Investment Adviser Regulation in a Nutshell
Authors:
Haas, Jeffrey J. / Howard, Steven R.
Edition:
1st
Copyright Date:
2008
27 chapters
have results for Investment Advisor Regulation in a Nutshell
Chapter I. Introduction 17 results (showing 5 best matches)
- In 2006, several provisions of the Advisers Act were amended while others were added. Section 202(a)(2), which sets forth the definition of a “bank” for purposes of the Act, was amended to include savings associations. As a result, most savings associations are now excluded from the definition of “investment adviser.” See Advisers Act Section 202(a)(11)(A) and Nutshell Section 3B(1). Section 202(a)(11) itself was amended to exclude most nationally recognized statistical rating agencies (“NRSROs”) from the definition of “investment adviser.” See Advisers Act Section 202(a)(11)(F) and Nutshell Section 3B(6). Sections 203(e)(2)(B) and (e)(4) were amended to make clear that misconduct by an investment adviser in its capacity as a credit rating agency could lead to the suspension or even revocation of the adviser’s registration as an investment adviser. Section 202(a)(28) was added to provide a definition of “credit rating agency.” Finally, Section 210A was added to require consultation...
- Congress’ weariness with New Deal legislation discouraged it from creating a sweeping investment adviser statute. Thus, the Advisers Act was originally modest in scope, containing only 21 sections (it now has 26). In large part, it was originally designed only to facilitate a census of the investment adviser industry.
- The 1999 Amendments resulted from the passage of the Gramm–Leach–Bliley Financial Modernization Act of 1999 (“GLBA”). The most significant change to the Advisers Act was a revision made to the definition of “investment adviser” found in Advisers Act Section 202(a)(11). Prior to the 1999 Amendments, banks and bank holding companies were entirely exempted from regulation under the Advisers Act. This directly reflected the Glass–Steagall Banking Act of 1933’s (“GSA”) limitation on banks’ ability to engage in securities activities, such as advising and distributing mutual funds. The GLBA, however, repealed the GSA; therefore, the 1999 Amendments were designed to fill a perceived regulatory gap. Pursuant to those Amendments, as of May 12, 2001, banks and bank holding companies providing investment advisory services to mutual funds and other registered investment companies would be subject to SEC jurisdiction and the requirements of the Advisers Act. See Advisers Act 202(a)(11)(B) and
- Most of the 1970 Amendments, by contrast, were geared towards the Company Act as opposed to the Advisers Act. The 1970 Amendments, which were in large part a political compromise, left it to independent directors, rather than the courts, to decide in the first instance whether an investment adviser’s fee charged to an investment company was reasonable in light of the costs incurred and services rendered by the adviser. These Amendments also provided that at least 40% of the directors or trustees of an investment company must not be “interested persons” of that investment company, a standard viewed as more stringent than the former “unaffiliated” standard required under the Company Act.
- The Advisers Act, by contrast, centers around the delicate fiduciary nature of the investment advisory relationship. Its primary purpose is to provide the investing public with disclosure about persons who are paid for advice concerning the desirability of investing in securities. Like all other Federal securities acts, the Advisers Act rejects the notion of caveat emptor and instead embraces a philosophy of full disclosure in order to help achieve a high standard of business ethics in the securities industry. Moreover, the Advisers Act is designed to prevent investment advisers from engaging in fraudulent practices that could potentially injure the investing public. In particular, the Advisers Act eliminates, or at least exposes, all conflicts of interest which might preclude an investment adviser from rendering disinterested investment advice to its clients.
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Chapter III. Federal and State Authority Over Investment Advisers 67 results (showing 5 best matches)
- Advisers Act Section 203A(b)(1)(A) prohibits the various states from applying their laws requiring the registration, license or qualification of an investment adviser to a SEC-registered investment adviser. Nevertheless, a state may still require a SEC-registered adviser to file with it any documents filed with the SEC solely for notice purposes. See Nutshell Section 16. Moreover, a state may continue to register, license and qualify certain of a SEC-registered adviser’s “supervised persons” (as defined in Advisers Act Section 202(a)(25)) if they also qualify as “investment adviser representatives” and have a place of business in that state. See Nutshell Section 5B(2)a.
