Tag: Investment Advisers Act

Opening Remarks at the 75th Anniversary of the Investment Company Act and Investment Advisers Act

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks on the 75th Anniversary of the Investment Company Act and Investment Advisers Act. The full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. Thank you for coming today [September 29, 2015], and welcome to the SEC, both those here in person and through our webcast. Before I say anything else, I would like to acknowledge staff from the Division of Investment Management for their hard work in putting this anniversary program together. In particular, kudos go to Director Dave Grim, Jennifer McHugh, Bridget Farrell and Jamie Walter. I also would like to thank my fellow Commissioners who are introducing the panels, and all of the stellar panelists who will be sharing with us their insights throughout the day.

Today, we celebrate 75 years of the Investment Company Act and the Investment Advisers Act—two pieces of legislation that came to shape the financial markets as we know them. And this event is more than an anniversary celebration—it is a day to reflect on this extraordinary regulatory system that has facilitated the management and growth of assets for millions of Americans and other investors from around the world. In these opening remarks, my assignment is to first take us on a brief historical tour and then come back full circle to today where we see just how powerful and alive these Acts are in the modern markets.

Scrutiny of Private Equity Firms

Veronica Rendón Callahan is a partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum.

On June 29, 2015, the U.S. Securities and Exchange Commission charged Kohlberg Kravis Roberts & Co. with misallocating more than $17 million in broken deal expenses to its flagship private equity funds in breach of its fiduciary duty as an SEC-registered investment adviser. KKR agreed to pay nearly $30 million to settle the charges. This action represents a continuing and robust focus by the SEC on fee and expense allocation practices and disclosure by private equity fund advisers, many of which are relatively newly registered with the SEC following passage of the Dodd-Frank Act. It serves as a reminder of the need for private equity firms and other advisers to private investment funds to consider bolstering their compliance and disclosure policies and procedures related to the allocation of fees and expenses.

Clarity in Commission Orders

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

This statement is about the critical importance of clarity in Commission Orders for enforcement actions. One of the Commission’s most effective deterrents against future misconduct is what it says about the enforcement actions it takes. As a result, the Commission must use its position as a regulatory authority to carefully and effectively send clear messages to securities industry participants regarding what is, and what is not, acceptable behavior. For this reason, Commission Orders need to contain sufficiently detailed facts so that there is no doubt as to why the Commission brought an enforcement action, why the respondent deserved to be sanctioned, and why the Commission imposed the sanctions it did.

The Commission and its staff should always be cognizant that there is a broad audience that carefully reads Commission Orders for guidance. This broad audience is usually not familiar with the underlying facts of a particular matter, and is relying on the Order’s description of the misconduct to appreciate why a named respondent ran afoul of the applicable laws. A clear and transparent Commission Order, therefore, is an absolute necessity to ensure public transparency and accountability.


SEC Proposes Amendments to Form ADV & Investment Advisers Act

Jessica Forbes is a partner in the Corporate Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Forbes and Stacey Song.

On May 20, 2015, the Securities and Exchange Commission (the “SEC”) published for comment proposed amendments to Form ADV and certain rules promulgated under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). [1] The proposed amendments to Form ADV relate to Part 1A, which, although available on the SEC’s website, is not required to be delivered to clients. The SEC proposes to (1) require investment advisers to provide additional information on their Form ADV Part 1A, including information about their separately managed account (“SMA”) business; (2) incorporate a method for private fund adviser entities operating a single advisory business to register using a single Form ADV; (3) require investment advisers to maintain records that demonstrate performance calculations or rates of return in any written communications, and maintain originals of all written communications received and copies of written communications sent related to the performance or rate of return of all managed accounts or securities recommendations; and (4) make clarifying, technical, and other amendments to Form ADV and Advisers Act rules.


SEC Charges Hedge Fund Adviser for Prohibited Transactions and Retaliating Against Whistleblower

The following post comes to us from David A. Vaughan and Catherine Botticelli, Partners at Dechert LLP, and is based on a Dechert legal update authored by Mr. Vaughan, Ms. Botticelli, Brenden P. Carroll, and Aaron D. Withrow.

The U.S. Securities and Exchange Commission (SEC or Commission) issued a cease and desist order on June 16, 2014 (the Order) against Paradigm Capital Management, Inc. (Paradigm) and its founder, Director, President and Chief Investment Officer, Candace King Weir (Weir). [1] The Order alleged that Weir caused Paradigm’s hedge fund client, PCM Partners L.P. II (Fund), to engage in certain transactions (Transactions) with a proprietary account (Trading Account) at the Fund’s prime broker, C.L. King & Associates, Inc. (C.L. King). Paradigm and C.L. King were allegedly under the common control of Weir. The Order further alleged that, because of Weir’s personal interest in the Transactions and the fact that the committee designated to review and approve the Transactions on behalf of the Fund was conflicted, Paradigm failed to provide the Fund with effective disclosure and failed effectively to obtain the Fund’s consent to the Transactions, as required under the Investment Advisers Act of 1940 (Advisers Act).


SEC Provides Guidance to Investment Advisers on Use of Social Media

The following post comes to us from James T. Lidbury, partner and co-head of the Mergers & Acquisitions practice at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Rajib Chanda.

