1) any positive return of the underlying asset (or index) multiplied by (2) the participation rate. This feature allows unitholders to participate in an enhanced return of the underlying asset gain. maximum overall (or index), but will often be subject to an 215. Maximum gain features limit the reference asset return available to a unitholder by by unitholder a designed to feature, available return protection asset contingent a reference the limit incorporate may features UITs gain structured Maximum 215. setting a predefined Certain maximum gain. In the event that the underlying reference asset exceeds the maximum gain for a given period, a amount/percentage. unitholder will receive only the maximum gain 216. to insulate the investor from incurring a principal loss if the value of the reference asset does not decline beyond a specified contingent protection level. In the event that asset the posts reference a negative return that exceeds the contingent protection level during term, the the UIT’s unitholder will realize a principal loss (excluding sales charges and other upfront costs) equal to the loss of the reference asset beyond the contingent protection level. In such a case, the amount returned to example, a structured a UIT with unitholder a 70% contingent will protection be level implies that less a unitholder than originally invested. For 5_M 448 U. 39057-ple_19-2 reissue Sheet No. 107 Side B 04/17/2017 09:23:23 B 04/17/2017 107 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 108 Side A 04/17/2017 09:23:23 The inclusion inclusion The 218 note 164 (describing the the (describing 164 note (Sep. 8, 2015), 2015), 8, (Sep. 449 449 supra Biggest Banks to Gain Flexibility USINESS B ,Maxey, LTERNATIVES /SSQ6-V2FZ] (describing a new regulatory A ) 3/1/17 11:06 AM See, e.g. LOOMBERG CC . ELETE D , B PERMA OT N :// O note 187. 187. note XPANDING (D HTTPS DOCX DOCX supra . RINTER P 4. TO _ note 185 (“My office is concerned that for some complex indices or referenced referenced or indices complex some for that concerned is office (“My 185 note IGURE supra F Structured UITs might provide unitholders economic exposure similar ACCHIAROLA M K https://www.bloomberg.com/news/articles/2015-09-08/biggest-banks-to-gain-flexibility-in-
embedded within the structured UIT’s derivative agreements. derivative UIT’s structured the embeddedwithin net mark-to-market liability under the daily relevant options basis. agreement on a investor’s Optionscredit risk exposure to a minimal amount and represent profound transactions constructed credit in enhancement this relative way to invested limit a amounts and capital structured the gain takes note the form where of obligation a of any general unsecured the return financial company of issuer. mitigated further by diversifying the structured UIT’s Counterparty derivative exposure risks may be multipleacross counterparties. of U.S. Treasuries in the proposed structure ensures that receive unitholders will the principal component liabilities. of And, the as units contract further may include a in bilateral collateral arrangement depicted whereby each party excess in of Figure pledges 5 any to the below, other trust a each security interest options in a held at an segregated independent custodian. collateral A typical account arrangement will require each party to fund its respective collateral account to at least the amount of its 218. See discussion See 218. fsb-s-too-big-to-fail-fix [ 5_M 2017] E to that available in the typical retail improvement. structured The $40 billion note, a year but notes market in with the U.S. structural has stalled over the past several years, with investors cautious about the credit risk of bank issuers, regulators increasingly hostile to sales guarded practices about the and balance sheet effects banks of note issuance. capital treatment for structured notes and its effects on banks). banks). on effects its and notes structured for treatment capital hesitation of certain investors to purchase notes following certain bank failures); Starr, Amy M. assets or issuers there may be a lack of transparency about the index, asset or issuer time of at issuance and on the an ongoing basis.”); John Glover, in FSB Too-Big-to-Fail-Fix C Y 39057-ple_19-2 reissue Sheet No. 108 Side A 04/17/2017 09:23:23 A 04/17/2017 108 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 108 Side B 04/17/2017 09:23:23 M K C Y /EK8Q-CM22] [Vol. 19:2 19:2 [Vol. CC . AW L PERMA :// Properly negotiated