- Assuming state registration is required or permitted, in which state(s) must an investment adviser register? In general, whenever a person meets the statutory definition of “investment adviser” of a given state and transacts business in that state, he or it must register with that state. Fortunately, most (but not all) states’ investment adviser statutes and regulations have been drafted to closely reflect provisions of the Advisers Act, including the definition of “investment adviser” set forth in Advisers Act Section 202(a)(11). Moreover, under Advisers Act Section 222(d) (the “National De Minimus Standard”), a state may not require an investment adviser to register with it unless the adviser has a place of business located within that state and, during the preceding 12–month period, has had at least six clients who are residents of that state.
- Form ADV requires an investment adviser to specify the amount of assets it has under management. A state-registered investment adviser must apply for registration with the SEC within 90 days of the date on which it files its annual updating amendment to its Form ADV with the state(s) reporting that its assets under management have increased to at least $30 million. See Advisers Act Rule 203A–1(b)(1). An adviser whose assets under management have increased to $25 million or more but not $30 million may, but is not required to, register with the SEC (assuming the adviser is not otherwise required to register with the SEC). Once registered with the SEC, the adviser will be subject to SEC regulations regardless of whether it also remains registered with one or more states. See General Instruction 11 to Form ADV and Nutshell Section 5B(1)b.
- In addition, all investment advisers remain subject to state general antifraud authority. Indeed, Advisers Act Section 203A(b)(2) explicitly provides state securities commissions (or equivalent entities) with the authority to investigate and bring enforcement actions with respect to fraud or deceit against an investment adviser or any person associated with an investment adviser. Associated persons include partners, officers and directors of an investment adviser, as well as any person directly or indirectly controlling or controlled by an investment adviser. See Advisers Act Section 202(a)(17).
- Importantly, a state may also license, register or otherwise qualify any “
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Chapter VIII. Performance of Duties 190 results (showing 5 best matches)
- An investment adviser has a duty to disclose all material facts relating to the offer of its services to a prospective client as well as conflicts of interest. Two particular areas of concern in this context are investment adviser advertising and the use of solicitors to refer clients to advisers. Advisers Act Rule 206(4)–1 addresses investment adviser advertising (see Nutshell Chapter VI), while Rule 206(4)–3 addresses cash payments for client solicitations (see Nutshell Section 22B).
- Second, some brokerage arrangements (referred to as “soft dollar arrangements”) call for a broker to provide the adviser with products or services (other than securities execution) in return for directing client securities transactions to that broker. Most soft dollar arrangements involve brokers providing securities research reports to investment advisers, thus theoretically and indirectly benefitting the clients of those advisers. Because of the inherent conflicts of interest involved in soft dollar arrangements, the SEC has scrutinized them very closely. These arrangements and the SEC’s regulation of them are discussed in detail in Nutshell Section 34.
- An investment adviser has a duty to act only in the best interests of its clients and to treat its clients fairly. Among other things, this means that an adviser must place the interests of its clients above its own interests when a conflict may be present. The investment adviser must disclose the existence of any conflict and obtain the client’s consent to the relevant arrangement. Disclosure is needed to ensure the client makes an informed decision. Additionally, an adviser must treat each client fairly, and any preferential practices must be adequately disclosed to its clients in its Form ADV or otherwise. See Nutshell Section 33.
- If an investment adviser invests client assets in an investment company ( , a mutual fund) or other pooled investment vehicle, the client may in effect be paying two layers of advisory fees: (a) one fee at the account level payable to the client’s adviser; and (b) another fee at the mutual fund or pooled investment vehicle level payable to the adviser of that fund or vehicle. “Pyramiding” of fees, however, could potentially work to the disadvantage of the client.
- The Advisers Act does not use the terms “error” or “trading error” and does not contain any specific provisions addressing an adviser’s responsibility for trading errors. However, the staff of the SEC has stated that an adviser, as a fiduciary, must effect client trades correctly (something also required by an adviser’s common law duty of care). The staff also requires an adviser itself to shoulder the cost of correcting trading errors. The adviser should not attempt to correct errors by selling securities to, or purchasing securities from, other client accounts. See In the Matter of M & I Investment Mgt. Corp., Advisers Act Rel. No. 1318, 1992 WL 160038 (June 30, 1992). As discussed in Nutshell Section 34C(2)b, an adviser may not correct trading errors through the use of soft dollars.
