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2015 Key Regulatory InitiativesFund Administration

Through our connection with more than 320 mutual fund clients and a significant share of the industry, we are fortunate to stay current on trends in requirements, such as SEC request lists and subsequent follow-up questions which help our clients react quickly to the ever changing regulatory landscape. As a new year begins, there are a number of key regulatory initiatives that fund officers and directors must understand. Below is a list of those regulations and guidelines to help you stay current on industry changes.

Alternative Funds Sweep: Leverage and CollateralDuring the recent alternative funds SEC sweep, we observed intense scrutiny of existing and new alternative mutual fund products, with a focus on asset coverage testing and collateral. Our administrators are well versed in derivatives and determining the proper coverage for futures, forwards, swaps, written options, short sales, and other types of securities. We were well poised to help answer questions on how sufficient collateral was calculated and explain evolving guidance on housing margin in a segregated custodian account.

Bond Funds Sweep: Liquidity Stress TestingThrough a recent SEC’s bond fund sweep, we saw firsthand their focus on fixed income securities. The SEC is calling for additional information regarding the depth of advisers’ liquidity testing in current and hypothetical increased interest rate environments. The SEC also requires documentation regarding how well this information is relayed to, questioned, and understood by fund boards. Our administrators scour reports to check for adequate disclosures, and recommend important discussions to help ensure fixed income stress testing is well documented and memorialized in board meeting minutes.

12b-1/Shareholder Servicing/Sub Transfer Agency Plans: Separate and ReasonableWhile distribution fees have been scrutinized for years, expenses processed through sub transfer agent and shareholder servicing plans have become a recent topic

for discussion. Our affiliated broker-dealer has a wealth of experience negotiating agreements with brokers for distribution and servicing, and our administrators often assist in comparing sub transfer agency to regular transfer agency fees for reasonability. Our Administration and Compliance group is able to provide clients with recommendations for separating distribution, shareholder servicing and sub transfer agency fees and can also share industry norms for per shareholder account charges and basis point fees.

New ASU 2014-11: Repos and Securities Lending DisclosureFASB additional disclosure requirements are expected to continue in 2015. Most recently, ASU 2014-11 affects funds participating in repurchase and reverse repurchase agreements as well as funds participating in securities

Sharing solutions on topics affecting our clients and their shareholders through innovative insights, sophisticated technology, and a solid tradition.

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Quintillion Named “Best European Administrator” by HedgeweekQuintillion Limited, LLC

During the sixth edition of the recent Hedgeweek Awards in London, Quintillion was named “Best European Administator”. The banquet brought together leading names in the global hedge funds industry to celebrate the achievements of the best performing managers and service providers in 2014.

Votes were submitted by Hedgeweek subscribers, who include institutional investors, wealth managers, fund managers and other industry professionals such as fund administrators, prime brokers, custodians, law firms, custodians and advisers.

For more information on our European service solution, contact Ken Somerville at ken.somerville@quintillion.com.

U.S. Bancorp is Fortune’s Most Admired Superregional BankU.S. Bank

Fortune Magazine recently released its “World’s Most Admired Companies” report, and for the fifth straight year, U.S. Bancorp was the No. 1 superregional bank on the list. We also finished first in eight of the nine categories used to rank the superregional banks. We ranked first among superregional banks in these categories:

• Management Quality• Quality of Products/Services Offered• Innovativeness• Value as a Long-term Investment• Soundness of Financial Position• Ability to Attract, Develop, and Retain Talent• Community Responsibility• Wise Use of Corporate Assets

“This is truly impressive, and we are very proud of this recognition,” said Richard Davis, chairman, president and CEO. “This is a true indication of how we invest our hearts and minds to power our own potential as a team, a company and a partner to deliver real value to our customers, colleagues, communities and shareholders.”

Our showing on the 2015 “Most Admired Companies in the World” list, however, is even more impressive than in past years. Of all the global companies who participated in this survey, we scored in the top 10 in six of Fortune’s nine overall categories—out-performing some of the largest, most well-known companies in the world, such as Google, Walt Disney, Nike, Apple, Cisco, and Bershire Hathaway, just to name a few.

