RIA Compliance Blog
On January 30, 2014, the Securities and Exchange Commission hosted a compliance outreach program for investment companies and investment advisors. The national seminar, which was jointly sponsored by the Office of Compliance Inspections and Examinations and the Asset Management Unit of the Division of Enforcement, was held at the SEC headquarters in Washington, D.C.
The seminar outlined the priorities of SEC Divisions or Programs as well as general regulatory priorities of the SEC in the coming years. These priorities included the Wrap-Fee Programs, General Solicitation under the JOBS Act, Cybersecurity, and IABD Harmonization. One program of note that will be taking on more importance over the next two years is the Examination Initiative. The National Examination Program intends to review a substantial percentage of registrants that have not had an examination in the last three years. These examinations will take the shape of either a Risk Assessment Exam or a Presence Exam.
Key takeaways from the seminar:
1. Compliance Concerns for the Private Fund Advisors
Private Equity Funds
The focus of the panel was on disclosure. They pointed to several areas where a lack of disclosure to limited partners could create compliance risks, which included the disclosure of fee shifting practices, the fund’s policies and practices, and co-investment conflicts that may exist between the fund and third parties or the fund and other investors. The SEC also emphasized the role of the CCO in understanding the business of the fund. The SEC will analyze the level of the CCO’s integration into business operations.
Hedge Funds
Compliance issues and risks can be minimized by putting procedures in place to limit trading conflicts with management and also among clients in the fund. Material non-public information is also an area that can create risks for hedge fund managers, but the SEC will look favorably on funds that have procedures in practices in place to safeguard such information once acquired. Lastly, the panel stressed the importance of avoiding misleading marketing techniques, such as overstating mid-stream or partial valuations.
2. Compliance Concerns for Registered Investment Companies
Distribution in Guise
Investment companies need a clear way to distinguish between fees paid to its intermediaries for distribution and non-distribution purposes, to avoid compliance risks. The seminar emphasized preemptive allocation of fees in the negotiation process to avoid the cloudiness of post-transaction allocations.
15(c) Procedure
Companies with poorly outlined or poorly executed 15(c) procedures are often open to major compliance risks. To combat this, the SEC emphasizes the importance of making such procedures robust. However, the SEC recognizes the large volume of information that may come before the board under a robust system. Therefore, it is acceptable to have summaries of the information concerning such contracts prepared and presented to the board in this process. The caveat is that while such summary presentations are acceptable, boilerplate discussions void of specific and relevant facts are not.
Alternative Mutual Funds
The advent of mutual funds following alternative investment strategies employed by private funds has raised compliance concerns. These concerns center on the unfamiliarity and inexperience that private fund managers overseeing these mutual funds have in the mutual fund regulatory environment and the strategies that accompany it. Investment companies employing these instruments need to show a corresponding increase in CCO and board understanding of these strategies as they are employed.
Exchange Traded Products
The SEC emphasized that investment companies engaged in Exchange-Traded Fund exchanges need to follow the conduct rules of that exchange and the terms of the applicable exemptive orders they have received.
3. Valuation Issues
Methodologies
While specific guidance on valuation methods and styles is not forthcoming from the SEC, examiners will look at two components when determining regulatory compliance–fairness in price and consistency of the methodology’s application.
Given the increased emphasis on compliance employed by the SEC, it is important to have attorneys that can assist you with this complex area. Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.