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Chapter II. Who is an Investment Adviser? 140 results (showing 5 best matches)
- As described in Nutshell Section 3B below, the definition of “investment adviser” found in Advisers Act Section 202(a)(11) contains . An excluded adviser need not comply with any of the provisions of the Advisers Act, including the antifraud provisions of Section 206. Moreover, Advisers Act Section 203A(b)(1) prohibits the states from applying their laws requiring the registration, license or qualification of an investment adviser to any person excluded from the definition of “investment adviser” under Advisers Act Section 202(a)(11).
- Subparagraph (E) excludes a person who provides advice with respect to U.S. government securities. A broker-dealer, therefore, who satisfied this requirement would qualify for an exclusion under subparagraph (E). See Nutshell Section 3B(5). Subparagraph (G), by contrast, allows the SEC to exclude other persons from the definition of “investment adviser” by rule, regulation or order if they do not fall within the Congressional intent of Section 202(a)(11). See Nutshell Section 3B(7).
- A SEC-registered investment adviser, by contrast, may have to register as a commodity trading adviser with the CFTC depending on its activities. See Nutshell Section 8.
- Second, any bank or bank holding company that serves as the investment adviser to a registered investment company is not entitled to the exclusion. However, if, in the context of a given bank, the investment advisory services are performed through a separately identifiable department or division of that bank, then that department or division, rather than the entire bank, is deemed the “investment adviser” and is required to register.
- The second requirement of the broker-dealer exclusion is that the broker-dealer’s provision of investment advisory services to clients be . Logically, the same considerations that arose in a context of the professionals’ exclusion to the definition of “investment adviser” should be applicable in the broker-dealer context. See Nutshell Section 3B(2). Thus, a broker-dealer who renders advice incidentally rather than as a part of a regular and separate business should satisfy the “solely incidental” element.
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Chapter VII. The Advisory Relationship 211 results (showing 5 best matches)
- NSMIA preempted a great deal of state regulation of investment advisers registered under Advisers Act Section 203(b) and their advisory personnel. Specifically, a state may not license or register any person who qualifies as a “supervised person” of a SEC-registered investment adviser, that person also qualifies as an “investment adviser representative” (“IAR”) of a SEC-registered adviser. See Advisers Act Section 203A(b)(1). However, if a solicitor has a place of business in a given state and also qualifies as an IAR, that state may subject him to its licensing, registration and qualification requirements. See Advisers Act Section 203A(b)(1)(A) and Nutshell Section 5B(2)a.
- Subject to three explicit prohibitions discussed in Nutshell Section 24C, a given investment adviser and its clients have, as a general matter, a great deal of flexibility with respect to the terms contained in their advisory contracts. In fact, it is not unusual for an investment adviser to have several custom-tailored contractual templates for different types of clients ( , institutional versus retail). Having said that, advisers should ensure that any written advisory contract is consistent with the adviser’s Form ADV and other regulatory filings.
- Obviously, having a written advisory contract with each client makes both business and common sense. A written advisory contract may provide an investment adviser with significant legal protection. By detailing the exact responsibilities of the adviser and the client in a written contract, misunderstandings down the road can be avoided. Additionally, a written contract can evidence the adviser’s disclosure and/or the client’s acknowledgment of certain legally disclosable information. See Nutshell Sections 23B & C.
- An investment adviser may only pay a cash fee to a solicitor pursuant to a written solicitation agreement to which the adviser is a party. See Advisers Act Rule 206(4)–3(a)(1)(iii). An adviser must keep a copy of the agreement as part of the records required to be kept under Advisers Act Rule 204–2(a)(10). See Nutshell Section 46E. As discussed below, whether apply to the written solicitation agreement depends on the identity of the solicitor and the type of advisory services the adviser is planning on providing to a prospective client.
- The major implication of the consumer/customer distinction is for purposes of the Regulation’s notice requirements. An adviser generally must provide a with notice no later than the time the customer enters into an advisory contract (whether in writing or orally) with the adviser. See Rules 4(a)(1) & (c)(3)(iii) of Reg. S–P. An adviser is required to give a notice of its privacy policies and practices only if the adviser intends to disclose nonpublic personal information to nonaffiliated third parties, subject to certain exceptions discussed in Nutshell Section 26G. See Rule 4(a)(2) of Reg. S–P and Nutshell Sections 26E & G.