Here’s how we ranked overall compared to the entire universe of companies who participated in the survey:

• #2 Management Quality• #6 Value as a Long-Term Investment• #7 Soundness of Financial Position• #8 Ability to Attract, Develop, and Retain Talent• #9 Community Responsibility• #4 Wise Use of Corporate Assets

For more information about this annual rankings, visit fortune.com/worlds-most-admired-companies/.

“I was honored to receive this award on behalf of the Quintillion staff. To be recognized by our peers demonstrates the high level of respect our people have earned through their dedication, hard work, and attention to detail.”

- Joan Kehoe CEO of Quintillion

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Record Setting Year for Our Transfer AgentTransfer Agent

2014 was a year of extraordinary records and accomplishments for our Transfer Agent. In a challenging year for the industry, we continued to set records in the number of shareholder accounts we maintain, the number of transactions we process, and the service levels we achieve.

  Nearly 8 million NSCC trades were processed and settled through our Financial Intermediary team. The team also supported the various broker-dealer roll up events that resulted in 310,000 accounts converting to omnibus accounts.

  50,000 correspondence items were sent with an average turnaround time of 2.62 business days across all of our clients. This turnaround time exceeds that of our NQR peer group, whose average is 3.3 days. The volume of correspondence the team responded to represents a 15 percent increase in overall correspondence items from 2013.

  Our AML Fraud team directly intervened to stop $150,000 in pending fraudulent transactions. The team also recovered approximately $75,000 from banks that received funds related to family member fraud on deceased persons’ accounts and from cashing stolen shareholder checks.

  28 cases of fraudulent activity were identified and prevented, averting $2.1 million in losses.

  More than 553,000 calls were placed to our clients’ 800 numbers, representing a 16 percent increase in call volume. Of that number, more than 279,000 were assisted by contact center representatives, who responded to calls within a 7.40 second average and with a 92 percent service level.

  NQR ratings for call quality reached formidable levels with an average of 2.98 beating the NQR average of 2.84. NQR quality ratings are based on accuracy and completeness of information, professionalism, courtesy, and overall customer service.

  Following the state inactivity mailings for several clients, the Outbound Calling team contacted the shareholders who did not respond to the mailing by

telephone in order to confirm and secure contact with the investor. This calling initiative resulted in retention of more than $5.7 million that would otherwise have been escheated to states. This highly effective calling campaign occurred within a one month period.

  The Transfer Agent initiated nearly 3,000 12b-1 runs, generating more than $135 million in 12b-1 and servicing fee payments in 2014.

  Technology and System Support prepared more than 216,000 reports, including more than 2,000 unique client requested queries.

  The Pricing team processed nearly 500,000 daily NAVs entered with 99.99 percent accuracy, more than 29,000 daily rates with 99.97 percent accuracy, and 7,000 dividend and capital distributions with 99.98 percent accuracy for the year.

  1.7 million periodic statements were produced and mailed with 100 percent accuracy and within five days of approval without exception.

  In excess of 350,000 direct financial transactions were processed in our Account Services group with an industry leading accuracy rate of 99.82 percent.

These achievements are made possible because of the success and commitment to partnership from our clients, along with our dedication to service excellence.

For more information on our record setting transfer agency services, contact your relationship manager.

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Prepare for Launch: Best Practices for Opening an Exchange-Traded FundETF Service Solutions

Exchange-Traded Funds (ETFs), both passively and actively managed, continue to launch at a brisk pace. What should a firm consider prior to launching their own ETFs?

First and foremost, identifying pre-launch sources of AUM for your ETF is a vital consideration. There are two categories to consider:

  “Captive AUM” refers to current client assets, such as existing SMA or mutual fund assets, which you can legally, compliantly, and efficiently bring to the ETF as part of, or shortly after, launch.

  “Captured AUM” refers to assets gathered through traditional wholesaling and marketing activities.

If you do not have captive AUM, a well thought out wholesale and marketing plan to capture AUM is essential. For example, identifying wire houses, regional platforms, and other RIAs who currently use your existing products and indicate strong interest in owning your ETF once launched, provides a target AUM level to help estimate first year revenue and expenses.