negotiated Properly 220 HTTPS USINESS B ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J ELETE D OT N O (D DOCX DOCX . ENNSYLVANIA ENNSYLVANIA P RINTER P 5. OF TO _ JPMorgan Chase Financial Company LLC: Capped Buffered Enhanced Enhanced Buffered Capped LLC: Company Financial Chase JPMorgan See IGURE These features represent significant advantages relative to a a to relative advantages significant represent features These F Finally, because any such UIT will be a registered investment Unlike most retail structured notes, products created as structured 219 ACCHIAROLA UITs offer both daily valuation and redemption rights based on value net in asset order to abide by the requirements Act. of the Investment Company unreasonable pricing determinations by the integration options of counterparty. multiple The enhances price counterparties discovery to inform in the UIT evaluator’s fair a determination of value and structured any decision by UIT the Thus, sponsor to a portfolio dispute structured a UIT particular investor price. may redeem confidently rely structured upon UIT the units right to on pursuant a to daily basis a at standards. accounting robust the price valuation determined process governed by regulatory company, it will offer and unitholders more full transparency in respect of design its and the contents of its portfolio. The composition of a structured options agreements will afford a structured UIT elective rights to terminate a portion of its exposure on a daily basis and dispute rights in respect of
219. Investment Company Act, § 22(e), 15 U.S.C.A. § 80a-22 (1987). (1987). 80a-22 § U.S.C.A. 15 22(e), § Act, Company Investment 219. 220. Participation Equity Notes due 2018 Prospectus, https://www.sec.gov/Archives/edgar/data/ 19617/000095010316015535/dp67930_424b2-3p813.htm [ 5_M 450 U. (explaining “JPMS intends to offer to purchase the notes in the secondary market but is not required to do so. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the notes easily. Because other dealers secondary market are for not the likely notes, to the make price a at which you may be notes.”). the buy JPMSto which willing at is any, if price, the on depend to likely able to trade your notes is structured note where limited secondary market liquidity may or may not be available at prices generally determined by the broker-dealer issuer rather or its than affiliated a robust market price. 39057-ple_19-2 reissue Sheet No. 108 Side B 04/17/2017 09:23:23 B 04/17/2017 108 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 109 Side A 04/17/2017 09:23:23 In In 222 Regulation and See 451 451 LTERNATIVES A 226 ) 3/1/17 11:06 AM ELETE The structured UIT prospectus sets forth forth sets prospectus UIT structured The D 221 OT N /BX2A-8SGL]. O XPANDING 223 CC (D . note 61, at 16-17 (describing the registration and disclosure 224 DOCX DOCX . Inv. Co. Act of 1940, § 17 (1987) (explaining the limitations on the PERMA 225 supra :// RINTER P TO _ HTTPS See generally Id. Relative to an investment in a structured note, investors in a structured (ii) requirement (ii) that the policies UITand procedures reasonably designed to prevent violations adopt and of the federal securities laws, appoint a Chief Compliance Officer implement written to administer the policies and procedures, and review the policies procedures; and (iii) strict limitations on the UIT’s ability to enter into affiliated transactions; (iv) requirement that the (iv) UIT adopt a Code of Ethics, approved by the depositor, and containing provisions reasonably necessary conduct; prohibited prevent to portfolio schedules; portfolio (i) robust registration and (i) disclosure requirements, providing for transparency to unitholders in the form of annual reports and ACCHIAROLA M K 223. Investment Company Act, § 24(f), 15 U.S.C.A. § 80a-24. 80a-24. (2012). § (2003). 80a-17 § U.S.C.A. 15 270.38a-1 § U.S.C.A. 24(f), § 15 C.F.R. 17 Act, 17j-1, Act, § Company Act, Company Company Investment Investment 223. Operation Memo, 24f-2). Rule and 24 Section to pursuant requirements Investment 224. 225. transactions). affiliated into enter to ability UIT’s 226. comment of the Commission’s Division of Investment Management prior to the effectiveness of industry each and new regulators to product work offering, disclosures discernable more to a greater number of investors. Today, structured closely thus in allowing crafting the plain notes English offerings become routinely effective Commissionthe staff. examinationby without any period of prior UIT would benefit fromprovisions of of the the various express protections addition, addition, in the UIT market, sales commissions are charged as an amount added to the principal investment as opposed to an embedded fee, which is typical of most structured notes. As a result, evident to an investor simply such by comparing the issue price charges to the economic may become return profile of the product. Moreover, by into moving the UIT these universe, product product disclosures would types benefit from review and