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Chapter IV. Hedge Fund and Collateralized Debt Obligation (CDO) Advisers 76 results (showing 5 best matches)
- Hedge fund investment advisers traditionally rely on the Private Adviser Registration Exemption of the Advisers Act to avoid registration with the SEC and the states. Advisers Act Section 203(b)(3) exempts an investment adviser from Advisers Act registration provided that the adviser (a) has fewer than fifteen clients during the preceding twelve-month period, (b) does not hold itself out generally to the public as an investment adviser, and (c) is not an adviser to any investment company registered under the Company Act. See Nutshell Section 4C.
- decision. So long as an adviser meets the requirements of the Private Adviser Registration Exemption in Advisers Act Section 203(b)(3), it is free to do so. To deregister with the SEC, a registered investment adviser must file Form ADV–W with the SEC. Form ADV–W is filed electronically through the Investment Adviser Registration Depository (“IARD”). See Advisers Act Rule 203–2 and Nutshell Section 15C. Perhaps surprisingly, the SEC has indicated that, although many hedge fund advisers did withdraw registration after the decision, a significant number voluntarily maintained their registration. Consequently, the net registration loss since the decision has not been as significant as had been anticipated.
- If the investors in a “private fund” included a registered investment company, then the investment adviser to that fund had to count the owners of that investment company for purposes of the Private Adviser Registration Exemption. This rule applied whether or not the registered investment company’s ownership stake in the “private fund” was direct or indirect. However, when counting the owners of the investment company, the general provisions of current Advisers Act Rule 203(b)(3)–1(a)(1), which give guidance with respect to when certain persons count as a “single” client, continued to apply.
- The Rule’s prohibitions apply to advisers to pooled investment vehicles regardless of whether the vehicle is offering, selling or redeeming securities, or whether the investment adviser is merely communicating with current or prospective investors. Because Rule 206(4)–8 lacks a “scienter” or knowledge requirement, it imposes a low negligence threshold for liability on a pooled investment vehicle’s adviser, while also covering conduct that is recklessly or deliberately deceptive. However, the Rule provides neither a pooled investment vehicle nor its investors with a private right of action against the vehicle’s adviser. Instead, the SEC will enforce the Rule by bringing civil and administrative enforcement actions against investment advisers that violate the Rule.
- In December 2006 the SEC proposed new Advisers Act Rule 206(4)–8, later adopting it as proposed with an effective date of September 10, 2007. Under the Rule, it is a fraudulent, deceptive or manipulative act, practice or course of business within the meaning of Advisers Act Section 206(4) for an investment adviser to a “pooled investment vehicle” to:
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Annex A. Investment Advisers Act of 1940 258 results (showing 5 best matches)
- The term “person associated with an investment adviser” means any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser, except that for the purposes of Section 203 of this title (other than subsection (f) thereof), persons associated with an investment adviser whose functions are clerical or ministerial shall not be included in the meaning of such term. The Commission may by rules and regulations classify, for the purposes of any portion or portions of this, persons, including employees controlled by an investment adviser.
- No State may enforce any law or regulation that would require an investment adviser to maintain a higher minimum net capital or to post any bond in addition to any that is required under the laws of the State in which it maintains its principal place of business, if the investment adviser—
- No State may enforce any law or regulation that would require an investment adviser to maintain any books or records in addition to those required under the laws of the State in which it maintains its principal place of business, if the investment adviser—
- Every investment adviser subject to Section 204 of this title shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse in violation of this chapter or the Securities Exchange Act of 1934, or the rules or regulations thereunder, of material, nonpublic information by such investment adviser or any person associated with such investment adviser. The Commission, as it deems necessary or appropriate in the public interest or for the protection of investors, shall adopt rules or regulations to require specific policies or procedures reasonably designed to prevent misuse in violation of this chapter or the Securities Exchange Act of 1934 (or the rules or regulations thereunder) of material, nonpublic information.
