Posts Tagged ‘Investment Advisers Act’

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

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday November 17, 2013 at 9:11 am
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Editor’s Note: 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.

…continue reading: SEC Sanctions Adviser, Broker-Dealer and Their Owner Over ETF Trades

Regulation of the Investment Advisers

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on Saturday November 10, 2012 at 9:52 am
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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.

…continue reading: Regulation of the Investment Advisers

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

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Tuesday February 1, 2011 at 9:36 am
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Editor’s Note: 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.

…continue reading: SEC Study on the Fiduciary Duty of Investment Advisers and Broker-Dealers

Remarks Regarding Investment Companies

Posted by Troy A. Paredes, Commissioner, U.S. Securities and Exchange Commission, on Tuesday October 6, 2009 at 9:01 am
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(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.

…continue reading: Remarks Regarding Investment Companies

SEC Proposes Rule to Prohibit Pay-to-Play Practices

Posted by Charles M. Nathan, Latham & Watkins LLP, on Saturday September 26, 2009 at 11:51 am
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(Editor’s Note: This post is based on a client memorandum by Kathleen Walsh, Andrea Schwartzman and Matthew Chase of Latham & Watkins LLP.)

On August 3, 2009, the US Securities and Exchange Commission (the SEC) released a proposed rule under the Investment Advisers Act of 1940 (the Advisers Act) aimed at preventing “pay to play” practices by investment advisers that seek investment advisory business — including investment commitments in private equity funds — from state and local government entities.  As described in the proposing release, pay to play practices “may take a variety of forms, including an adviser’s direct contributions to government officials, an adviser’s solicitation of third parties to make contributions or payments to government officials or political parties in the State or locality where the adviser seeks to provide services, or an adviser’s payments to third parties to solicit (or as a condition for obtaining) government business.”  Referencing a number of enforcement proceedings in the area, the proposing release further states that “it has become increasingly clear that pay to play is a significant problem in the management of public funds by investment advisers.”

Proposed Rule

In response, the proposed rule would prohibit an investment adviser, as well as its “covered associates” from:

(1) providing or agreeing to provide payments (broadly defined) to a third party to solicit a government entity for investment advisory business on behalf of such investment adviser;

(2) receiving compensation from government entities within two years of making a contribution to an official of the government entity; and

(3) soliciting third parties to make a political contribution to an official of a government entity to which the investment adviser is providing or seeking to provide investment advisory services. The proposed rule would also require an investment adviser to maintain detailed records relating to its covered associates and their political contributions.

…continue reading: SEC Proposes Rule to Prohibit Pay-to-Play Practices

Administration Proposes Regulations for Private Fund Investment Advisers

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on Thursday July 23, 2009 at 10:04 am
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Editor’s Note: This post is by John F. Olson’s colleague Susan Grafton.

On July 15, 2009, the Obama administration (the “Administration”) delivered to Congress draft legislation, the Private Fund Investment Advisers Registration Act of 2009. Under the proposed legislation, managers of most hedge funds, private equity funds and venture capital funds in the U.S. would be required to register with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940 (the “Advisers Act”). The existing exemption for investment advisers with fewer than 15 clients would be eliminated, and specific information reporting would be required for advisers to any “private fund.” A limited exemption will continue to apply to certain “foreign private advisers.” The existing threshold of $30 million of assets under management for mandatory SEC registration would continue to apply.

Andrew Donohue, the SEC’s Director of Investment Management, discussed these and other potential regulatory reforms in his testimony on July 15, 2009, before the Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs concerning the regulation of hedge funds and other private investment pools.

Applicability to Advisers to Private Funds

The new reporting requirements will generally apply to investment advisers to any “private fund,” which would be any investment fund that is relying on Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 for exemption from registration, and that is either organized in or created under the laws of the U.S. or has 10 percent or more of its outstanding securities owned by U.S. persons.

Additional Reporting to the SEC

In addition to the existing regulatory obligations of registered investment advisers to private funds, the draft legislation would require all registered investment advisers to private funds (including newly registered advisers) to submit reports to the SEC as are necessary or appropriate in the public interest and for the assessment of systemic risk by the Federal Reserve Board (the “Federal Reserve”) and the proposed Financial Services Oversight Council (the “FSO Council”).

The reports would include at least the following information for each private fund:

1. Amount of assets under management;
2. Use of leverage, including off-balance sheet leverage;
3. Counterparty credit risk exposures;
4. Trading and investment positions;
5. Trading practices; and
6. Such other information as the SEC and the Federal Reserve determines are necessary or appropriate.

These records and reports would be deemed records and reports of the investment adviser, which would be required to maintain and keep them in accordance with retention requirements prescribed by the SEC. The SEC would be required to make the new systemic risk data and reports available to the Federal Reserve and the FSO Council. In addition, because the private fund’s records would be deemed records of the investment adviser, they would be subject to periodic examination by the SEC and its staff.

Although the draft legislation provides that the SEC would not be required to disclose the reports or their content, the SEC would not be permitted to withhold information from Congress or any federal agency or self-regulatory authority. Accordingly, confidentiality would not be completely safeguarded.

…continue reading: Administration Proposes Regulations for Private Fund Investment Advisers

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