UIT’s portfolio and each holding’s contribution to the initial net asset value value asset net initial the to contribution holding’s each and portfolio UIT’s of the UIT will be set forth in audited financial statements contained in the structured UIT prospectus. 221. Securities and Exchange Commission, Form S-6, https://www.sec.gov/about/forms/ https://www.sec.gov/about/forms/ S-6, Form Commission, Exchange and Securities 221. [ forms-6.pdf 5_M 2017] E 222. 222. applicable applicable sales charges and trust expenses in a robust tabular format. Investment Company Act that make such harms much less likely, including limitednot to: but C Y 39057-ple_19-2 reissue Sheet No. 109 Side A 04/17/2017 09:23:23 A 04/17/2017 109 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 109 Side B 04/17/2017 09:23:23 M K C Y , at 2, RUSTS T [Vol. 19:2 19:2 [Vol. IRST AW , F L note 62 (“Management (“Management 62 note supra USINESS SEC, B /T9FH-BNUC] (suggesting that the fixed CC . and 227 The fixed and transparent nature of the the of nature transparent and fixed The ) 3/1/17 11:06 AM OURNAL OF OF OURNAL PERMA J 229 HAIRMAN OF THE :// 228 C ELETE D OT HTTPS N O Common/ContentFileLoader.aspx?ContentGUID=2c0acb75- note 7, at 1051 (distinguishing fixed trusts from managed managed from trusts fixed (distinguishing 1051 at 7, note (D DOCX DOCX . supra ENNSYLVANIA ENNSYLVANIA ETTER FROM THE P RINTER P Unlike a managed fund, there is no investment manager paid paid manager investment no is there fund, managed a Unlike OF TO 230 _ Harman, see also A Guide to First Trust Unit Investment Trusts Favoring the Unit Investment Trust Over Other Registered Other Over Trust Investment Unit the Favoring Companies Investment See The statutory requirement that a UIT maintain a relatively fixed, The unique attributes of the unit investment trust relative to other (v) stringent stringent recordkeeping requirements, including (v) obligation of UIT sponsor to assets; portfolio of substitutions maintain records and notify unitholders of (vi) requirement (vi) that the valuation UIT policies and procedures adopt with respect and portfolio. UIT the of value to the net adhere asset to robust Further, the absence of management helps to sanitize the structured B. ACCHIAROLA registered investment companies make it the most fund. structured suitable vehicle for a unmanaged portfolio provides transparency in respect of the expected return in various market conditions investors with than a managed fund can enable. greater certainty and https://www.ftportfolios.com/ is ordinarily reduced to a minimum, because the controlling document, the trust agreement, usually specifies not only the securities in which the purchased.”)be may which security each of number specific funds may be invested but also the
vehicles); c76a-4dd2-b976-cbd5b975c202 [ 227. Investment Company Act, § 26(a)(4), 15 U.S.C.A. § 80a-26 (2012). (2012). (2012). 80a-26 80a-2 § § U.S.C.A. U.S.C.A. 15 15 26(a)(4), 2(a)(41), § § Act, Act, Company Company Investment Investment 227. 228. 229. 5_M 452 U. a percentage of the value of the structured sponsors UITs assets. and Therefore, evaluators UIT have no determinations incentive to inflate to values. manipulate UIT sponsors fair have no need valuation to advertise 230. See, e.g., L e.g., See, nature of the UIT provides the “comfort of knowing what emotional investing” you and allows own investors and to take [] greater control eliminate[ing] of overall exposures, and overlap). portfolio and positions concentrated avoid 230. make make their investment in a structured UIT understanding that it frommanipulationprotected subsequent modification. or remains UIT from conflicts of interest companies. that impact other registered investment UIT portfolio is an important attribute investors who expect for fidelity to a attracting defined return profile structured set in place product at the time of investment. Such investors consider