- “Assignment” includes any direct or indirect transfer or hypothecation of an investment advisory contract by the assignor or of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor; but if the investment adviser is a partnership, no assignment of an investment advisory contract shall be deemed to result from the death or withdrawal of a minority of the members of the investment adviser having only a minority interest in the business of the investment adviser, or from the admission to the investment adviser of one or more members who, after such admission, shall be only a minority of the members and shall have only a minority interest in the business.
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Chapter XV. Purchase and Sale of Investment Advisers 14 results (showing 5 best matches)
- Under Advisers Act Section 205(a)(2), an investment adviser that is not exempt from registration under Advisers Act Section 203(b) generally may not enter into, extend, renew or perform any investment advisory contract the contract prohibits assignment by the adviser without the client’s consent. See Nutshell Section 24C(2). Congress in 1940 wanted to put an end to the unsavory business practice of “trafficking in investment advisory contracts,” whereby advisory clients had no idea who their investment adviser was or who controlled their investment adviser because of multiple sales of advisers about which advisory clients were not notified.
- Non-competition and non-solicitation provisions are typically included in employment agreements in order to punish wayward portfolio managers and senior management who leave prior to the end of the term of their employment contracts. Non-competition provisions generally prohibit key advisory personnel from competing with the adviser in any investment services capacity after their departure from the adviser. Non-solicitation provisions prohibit key advisory personnel from soliciting any advisory clients of the adviser and prohibit them from hiring any personnel of the adviser.
- The purchase and sale of investment advisers occur frequently in the investment management industry. Among the many reasons for purchase and sale transactions are the retirement of the founders of an investment adviser and the desire of advisers to increase their assets under management or expand their staff of portfolio managers. Investment advisers are typically sold at prices equivalent to three to five times annual advisory fees or ten to twelve times earnings before income, taxes, depreciation and amortization (“EBITDA”).
- When an adviser to a mutual fund (or any other registered investment company) is sold, Company Act Section 15(a)(4) adds addition requirements before the sale transaction may be consummated. For instance, the board of directors of the mutual fund must approve the new advisory contract and the mutual fund shareholders must also approve the new advisory contract pursuant to a proxy vote and shareholder meeting. In addition, Company Act Section 15(f) requires that: (1) for a period of three years after the transaction, at least 75% of the mutual fund’s board of directors be comprised of independent directors (directors that are not affiliated with the buyer or seller of the adviser); and (2) the transaction not impose an “unfair burden” on the mutual fund, meaning that for two years after the transaction, the adviser must not receive compensation from the mutual fund other than advisory and other bona fide service fees.
- When an unregistered entity acquires a registered adviser, Advisers Act Section 203(g) deems the buyer to be registered with the SEC if within 30 days from the date of the transaction the buyer files a Form ADV with the SEC. However, as a practical matter, most buyers will be registered prior to the closing of the acquisition in order to assure operational, administrative and investment continuity for their clients.
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Chapter V. Registration and Form ADV 78 results (showing 5 best matches)
- While a state is prohibited from requiring the registration, licensing or qualification of a SEC-registered adviser, it may continue to license, register or otherwise qualify any “
- In a similar vein, an adviser must use care in representing itself as an “investment counsel” or using the name “investment counsel” as descriptive of its business. Indeed, it is unlawful for an adviser to do so unless (1) its principal business consists of acting as an investment adviser and (2) a substantial part of its business consists of rendering investment
- Unless exempt from registration under Advisers Act Section 203(b), an investment adviser must register as such with either the SEC or one or more state securities regulators. See Nutshell Section 5B. Regardless of whether registration is required at either the Federal or state level, an adviser must do so on Form ADV, the “Uniform Application for Investment Adviser Registration,” which the SEC and the North American Securities Administrators Association jointly developed. In addition, existing SEC-registered advisers and those registering with the SEC for the first time also use Form ADV to make required with state securities regulators. See Nutshell Section 16.
