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.
As we approach the end of the year, we can reflect on what we learned at the panoply of investment management conferences we attended since June. CCS professionals attended most of the major industry conferences and compared notes. As we talked, we concluded that some of the same themes arose from the conferences’ agendas and speakers. We thought our clients and friends might benefit from our meta-observations.
10 Things We Learned During the Fall 2019 Investment Management Conferences
Proxy Voting. Nobody is exactly sure how to supervise proxy voting firms.
Cybersecurity. The authorities are warning about targeted cybersecurity attacks, not just generalized cyber threats.
RIA Advertising. Everybody likes the new RIA advertising rule, but many are concerned about heightened enforcement.
Expense Transparency. The Investment Management Division is focused on fee and expense transparency especially as advertised fund expenses approach zero.
Portfolio Management. OCIE will investigate whether portfolio management practices deviate from disclosures made to clients and investors.
Custody. Private fund firms still do not comply with the custody rule either because they fail to delivery financials on time or because they fail to engage a PCAOB firm.
Form CRS. Everybody is trying to make Form CRS as marketing-friendly as possible while including all required information.
AML. There is over-reliance on clearing firms to perform anti-money laundering surveillance.
Technology. Technology firms are selling a variety of solutions to automate advisers’ back and middle offices.
ETFs. Industry players expect a proliferation of active ETF products in the wake of the proposed rule.
Hire better service providers. Not every lawyer knows the Investment Company Act Board approval, disclosure, and reporting rules. Not every compliance person understands Rule 38a-1 and how to implement fund procedures and testing. Not all administrator/distributors understand the differences between private funds and registered funds. You wouldn’t hire a neurologist to perform surgery. You shouldn’t hire just any lawyer or compliance consultant to implement your registered fund regulatory program.
An exempt reporting adviser is still subject to several provisions of the Advisers Act, including its fiduciary and anti-fraud rules. We recommend that ERAs implement a legitimate compliance program to avoid a firm-ending regulatory action like this one.
The SEC fined a now-defunct fund manager for ignoring its compliance obligations. The SEC charges that the firm never delivered audited fund financials within 120 days as required by the custody rule (206(4)-2). Although the firm did hire an auditor, the firm never received an opinion that the financials were prepared in accordance with GAAP. Instead, the audit firm issued reports stating that it was unable to express such an opinion. In addition, the SEC charges the firm with violating the compliance rule (206(4)-7) because the principal, who also served as the Chief Compliance Officer, failed to adopt and implement policies and procedures and disregarded his obligation to conduct annual compliance reviews.
When you register as an investment adviser, you subject yourself to the full panoply of substantive regulation imposed by the Investment Advisers Act. To comply and continue as a going concern, you need to hire a competent Chief Compliance Officer to help you meet the regulatory requirements. Otherwise, you may end up either in your next career or in jail.
SEC’s Investment Management Division Director, Dalia Blass, anticipates that
the Division will soon recommend changes to the adviser marketing and solicitation
rules. In her annual speech to the Investment
Company Institute membership, Ms. Blass also announced initiatives for a
summary shareholder report, updates to the valuation guidance, modernization of
the offering rules for business development companies and closed-end funds, and
changes to the rules for funds’ use of derivatives. Additionally, Ms. Blass wants the Division to
finalize the proposed ETF and fund-of-funds rules. She has also asked the staff to begin an
outreach to small and mid-sized fund sponsors about regulatory barriers. She announced that the Division is
considering the formation of an asset management advisory committee to solicit diverse
viewpoints on critical issues.
We applaud the reinvigorated Investment Management Division for tackling some of the thornier problems that have faced the industry for many years. For instance, the marketing rules haven’t changed for decades despite revolutionary change in the financial services industry.
A federal judge has ruled that an initial coin offering may not constitute an offering of securities. In rejecting the SEC’s request for a preliminary injunction against an ICO, Judge Gonzalo Curiel of the Southern District of California, opined that the SEC failed to present sufficient facts to satisfy the Howey test requiring an investment of money in a common enterprise with an expectation of profit produced by the efforts of others. Faced with conflicting interpretations of how the ICO operated, the Court denied the preliminary injunction because of genuine disputes about material facts.
The significance of this decision is that a court is requiring the SEC to factually prove the three prongs of the Howey test rather than simply accept the SEC’s position that digital tokens are securities. If the SEC fails to prove its case and digital tokens are not securities, the SEC will not have the legal authority to regulate ICOs.
Joe Scavetti of Cipperman Compliance Services recently attended the Investment Adviser Association Compliance Conference in Washington. The conference brings together senior regulatory officials and compliance professionals to address cutting-edge regulatory issues. Linked below is a more detailed summary of the meeting prepared by Joe, who would be happy to discuss with you in more detail. SEC Commissioner Hester Peirce, the conference headliner, spoke at length about the SEC’s regulatory agenda including the prospect of an SEC conduct rule. SEC officials Peter Driscoll, Director of OCIE, and Stephanie Avakian, Co-Director of Division of Enforcement, also participated, offering their views on examination and enforcement priorities. Over the course of 2 days, several panels addressed issues such as mutual funds, cybersecurity, vendor management, advertising, Form ADV, custody, and SEC exams.