investment products in light of personal factors such as investment horizon. objectives, Similar to a risk structured note investment, tolerance investors may choose and to time 39057-ple_19-2 reissue Sheet No. 109 Side B 04/17/2017 09:23:23 B 04/17/2017 109 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 110 Side A 04/17/2017 09:23:23 231 453 453 note 83, at 1. LTERNATIVES A supra ) 3/1/17 11:06 AM ELETE D OT N O /DT8L-NWG9] (explaining that the Trust, offered in October XPANDING (D CC . DOCX DOCX . PERMA :// RINTER P TO _ HTTPS Advisors Disciplined Trust 459: Multi Enhanced Return Investment Trust, Trust, Investment Return Enhanced Multi 459: Trust Disciplined Advisors Believed to be the first offering of a UIT portfolio comprised of of comprised portfolio UIT a of offering first the be to Believed 232 See Such features allow for the creation of bespoke product tailored to the Finally, the possibility of the Rule 487 automatic effectiveness The costs of investment management and the organization and To date, only a handful of UIT offerings identifiable as “structured ACCHIAROLA M K
be profitable for its sponsor with a much lower asset raise. Moreover, an issuer’s commitment to a UIT product has a fixed term, meaning that potential the profitability of a product launch does manyroad.downappetite the years investor assessmentlikely not of require a speculative investment goals and time horizons of a particular investor base and afford structured UIT sponsors the potential to contribute a more customized set of options for investors, more responsive to individual circumstances than offering. managedfund any their investmenttheir management market.the to to incentive ability no is There record. track a performance impact to investments or valuations manipulate Simply, UITs do not afford any manner. party self-interested a in portfolio UIT the opportunity to manipulate the function of an independent Board of structured UIT, Directors allowing the are product to operate eliminated more cost from efficiently than the managed funds. This structural efficiency is structured essential notes that may be offered to at a minimal expense, and because compete the with UIT does not require the infrastructure of a managed fund, the vehicle can typical managed fund. streamlined, And, the structured UIT once creation time cycle should the allow an issuer creation to process craft timely is offerings in response scaled to evolving and client tastes in not available a to manner even the most efficient open end fund operation. Such an accelerated schedule might allow a fund salesforce to be armed with timely times.thematicall at product investments” have been brought to market. In October 2011, for example, Advisors Asset Management (“AAM”) offered the Advisors Trust 459, Disciplined under the “Multi Enhanced Return Investment Trust, High 50” banner. allows the structured UIT to wring out much of that the cost regularly and uncertainty accompanies the more elastic creation time cycle of the 231. Securities Act Release No. 6401, 6401, No. Release Act Securities 231. 232. High 50 October 2011 Series Prospectus, http://pdf.secdatabase.com/193/0001013228-11- 002015.pdf [ 5_M 2017] E 2011, invested in U.S. Treasuries and call options on a basket of 50 stocks high dividend and paying that the collective investment sought an counterparty). option the was PLC enhanced total return. Barclays Bank in U.S. Treasuries and call options on a basket of fifty high dividend paying dividend high fifty of basket a on options call and Treasuries U.S. in a fixed income allocation and a purchased derivative, the product invested C Y 39057-ple_19-2 reissue Sheet No. 110 Side A 04/17/2017 09:23:23 A 04/17/2017 110 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 110 Side B 04/17/2017 09:23:23 M K C Y Matrix Matrix 237 /7DBS-LV7N] /48WF-BFLY] [Vol. 19:2 19:2 [Vol. CC CC . . AW L PERMA PERMA :// :// HTTPS HTTPS U.S. Treasury Strips and Index Index and Strips Treasury U.S. USINESS SM B These early efforts to market market to efforts early These 236 ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J ELETE Following Advisors Disciplined Trust 459, 459, Trust Disciplined Advisors Following Subsequently, between September 2015 and and 2015 September between Subsequently, D /A5C5-YEH5] (explaining that the Trust, offered in 234 238 OT CC N . O (D PERMA DOCX DOCX . :// ENNSYLVANIA ENNSYLVANIA P ALAIA Market Linked Trust 1 Prospectus, /4BEP-9N58] (showing a prospectus