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The Friday List: 10 Things We Learned During the Fall 2019 Investment Management Conferences

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

  1. Proxy Voting. Nobody is exactly sure how to supervise proxy voting firms.
  2. Cybersecurity. The authorities are warning about targeted cybersecurity attacks, not just generalized cyber threats.
  3. RIA Advertising. Everybody likes the new RIA advertising rule, but many are concerned about heightened enforcement.
  4. Expense Transparency. The Investment Management Division is focused on fee and expense transparency especially as advertised fund expenses approach zero.
  5. Portfolio Management. OCIE will investigate whether portfolio management practices deviate from disclosures made to clients and investors.
  6. 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.
  7. Form CRS. Everybody is trying to make Form CRS as marketing-friendly as possible while including all required information.
  8. AML. There is over-reliance on clearing firms to perform anti-money laundering surveillance.
  9. Technology. Technology firms are selling a variety of solutions to automate advisers’ back and middle offices.
  10. ETFs. Industry players expect a proliferation of active ETF products in the wake of the proposed rule.

SEC Finds Pervasive Regulatory Failures by Registered Funds and Boards


The SEC’s Office of Compliance Inspections and Examinations (OCIE) has warned the registered fund industry about rampant regulatory violations involving compliance programs, disclosure, advisory contract approvals, and Codes of Ethics.  In a recent Risk Alert detailing common deficiencies and weaknesses uncovered during 300 examinations over the last two years, OCIE chided the industry for weak compliance programs including policies and procedures that failed to prevent violations of investment guidelines or to ensure fulsome disclosure in fund marketing materials; breakdowns in providing the Board with adequate fair valuation information and broker quotes; weak service provider and subadviser oversight; and inadequate annual reviews.  OCIE also criticized the information used to approve advisory contracts as well as shareholder disclosure in offering documents.  OCIE also warned that funds need to enhance their Codes of Ethics including reporting and how to define “access persons.”

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. 

Exempt Reporting Adviser Barred and Fined Over $1.1 Million

The principal of an exempt reporting adviser was barred from the industry and agreed to pay over $1.1 Million in disgorgement and penalties for conflicted transactions and misrepresentations.  The SEC charges that the respondent caused a fund he managed to purchase a portfolio company from an affiliated fund in violation of the purchasing fund’s debt and concentration limits.  The SEC asserts that the respondent intentionally misled investors by undervaluing the portfolio company in financial statements and disclosure documents.  The SEC also claims that the respondent misled investors about underlying investments and charging undisclosed monitoring fees.  The SEC also fined the firm’s CFO/CCO.  The SEC cites violations of the anti-fraud rules under the Advisers Act (206(4)-8), the Securities Act (17(a)(1) and 17(a)(3)), and the Exchange Act (10b-5).

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.

Private Fund Manager Completely Shirked His Compliance Obligations


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 Blass Announces Plans to Modernize Adviser Marketing Rules

The 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. 

Federal Court Rules that the SEC Must Prove that Digital Tokens are Securities

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. 

SEC Fines Two Initial Coin Offerings

The SEC ordered two initial coin offerings to offer investors rescission and pay a $250,000 fine for failing to register the offerings under the securities laws. These cases represent the first time that the SEC has imposed civil penalties solely for ICO securities offering registration violations.  One of the respondents raised $15 million by selling digital tokens intended to create a new digital coin ecosystem related to advertising and mobile phones.  The other respondent raised $12 Million to create a blockchain technology for the emerging cannabis industry.    The SEC maintains that the digital tokens are “securities” under the Howey test and, therefore, the offerings violated the registration requirements of the 1933 and 1934 Acts.  Both respondents undertook to register the offerings.

Given the SEC’s concerns about disclosure and compliance for ICOs, it will be interesting to see the extent of disclosure required in the promised registration statements. 

SEC Halts Trading in Company Touting Crypto Offering

 The SEC suspended trading of a public company that issued press releases claiming SEC approval of its cryptocurrency products.  The company’s press releases advertised that it had partnered with an SEC qualified custodian for cryptocurrency transactions and that it was conducting an SEC-registered token offering.  The SEC’s Cyber Unit Chief warned that the SEC “does not endorse or qualify custodians for cryptocurrency.”

Back in January, the SEC raised several regulatory questions around ICO offerings and notified the industry that it would not approve crypto-offerings until the issues were adequately addressed.  Any efforts to suggest otherwise will draw the attention of the Enforcement Division’s Crypto Unit.

CCS’s Scavetti Reports on IAA Compliance Conference  

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.

IAA Compliance Conference Report 2018

Top 5 Regulatory Alerts – February-March 2018


Here are our Top 5 Regulatory Alerts for February-March 2018, ranked by significance.  We have also included the Top 5 most read Alerts.


Top 5 Regulatory Alerts – February-March 2018



Most Read – February-March 2018