40 Act Blog

OCIE Undertakes Initiative to Examine Registered Investment Advisers that Employ Individuals with a History of Disciplinary Events

In a recent risk alert, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) stated that it intends to examine compliance oversight and controls of registered investment advisers that employ individuals with disciplinary histories in the financial services sector. A recent study found that such individuals pose an increased risk of future misconduct that may harm clients. Thus, advisers may want to consider heightened supervision of such individuals.

OCIE’s examinations will focus on the effectiveness of the adviser’s compliance programs, supervisory oversight practices, particularly of those persons that may pose increased risks to clients, and disclosures to clients and prospective clients relating to the potential risk associated with financial arrangements initiated by individuals with a disciplinary history.

SEC Issues No-Action Relief in Connection with the Purchase of an Investment Adviser

In a recent no-action letter, the staff of the Division of Investment Management of the Securities and Exchange Commission (the “Staff”) indicated that it would not recommend enforcement under Section 12(d)(3) of the Investment Company Act of 1940 (the “1940 Act”) against the AFL-CIO Housing Investment Trust (“HIT”), an open-end management investment company registered under the 1940 Act, if HIT organizes and acquires securities issued by a wholly owned and controlled subsidiary, organized as a limited liability company, that will operate as an investment adviser (the “Adviser Sub”), and will be registered under the Investment Advisers Act of 1940 (the “Advisers Act”).

SEC Adopts Rule Amendments to Enhance Information Reported by Investment Advisers

On August 25, 2016, the Securities and Exchange Commission (the “SEC”) adopted amendments to Form ADV and the Books and Records Rule to enhance investment adviser information reporting and disclosure. The amendments are designed to improve the depth and quality of information that the SEC collects on investment advisers, facilitating its risk monitoring initiatives and assist the staff in its risk-based examination program. The amendments also are intended to provide advisory clients and the public with additional information regarding registered investment advisers. The Final Rule will apply to filings and communications made on or after October 1, 2017.

Investment Adviser Settles Charges of Failing to Disclose Key Terms in Application for Exemptive Relief

The Securities and Exchange Commission ("SEC") recently announced its settlement of charges against a registered investment adviser (the "Adviser") for failing to disclose a material side letter agreement in an application for exemptive relief. The exemptive application, jointly submitted by the Adviser and the registered investment company (the "Trust") that engaged the Adviser on behalf of two of the Trust's portfolios (the "Funds"), sought relief from the 1940 Act requirement to obtain shareholder approval to enter into and materially amend advisory agreements. The SEC determined that the Adviser violated Section 34(b) of the Investment Company Act of 1940, as amended (the "1940 Act") by, among other things, not disclosing to the SEC staff in connection with its review of the exemptive application a side letter between the Adviser and a subadviser (the "Subadviser") relating to the ability of the Adviser to terminate the Subadviser.

FINRA Seeks Comment on Proposed Amendments to Its Gifts, Gratuities and Non-Cash Compensation Rules

FINRA has issued Regulatory Notice 16-29 (the “Notice”) seeking comment on proposed amendments to FINRA Rule 3220 (Influencing or Rewarding Employees of Others), as well as the adoption of proposed FINRA Rule 3221 (Restrictions on Non-Cash Compensation) and FINRA Rule 3222 (Business Entertainment). Comments are due by September 23, 2016.

The proposed rule amendments are the result of FINRA’s retrospective review, completed in 2014, of its existing rules to assess their effectiveness and efficiency. The Notice states that FINRA’s published report on its review concluded that the rules “could benefit from some updating to better align the investor protection benefits and the economic impacts.”

FINRA Proposes Rule Changes Affecting Filing Requirements for Investment Company Advertisements and Sales Literature

FINRA has filed proposed rule changes to FINRA Rule 2210 and FINRA Rule 2214 governing member communications with the public, with the SEC.  The proposed rule changes are intended to enhance the efficiency of the rules without a reduction in investor protection.

SEC Proposes Rule Requiring Investment Advisers to have Business Continuity and Transition Plans

On June 28, 2016, the SEC released a rule proposal that would require registered investment advisers to adopt and implement written business continuity and transition plans detailing the adviser’s policies and procedures in case of significant disruptions to, or discontinuation of, the adviser’s operations, with the purpose of minimizing client and investor harm.

SEC Issues Updated Guidance on Business Continuity Planning for Registered Investment Companies

In a guidance update issued on June 28, 2016, the staff of the Division of Investment Management (the “Division”) of the Securities and Exchange Commission outlined certain issues that fund complexes should consider when formulating business continuity plans (“BCPs”) as they relate to critical service providers.

The Division stressed that Fund complexes increasingly rely on affiliates and third parties to perform critical functions, and thus need to understand the business continuity and disaster recovery protocols of such service providers. Additionally, fund complexes should determine how their own BCPs address the risk that a critical service provider could suffer a significant business disruption.

SEC Chair White Urges Fund Boards to be Proactive Risk Monitors

In a keynote address at the Mutual Fund Directors Forum 2016 Policy Conference, Chair White discussed the evolution of the asset management industry, and noted that the role of mutual fund directors is evolving and should continue to evolve with the industry. Just as the SEC is recalibrating its regulatory program, Chair White said, fund directors also must adjust to growing responsibilities to ensure that funds are “fully addressing current and potential future risks.”

SEC Chair Testifies before Congress on Upcoming Asset Management Rules

Testifying before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Committee”) on June 14, 2016, Securities and Exchange Commission (“SEC”) Chair Mary Jo White spoke to the “Oversight of the [SEC]” and the current work and initiatives underway at the agency, providing insight into the timing of major regulatory initiatives affecting the investment management industry.