filed by Beech Hill Securities /J7SA-94UH] (presenting a prospectus filed by Elkhorn Securities RINTER HTTPS P CC CC OF . . TO _ Matrix Defined Trust 20: Convexcel SUIT Index. None of these efforts have gained effectiveness to to effectiveness gained have efforts these of None Index. Matrix Defined Trust 20: SEC File No: 333-185505, https://www.sec.gov/cgi- Advisors Disciplined Trust 972: ARBR Portfolio, Series 1 (Advisors Reference Reference (Advisors 1 Series Portfolio, ARBR 972: Trust Disciplined Advisors ® at 1. The product was tailored to provide investors what AAM termed termed AAM what investors provide to tailored was product The Advisors Disciplined Trust 927 invested in a portfolio comprised comprised portfolio a in invested 927 Trust Disciplined Advisors See See Id. Id. Id. See See PERMA PERMA 233 235 :// :// In December 2012, Matrix Capital Group, Inc. (“Matrix”) attempted 239 ACCHIAROLA HTTPS HTTPS Bond Portfolio): http://www.sec.gov/Archives/edgar/data/1556132/000101322813000093/ 235. 235. 237. 237. 234. 234. of U.S. Treasuries and credit derivatives that offered its yield investors contingent a upon high the occurrence of certain credit events related basket to a of fixed income securities. amended the registration statement for Matrix Defined Trust Series 20 four times between February 2013 and July 2014. failed to gain effectiveness. The registration statement attempting to register a UIT investing in U.S. Treasuries and exchange traded options); 236. January 2103, invested in U.S. Treasuries and put options and call options on five specific counterparty). option the was Générale Société bonds. corporate 236. Option Trust, Series 1 Prospectus, https://www.sec.gov/Archives/edgar/data/1468678/ AAM brought an additional structured UIT offering to market in January 2013. https://www.sec.gov/Archives/edgar/data/1652446/000121465915006525/a819150s6.htm https://www.sec.gov/Archives/edgar/data/1652446/000121465915006525/a819150s6.htm
stocks. bin/browse-edgar?action=getcompany&CIK=1468678 [ [ [ 233. 233. adt972-487.txt [ 000101322812002583/matrixprofinalwrap.htm [ 5_M 454 U. 239. tool). investment the for prospectus revised recently most the (showing 239. 238. (explaining that Matrix Defined options). traded exchange and obligations Trust 50 is 238. invested in zero coupon U.S. Treasury attempting to register a UIT investing in U.S. Treasuries and exchange traded options); date. “an enhanced total return.” to register a UIT that offered a similar return profile as the eUnits fund by investing in U.S. Treasuries and exchange traded options. structured funds struggled investment to community attract due significant in employed.they strategies complicatedaggressive and part interest to in a the general wariness retail towards the April 2016, three other offerings of structured UITs firms, investing in portfolios of U.S. including Treasuries and AAM, exchange traded options to attempted achieve a structured return profile linked to to the register S&P 500 Elkorn Unit Trust, Series 6: Elkhorn IWM Vest 10% Buffered Return Portfolio Prospectus, https://www.sec.gov/Archives/edgar/data/1644051/000152862115003559/s6wraps.txt 39057-ple_19-2 reissue Sheet No. 110 Side B 04/17/2017 09:23:23 B 04/17/2017 110 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 111 Side A 04/17/2017 09:23:23 241 455 455 Portfolio Series 2016-1 Prospectus, SM LTERNATIVES A ) 3/1/17 11:06 AM ELETE D OT N O XPANDING (D /A2YK-2QCG] (showing registration statement filed by Olden /Y6CU-8LJR] (showing a prospectus filed by Advisors Asset DOCX DOCX CC CC . . The authors of this Article were closely involved in the the in involved closely were Article this of authors The . 240 /T6W6-ZH59] (noting Olden Lane Securities withdrawal request). RINTER P PERMA PERMA CC . :// TO :// Olden Lane Trust 1: Cap Trigger Performance Portfolio Prospectus, Olden Lane Trust 1: SEC File No. 333-202887, https://www.sec.gov/cgi- _ Index. ® See See PERMA HTTPS HTTPS :// However, all recent and current efforts to advance such innovations In recent years, some of the most interesting innovations in the UIT In March 2015, Olden Lane Securities LLC, attempted to register a ACCHIAROLA M K HTTPS Commission staff to such innovations appears injudicious in significant reduction light of credit and liquidity of risk that such the innovations offer relative to registered structured notes, and the improved transparency and independence of structured UITs relative to commonplace retail