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Author: Todd Cipperman

SEC Offers Relief for Private Equity Holding Companies


The SEC’s Division of Investment Management has provided guidance allowing holding companies to avoid Investment Company Act registration.  Under current rule 3a-2, a bona fide holding company could be subject to registration because certain corporate events (e.g. holding cash pending a new deal, acquisition, or tender offer) would exceed permitted passive investment thresholds for more than 12-months.  The staff advises that such holding companies could begin the 12-month clock ticking upon the occurrence of the extraordinary event so long as there is a “bona fide intent to be engaged primarily in a non-investment company business, regardless of whether they operate directly or through a holding company structure.”  The SEC maintains that this relief furthers its mission of facilitating capital formation.

OUR TAKE: This is good news for private equity firms who could otherwise get caught up in the Investment Company Act’s technicalities.  Neither Congress nor the SEC likely intended such firms to register for a temporary period.


Top 5 Regulatory Alerts – February 2017

Here are our Top 5 Regulatory Alerts for February 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).


Top 5 Regulatory Alerts – February 2017



Most Read – February 2017


FINRA Proposes 7-Year Hiatus Period Before Requiring a Re-Taking of Exams

FINRA has filed a proposal that would allow individuals to return to a broker-dealer without re-taking their exams for up to 7 years so long as they fulfill continuing education requirements.  The proposal seeks to correct the current rule whereby a licensed representative loses his/her license after 2 years even though s/he merely transferred to a financial services affiliate.  The proposal also allows a person associated with a firm to obtain any qualification and registration permitted by the firm so as to allow such person to “demonstrate proficiency for new roles” and “help firms better manage unanticipated needs.”  FINRA will also create a new Securities Industries Essentials exam for those interested in joining the securities industry but may not yet be associated with a registered firm.  Those passing the SIE will then take a second specific proficiency exam upon joining a firm.

OUR TAKE: FINRA offers a long overdue revamping of the outdated examination rules.  The 2-year rule really makes little sense in the modern world populated by financial services firms that are not necessarily organized by regulatory designation.  Also, the contemplated SIE is a brilliant idea to get new blood in the industry and rid the current exams of duplicative questions.


The Friday List: 10 Most Significant Form ADV Changes

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Last August, the SEC again re-vamped Form ADV to add significantly more disclosure.  Firms with a 12/31 fiscal year have until next year to implement the changes.  However, many firms have begun the process as they prepare this year’s annual update.  To assist your planning, here are the 10 most significant Form ADV changes:


10 Most Significant Form ADV Changes


  1. Separately Managed Accounts.  The new Form ADV requires significant reporting on separately managed account assets including reporting by asset type and related derivative transactions.
  2. Umbrella Registration.  The new filing rules allow affiliated advisers to use a single ADV, but the registrant must complete a detailed schedule for each relying adviser
  3. Social Media.  Every registrant must include websites and social media addresses.
  4. Offices.  An adviser with multiple offices must list its largest 25 offices (used to be 5).
  5. Outside CCO.  If a firm retains a Chief Compliance Officer paid by a third party, the new Form requires the registrant to name the CCO and his/her employer.
  6. Assets Under Management.  The new Form ADV requires more detailed reporting of regulatory assets under management by client type.
  7. Wrap Programs.  Registrants must include more detailed information about the wrap programs in which they participate.
  8. Referral Payments.  The new rules require more disclosure about compensation paid, or received for, referrals including amounts paid by, or to, employees.
  9. Bad Actors.  The bad actor disclosure (DRP) requires information about all relying advisers.
  10. Auditors.  New Form ADV requires information about the auditors to private funds.


Multi-National Advisers Should Send Email Notice to SEC

The staff of the SEC’s Division of Investment Management has issued guidance on how multi-national firms can ensure compliance with the Advisers Act without subjecting all non-U.S. operations to U.S. regulation.  For many years, firms have relied on the Unibanco doctrine, whereby a non-U.S. affiliate can share resources with a registered investment adviser so long as the firm complies with several conditions including subjecting books and records to SEC review and appointing an agent for service of process.  In this guidance, the SEC recommends that firms email the SEC with the Unibanco undertakings.

OUR TAKE: This is an unusual process.  Ordinarily, a firm seeking to rely on no-action relief would assert (and demonstrate) compliance if questioned by regulators.  Apparently, in the Unibanco context, the SEC staff wants registrants to proactively make this informal email filing in order to rely.  It is unclear whether firms would not be able to rely if they decline or fail to email the undertakings to the SEC.


Financial Adviser Barred for Using Personal Emails/Texts

A financial adviser was barred from the industry for using personal email and text messages as part of an unlawful scheme to solicit client investments.  The SEC alleges that the financial adviser failed to submit personal communications that concerned brokerage business to his broker-dealers as required by the firms’ policies and procedures.  The SEC has charged the respondent with aiding and abetting the broker-dealers’ violations of their obligations to retain emails and other client communications.   The SEC maintains that the adviser sold securities to clients without conducting adequate due diligence or providing sufficient disclosure about the offering or his conflicts of interest.