Second, the selection of an experienced service provider for administration, accounting, transfer agent, custody, and distribution is an operational necessity. Joining an existing multiple series trust, using your own existing investment company, or creating a new one are all readily available options for managers.

Finally, deciding on filing for your own active and/or passive ETF relief or “renting relief” from an existing investment adviser is also an essential decision that must be made prior to launch.

Continued demand for ETFs has fostered innovation and efficiency with issuers, service providers, and the SEC. Streamlined application processes and increased familiarity with product structures, securities utilized within portfolios, and management techniques have shortened the application, approval, and launch process. This includes the 19b-4 application process exchanges must go through prior to listing certain products. Clarity in terms of what is “getting through” the process and what is not is essential intelligence.

Just as important is the continued advancement and efficiency in the ETF capital markets arena. Agency execution desks are providing crucial services in the areas of liquidity sourcing and best execution. Authorized Participants continue to streamline and provide creation and redemption efficiency. Lead market makers, designated liquidity providers, and secondary liquidity providers continue to keep bid/ask spreads tighter and depth of book more robust.

U.S. Bancorp Fund Services can help clients find solutions to these critical considerations to ensure an efficient and well thought out ETF launch.

For more information about launching an ETF, contact Mike Castino at michael.castino@usbank.com.

lending. Mutual funds have historically accounted for these types of arrangements as secured borrowings. Therefore, stricter requirements in accounting for these investments as sales are not anticipated to have any impact on our mutual fund clients. However, additional disclosure for secured borrowings will be required for fiscal years that begin after December 15, 2014 and interim periods beginning after March 15, 2015 (e.g. for a 12/31 FYE fund we recommend first including in the 9/30/15 Form N-Q). This disclosure will include a breakdown by maturity and collateral type as well

as a comparison to 2011-11 liabilities and a discussion of risk. Our accounting update committee has diligently drafted a summary of the new regulation, including examples and sample language for our clients.

To learn more on how the 2015 regulatory initiatives may impact your fund, please contact your fund administrator or relationship manager.

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Industry Update: Recent U.S. GAAP Accounting Pronouncements for Investment CompaniesAlternative Investment Solutions

The Financial Accounting Standards Board’s recently released pronouncements, or updates to the accounting standards, to help serve as a guide for investment managers during the upcoming tax and audit season. Fund administrators from U.S. Bancorp Fund Services combed through the pronouncements to highlight those that may be most relevant for hedge fund managers:

  Offsetting assets and liabilities: The amendments clarify that the scope of guidance issued in December 2011 to enhance disclosures around financial instruments and derivative instruments that are either (1) offset, or (2) subject to a master netting arrangement or similar agreement, irrespective of whether they are offset, applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for interim and annual periods beginning on or after January 1, 2013. [FASB issue ASU 2014-13]

  Measuring the Financial Assets and Liabilities of a Consolidated Collateralized Financing Entity: The new guidance provides a measurement alternative which allows entities to measure both the financial assets and financial liabilities of the consolidated collateralized financing entity using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The requirements are effective for companies beginning in the first quarter of 2016, with early adoption permitted in the first quarter of 2015. [FASB issue ASU 2014-13]

  Characteristics of an Investment Company: A new two-tiered approach that requires an entity to possess certain fundamental characteristics while allowing judgment in assessing certain typical characteristics. The fundamental characteristics that an investment company must include the following:

1. Obtains funds from one or more investors and provides the investor(s) with investment management services;

2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both; and

3. Does not obtain returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests.

The typical characteristics of an investment company that an entity should consider before concluding whether it is an investment company include the following:

1. More than one investment;

2. More than one investor;

3. Investors that are not related parties of the parent or the investment manager;

4. Ownership interests in the form of equity or partnership interests; and

5. Manages substantially all of its investments on a fair value basis.

The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The guidance includes disclosure requirements about an entity’s status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. [FASB issue ASU 2014-13]

For more information on how these recent pronouncements may affect your funds, or to learn more about our financial statement preparation services, please contact your primary administrator or Fred Ashraf at fred.ashraf@usbank.com.