In response to the prevalence of social media sites featuring consumer reviews of various types of businesses, on March 28, 2014, the SEC’s Division of Investment Management published an IM Guidance Update to address concerns arising from the rating of investment advisers on such social media sites (the “Guidance Update”). Specifically, the Guidance Update clarifies the application of the testimonial rule to social media sites featuring consumer reviews, such as Yelp and Angie’s List, and sets forth the parameters for the use of such sites by investment advisers in connection with their marketing materials.


SEC Sanctions Adviser, Broker-Dealer and Their Owner Over ETF Trades

The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by Jackson B. R. Galloway.

The SEC settled claims against a registered investment adviser (the “Adviser”), its affiliated broker-dealer (the “Broker-Dealer”), and the founder, owner, and president of each (the “CEO”) that related to (1) investments in Class A shares of underlying funds made by funds managed by the Adviser (the “Funds”) and (2) commissions paid by the Funds to the Broker-Dealer for trades in exchange-traded funds (“ETFs”). Without admitting or denying its findings, the Respondents agreed to the settlement order (the “Order”), available here, which this post summarizes.


Regulation of the Investment Advisers

Editor’s Note: Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement from Commissioner Gallagher; the full speech, including footnotes, is available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

In January 2011, the Commission, with Commissioners Casey and Paredes dissenting, issued a staff report on a study, conducted pursuant to Section 913 of the Dodd-Frank Act, of the effectiveness of the existing regulatory standards of care that apply when brokers and investment advisers provide personalized investment advice to retail customers. In addition to mandating that study, Section 913 authorized, but did not require, the Commission to adopt rules establishing a duty of care for brokers identical to that which applies to investment advisors — in other words, a uniform fiduciary duty for brokers and investment advisors — and to undertake further efforts to harmonize the two regulatory regimes.


SEC Study on the Fiduciary Duty of Investment Advisers and Broker-Dealers

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Ms. Nazareth, Gerard Citera, Robert L.D. Colby, Lanny A. Schwartz and David L. Portilla.

General Observations

Background. On January 21, 2011, the Securities and Exchange Commission (the “SEC” or “Commission”) released its much anticipated staff study on the effectiveness of the standards of care required of broker-dealers and investment advisers providing personalized investment advice about securities to retail customers (the “Study”). As required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the Study also considered whether there are regulatory gaps, shortcomings or overlaps that should be addressed by rulemaking.


Remarks Regarding Investment Companies

(Editor’s Note: The post below by Commissioner Troy Paredes is a transcript of his remarks at the Investment Company Institute’s Annual Capital Markets Conference, omitting introductory and conclusory remarks; the complete transcript is available here. The views expressed in this post are those of Commissioner Paredes and do not necessarily reflect those of the Securities and Exchange Commission or the other Commissioners.)

Since its inception in 1940 [1] — a historic year for the SEC — ICI has been an important voice, actively contributing to improving the oversight of our securities markets. In fact, many of the rules and regulations that the SEC has enacted in the subsequent decades were refined thanks to the thoughtful comments and research ICI and its members have provided. I am sure that this conference, like others before it, will spawn interesting insights that can help us achieve a well-calibrated regulatory regime that strikes appropriate balances.

I considered a range of topics to address today before deciding on three: custody, money market funds, and the Jones case.


Safeguarding client assets is a critical function of investment advisers. Investors must feel safe knowing that the funds and securities they own on paper exist in reality. Investors need to be confident that their returns are not fictitious and that their assets have not been misappropriated.

To this end, this past May, the Commission proposed rules under the Investment Advisers Act to enhance the safeguarding of investment adviser client assets. [2] Among other things, the Commission proposed amending the custody rule to require an annual surprise examination of client assets by an independent public accountant for registered investment advisers with custody.

Although I voted in favor of the Commission’s custody proposal, I raised certain reservations at the open meeting, particularly about extending the surprise exam to the extent proposed. [3] First, I questioned whether the surprise exam should cover investment advisers with an independent qualified custodian or be targeted to instances where the investment adviser or a related person is the qualified custodian. Given that non-affiliated custodians already serve as an important safeguard of client assets, it is not self-evident that the cost of a surprise exam is warranted. Second, I sought comment on whether the custody rules should cover investment advisers who have custody only because they withdraw fees from client accounts. Is the ability to withdraw fees a sufficient basis upon which to subject an adviser to the cost of yearly surprise exams? I expressed a related reservation that surprise exams may undercut competition if they were disproportionately costly and burdensome for smaller advisers.

Having had occasion to consider comments the Commission has received, I still question whether the proposed surprise examination requirement may reach too far. Without doubt, investors need to be secure that their investments are protected. That said, it is possible to regulate past the point of prudence. It is always possible to take another regulatory step to protect against fraud and other abuses, but is the cost of the additional regulation warranted? Given the rest of the relevant regulatory regime and the steps advisers already take to secure investor assets, the marginal benefit of a surprise examination may not outweigh the attendant cost. Not every incremental benefit of additional regulation is justified; there are diminishing returns.


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