structured product. The proclivity policies through of informal actions and communications the designed to disrupt Commission staff the registration of structured to UIT offerings is a implement troubling development for such the investment management industry. First, Division it signals a of hostility to the Investment Management’s stated charge to facilitate space have been found structured payouts within in the UIT wrapper. When compared the to structured efforts notes, of a structured fund several offers the potential to sponsors improve the experience to for investors. include have confronted apparent experienced resistance prolonged delay or failure from to gain effectiveness. the The fate these of efforts Commission reveals an apparent policy staff shift assumed by the Commission and staff since the AAM and Eaton Vance offerings between 2011 and Yet, 2013. the specific policy changes steering the resistance of the Commission staff to such offerings remain opaque and absent from the formal Commission’s rulemaking and public statements. The newfound hostility of the efforts to register the offering of Olden Lane Trust Series 1. In July 2016, six after submitting statement Olden Lane withdrew the finally registration amendments and engaging in lengthy and exhaustive negotiations with the 2016. July and 2015 June Commissionbetween staff
structured structured UIT offering that closely resembled the Eaton Vance eUnits by investing in individually negotiated structured multiple to counterparties achieve a structured option return profile linked to the transactions with S&P 500 240. Management attempting to register a UIT investing in U.S. Treasuries and exchange traded options). 240. in.htm [ s6.htm [ [ Advisors Disciplined Trust 1682: ACE MLT 5_M 2017] E https://www.sec.gov/Archives/edgar/data/1662283/000101322816004031/adt1682_fulls6ma 241. UIT). structured for Securities Lane 241. bin/browse-edgar?company=Olden+Lane+Trust&owner=exclude&action=getcompany https://www.sec.gov/Archives/edgar/data/1636919/000091412115000158/ol31884357- C Y 39057-ple_19-2 reissue Sheet No. 111 Side A 04/17/2017 09:23:23 A 04/17/2017 111 Side Sheet No. reissue 39057-ple_19-2 39057-ple_19-2 reissue Sheet No. 111 Side B 04/17/2017 09:23:23 M K C Y [Vol. 19:2 19:2 [Vol. note 213. AW L supra USINESS B ) 3/1/17 11:06 AM OURNAL OF OF OURNAL J ELETE D OT N O (D DOCX DOCX . , Investment Management, About the Office, the About Management, Investment , V ENNSYLVANIA ENNSYLVANIA P RINTER P ART OF Moreover, it reveals an inclination to resist financial financial resist to inclination an reveals it Moreover, P TO _ 242 See generally See While While there are no certainties in the uncertain world of structured Much Much work remains to refine and streamline a process by which ACCHIAROLA improved liquidity and transparency and substantially mitigatedsubstantially risk. and credit improvedtransparency and liquidity finance, the unit investment trust warrants a closer look by those eager to embrace the possible. Still, those excited of by dollar a worth thisain’t ideas of dollars Article’smillion a adage: old the ideasrecall to well would do execution! repeatedly packaged within structured evidence unit exists, investment however, trusts. to intrigue possibilities. When Enough measuredthe typical open-end mutual against fund, the many market observers as to unit investment trust the might offer a cheaper and more streamlined wrapper. UIT the fund, end open an than issuer its for costs lower significantly With offers a scalable underlying assets might be neatly tailored in registered package form, on a bespoke by basis which and with a customized non-perpetual life. risk well in an world investment These clamoring for and tailored solutions fearful of advantages exposures play particularly to over-building product into a distribution model requiring great expense and reliant on a sizeable headcount structured for notes, success. the And, UIT when might compared to provide its unitholders ease of use, alternative streams of return and smart beta solutions might be reliably and
appropriate appropriate innovation in investment products regulation. and services through its 242. 242. 5_M 456 U. innovation innovation in the shadows and avoid a public airing of the merits of innovations such and the formal policies that may them.resist be advisable to support or 39057-ple_19-2 reissue Sheet No. 111 Side B 04/17/2017 09:23:23 B 04/17/2017 111 Side Sheet No. reissue 39057-ple_19-2