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Crowd Control: New Product Launch ChallengesQuasar Distributors

While it may not be news worthy that broker-dealer platforms are crowded with mutual fund, exchange-traded fund, and other registered products, what is becoming noteworthy is the effort exerted by the major platforms to institute measures of ‘crowd control.’ Even amongst major supermarkets, which historically have been product agnostic, we are seeing steep criteria facing all new fund families.

One prominent supermarket platform has been the face of this trend. A new mutual fund is required to a have six month fund track record, a national distribution plan, pay a $25,000 one-time fee, and generate or demonstrate known demand in the mutual fund product of $25 million. Historically, for every 20 new distribution clients Quasar takes on annually, 15 seek and gain access to this specific supermarket platform. In 2014, only five new fund families gained access, and we continue to see new fund families struggle to generate the necessary demand to gain acceptance by this specific supermarket firm.

Other platforms currently employ similar, but not nearly as onerous, criteria. This increasingly puts pressure on investment advisers to be able to locate and push RIAs and institutions to serve as advocates for them with the home office of the platform, which is at times a challenging order for a start-up fund company.

National wirehouses and other regional broker-dealers continue to employ common criteria such as internal demand, one to three year track record, and minimum AUM levels before seriously considering onboarding a new fund company.

Product Type and Share Class DevelopmentsThe market continues to introduce liquid alternative products and other alternative products at a rather stunning rate compared to traditional asset classes. These funds appear to have captured the attention of certain segments of the RIA and institutional markets, but have been less successful in gathering assets in traditional retail channels based on the information available to Quasar. These products face a more challenging onboarding process, as broker-dealers often employ more arduous and rather lengthy review processes compared to their more ‘vanilla’ asset-class brethren.

Clients continue to seek our advice regarding which share classes to launch. One trend not to be ignored is the

continued movement toward the ‘cheapest share class’ available due to the continued growth of fee-based accounts. Investors are seeking advice, and financial advisers are offering the advice to service their clients in a fee-based account where the investor is charged an asset-based fee on the total account size. This means the adviser increasingly does not want a share class with a 12b-1 fee, but instead wants an institutional share class whenever available. The fund company must then agree to waive the investment minimum and likely waive any redemption fees, or they will not be under consideration for wrap or fee-based programs by the financial intermediary.

This doesn’t mean the retail class is dead. NTF platforms, no-load, load waived A, and load A shares still have a healthy market share. As always, launching an A share still requires an investment adviser to have the resources to support the infrastructure required to sell the share class. We have seen few new fund families succeed, at a large scale, in the use of Class C shares over the past several years. It should be noted, each of these firms had an existing sales force that was prepared to sell to this specific slice of the marketplace upon fund launch. Success for these fund families has been between 20 to 30 percent of all new fund sales in the Class C share, compared to most Class C share launches with less than 5 percent of Class C share fund sales.

Finally, an interesting note regarding share class trends is the segment of the retirement industry and institutional type investors demanding a true ‘naked’ share class. In other words, they want a share class that is void of any form of revenue sharing, servicing fees, sub-transfer agency fees, networking fees, or sales charges. This is creating some anxiety for the major platforms as they have come to expect to be paid by the fund company or investment adviser. At the larger fund complexes in this industry, this has led the launch of several R6 share classes, which are meant to service this new but growing segment of the marketplace. We have observed a few of our clients try to meet this need by developing three share classes. A retail or no load class with a 12b-1 fee, a second class (ex. Advisor, F share) which has no 12b-1 fee, but does contain a servicing fee of 10-15 bps to serve the fee-based advisor/transaction fee platform market, and then launch a true institutional share class,

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which is not actively presented to the platforms. From time to time, this means some of the platforms are caving to their customer’s needs and may agree to allow for investors to use these share classes on their platform in a one-off basis, and without a platform fee. This is a very interesting development for us to watch in the coming year.