OUR TAKE: This case is a good example of the SEC properly asserting individual accountability rather than only punishing their organizations.  Every employee at a regulated entity should have a regulatory responsibility to assist with securities laws compliance, and the regulators should prosecute individuals who intentionally evade internal policies to further wrongdoing.


Wrap Sponsor Fined for Failing to Monitor Trading Away Practices

The SEC fined and censured a wrap fee sponsor for failing to provide sufficient trading away information to financial advisers and their clients.  The wrap program’s third-party sub-advisers had full discretion to direct trades to any broker, but a program client would only be charged additional fees and commissions if a sub-adviser chose a broker other than the respondent’s affiliate.  According to the SEC, the sponsor discovered that many of the sub-advisers placed a majority of trades with third-party brokers.  The SEC faults the program sponsor for failing “to inform its clients when they have incurred these additional trading away costs or provide its clients with the amount of the additional trading away costs.”  As a result neither the clients nor their financial advisers could assess suitability or best execution.  The SEC found that the wrap sponsor violated the compliance rule (206(4)-7) for failing to implement reasonable policies and procedures to monitor brokerage practices and costs.

OUR TAKE: The SEC will scrutinize wrap programs and other sub-advisory relationships to ensure proper supervision and full transparency to clients.  It is noteworthy that the SEC is concerned that the clients didn’t have sufficient information to make an assessment about execution quality and suitability, but the SEC did the not allege the clients failed to receive best execution.


Best of the Web – February 2017

“Simplicity does not precede complexity, but follows it.” (Alan Perlis)


Welcome to the February 2017 BOTW.  Morgan Lewis offers a comprehensive review (107 pages) of last year’s SEC and FINRA activity.  ACA tries to explain GIPS.  Dechert addresses regulation of political contributions.  And SEC3 tackles CCO personal liability.  Also, kudos to Thompson Hine for using a podcast to deliver regulatory information.


2016 Year in Review: Select SEC and FINRA Developments and Enforcement Cases (Morgan Lewis)

Complying with the rules and requirements of both the SEC and GIPS standards: Navigating key similarities and differences (ACA)

Continued Regulatory Focus on US Political Contributions (Dechert)

How Compliance Officers & Firms Can Help Limit CCO Personal Liability (SEC3)

Market Matters: Regulatory Outlook Under the Trump Administration (podcast) (Thompson Hine)

Certain Upcoming 2017 SEC Regulatory Deadlines for Investment Advisers (Cordium)

NYDFS announces final cybersecurity rules for financial services sector: key takeaways (DLA Piper)

FASB Updates for the Investment Industry (Cohen & Co.)

The Trump Administration Agenda: Potential Impact on the Asset Management Industry (K&L Gates)

Large Adviser Penalized $3 Million over Revenue Sharing

A large investment adviser agreed to pay over $3 Million in disgorgement, fines and interest for failing to disclose mutual fund revenue sharing received from its clearing broker.  The SEC alleges that, during the last 10 years, the clearing broker paid the adviser a portion of trailer fees received from mutual funds to which the adviser directed client assets.  The SEC also described an arrangement whereby the clearing broker paid the adviser for certain shareholder services.  The SEC faults the adviser for failing to disclose in either the ADV or its client agreements that it received payments and that such payments created a conflict of interest.  The adviser and clearing broker have since altered their agreement so that the revenue sharing is calculated based on total assets rather than the funds in which the adviser invests client assets.

OUR TAKE: The SEC does not allege that this conflict actually harmed any client, or that the revenue sharing had any empirical effect on the adviser’s investment decisions.  Also, the SEC seems to be ok with revenue sharing that does not present a potential conflict of interest i.e. based on total assets.  It is also less than clear whether disclosure would have actually cured the SEC’s conflict of interest concerns.


SEC Allows Cross-Border Fund-of-Funds Structure

The staff of the Division of Investment Management has granted conditional no-action relief that allows a foreign feeder fund to invest in an affiliated U.S. registered master fund.  The arrangement is intended to allow broader global distribution of U.S. investment products.  Without no-action relief, such a structure would be prohibited by Section 12(d) of the Investment Company Act, which significantly limits fund-of-funds schemes.  The no-action relief allows the foreign feeder fund to engage in limited currency and index hedging.  Conditions include the following: (a) the foreign feeder manager will make its books and records available for SEC examination; (b) the foreign feeder fund must be organized in a jurisdiction that has entered into an SEC cooperation agreement; (c) the feeder fund cannot sell securities to U.S. investors; and (d) the hedging activities will only be permitted for currency and index hedging related to the master fund’s index strategy.

OUR TAKE: This no-action letter offers significant structuring flexibility for global distribution of U.S. based mutual funds.  It also provides a good primer on the limits of cross-border fund-of-funds structures under the Investment Company Act.