Omnibus Account ProliferationThe rollup of networked accounts by a broker-dealer to an omnibus account remains a sustained reality in our industry. In 2015, we expect to see another wave of ‘rollups’ from a handful of broker-dealers. Additionally, some of these firms have made it known that they want to onboard any new funds in an omnibus environment from the start of the relationship.

Omnibus Costs to Fund Companies and Investment Advisers Broker-dealers holding omnibus accounts, often by outsourcing the actual service to one of two prominent sub-accounting vendors, typically charge fund companies or investment advisers for each sub-account. This charge is usually between $16 and $21 per sub-account. The high end of that range typically covers funds with a CDSC feature. Alternatively, some fund companies have been able to

negotiate an asset-based fee for omnibus services.

It is common for the investment advisor to bear the cost of sub-transfer agency or shareholder servicing fees or a portion as a fund expenses with the fund board’s formal approval following a formal analysis as to the reasonableness of the costs. Quasar, along with much of the rest of the industry, continues to pay close attention to developments related to the SEC’s ongoing review of payments for these and other types of services to financial intermediaries.

Sales Reporting in an Omnibus AccountOmnibus proliferation has also led to the lack of sub-account transparency in the omnibus account environment. Our clients are increasingly leaning on broker-dealer platforms to provide data through online portals, or have become much more serious about engaging with sales and compliance reporting service providers, such as MARS or Access Data.

Seven years ago, most of our client base found these services to be too expensive. With changes in the way funds are sold and held, we have also seen changes in the need for our clients to obtain the data, track investor flows, pay wholesalers, and fulfill compliance obligations.

Mutual Fund Profile I and II (MFPII)One trend we anticipate for 2015 is the required participation of fund companies to use the NSCC’s Mutual Fund Profile I and II services. Currently, a small number of funds we service use MFPII, primarily due to the cost associated (approximately $12,000 annually). Platforms are slowly beginning to push, and in some cases require, a fund’s use of MFPII. MFPII serves as a fund depository of data, information, and fund attributes and is used as a tool by financial intermediaries for reference and accuracy purposes. Fund profile information is populated into the MFPII service by the investment adviser.

Intermediary OversightBeginning in 2015, we are expecting increasing numbers of major financial intermediaries to begin providing the Financial Intermediary Compliance and Controls Assessment (FICCA) to fund companies upon request. Many of the same financial intermediaries indicated that they will not deliver those FICCA reports to any party not named as the CCO of the funds.

For additional information on new product launches, please contact your relationship manager or Quasar representative.

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BUILDING ON FOUR DECADES OF INVESTMENT EXPERIENCEWith 45 years of service distinction, U.S. Bancorp Fund Services, LLC combines industry-leading technology with high-quality customer service to provide our clients with customized solutions. For more information about our comprehensive suite of mutual fund, alternative investment, and ETF products and services, call 800-300-3863 or visit www.usbfs.com.

U.S. Bancorp Fund Services, LLC 777 East Wisconsin Avenue Milwaukee, WI 53202

Please send your comments and suggestions to usbfsinfo@usbank.com. U.S. Bank does not guarantee the products, services, or performance of its affiliates and third-party providers.

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See US This Spring at the Following Conferences and EventsU.S. Bancorp Fund Services

From coast to coast, our team of professionals will be on-site at industry-leading conferences to discuss your servicing needs. Visit US at the following conferences and events.

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March 15-18 | ICI Mutual Fund Conference Palm Desert, CA

March 26 | HFMWeek Global Economy Panel London, England

April 1 | Backstop Panel Discussion New York, NY

April 10 | 10th Annual Global ETF Awards Dinner New York, NY

April 13-14 | IIR Liquid Alternative Strategies San Francisco, CA

April 16 | HFMWeek European Hedge Fund Performance & Service Awards London, England

April 26-29 | GAIM Ops Grand Cayman

May 6 | RCA Enforcement, Compliance, & Operations New York, NY

May 6-8 | ICI General Membership Meeting Washington, D.C.

May 27-28 | Marcum MicroCap Conference New York, NY

May 31-June 3 | RIA Trend Forum III Charleston SC

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For more information about any of our upcoming events please contact U.S. Bancorp Fund Services at usbfsinfo@usbank.com.