- Advisers Act Section 203(f) gives the SEC similar authority over any person associated with or seeking to become associated with an investment adviser who is or has engaged in similar disqualifying events. For these purposes, the definition of “person associated with an investment adviser” covers all controlled persons and employees, including clerical and ministerial persons. It is unlawful for a disqualified person to associate with an adviser and for an adviser to allow such disqualified person to associate with it. For purposes of Section 203(f), it is irrelevant whether the adviser affirmatively allows a disqualified person to associate with it or stands by passively while it happens. See
- —requires information about the adviser’s financial industry affiliations and activities. Item 7 information helps identify areas in which conflicts of interest may occur between the adviser and its clients. In particular, the adviser must indicate the nature of an adviser’s “related persons” ( , a broker-dealer, an investment company, a bank) and, in certain cases, the identity of such persons. A “related person” is defined to include (1) all of the adviser’s officers, partners or directors (or any person performing similar functions), (2) all persons directly or indirectly controlling, controlled by, or under common control with the adviser, and (3) all of the adviser’s employees (other than those performing only clerical, administrative, support or similar functions).
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Chapter XIII. Compliance, Inspection and Enforcement Under the Advisers Act 100 results (showing 5 best matches)
- Advisers Act Section 208(d) makes it unlawful for any person, including unregistered investment advisers, to do . For example, Advisers Act Section 203(b)(3) exempts from registration an investment adviser who, during the course of the preceding 12 months, has had fewer than 15 clients and who neither holds itself out to the public as an investment adviser nor acts as an adviser to a registered investment company. See Nutshell Section 4C. Under Section 208(d), therefore, an investment adviser who has 13 clients is prohibited from pooling four additional clients into a limited partnership to circumvent registration under the Advisers Act, as the adviser would be deemed to have 17 clients.
- While Advisers Act Section 208(d) is designed to prohibit certain conduct, it is not intended to expand the scope of the Advisers Act to apply to all investment advice or investment advisory services related to the purchase and sale of U.S. securities. For example, under Advisers Act Section 205(a)(1) an unregistered investment adviser that is not exempt from registration under Advisers Act Section 203(b) is prohibited from using the mails or any means of interstate commerce (“jurisdictional means”) to enter into or to perform any advisory contract whereby the adviser receives compensation based upon the capital gains of a fund. See Nutshell Section 24C(1)c. This provision does not apply to unregistered investment advisers who use jurisdictional means to effect the purchase and sale of U.S. securities and receive compensation for their advisory services that they provide to non-U.S. persons or foreign investment companies. In one no-action letter, the SEC took the position that an...an
- Advisers Act Section 203(e) outlines the situations (detailed above in Nutshell Section 55A) where the SEC can impose severe non-monetary sanctions on an adviser’s operations, potentially having a great impact on its ability to do business. These sanctions can include limiting the adviser’s activities and operations, suspending the adviser’s operations for up to twelve months or revoking the adviser’s registration.
- Advisers Act Section 203(f) outlines the situations where a person may have severe sanctions imposed on him or her as an individual. An individual may suffer the same types of sanctions imposed on an entity adviser. Thus, the SEC may place limitations on the activities of the individual, suspend the individual for up to twelve months or bar the individual from associating with an investment adviser. The SEC may impose these sanctions when the individual has committed any violation outlined in subsection (1), (5), (6) or (8) of Advisers Act Section 203(e) or has been convicted within the previous ten years of any offense outlined in subsection (2) of that same Section. See Nutshell Section 55.
- Among other things, Advisers Act Section 203(e)(6) allows the SEC to impose sanctions on an adviser and its managers for a failure to properly supervise those under the adviser’s supervision. For example, in In the Matter of Applied Financial Group, Inc. and Dennis Holcombe, Advisers Act Rel. No. 2436, 2005 WL 2413652 (Sept. 30, 2005), the SEC found that the adviser and the supervisor of the adviser’s CCO had failed to properly supervise the CCO who had misappropriated approximately $5.4 million of the assets of four profit-sharing plans advised by the adviser. The SEC fined the adviser $50,000 and the supervisor $25,000. It also suspended the supervisor from acting in any supervisory capacity with any investment adviser for a period of 12 months.
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Annex B. General Rules and Regulations Under the Investment Advisers Act of 1940 433 results (showing 5 best matches)
- (2) Neither the investment adviser nor any person controlling, controlled by, or under common control with the investment adviser is the issuer of, or, at the time of the sale, an underwriter (as defined in Section 202(a)(20) of the Advisers Act of, the security; the investment adviser or a person controlling, controlled by, or under common control with the investment adviser may be an underwriter of an investment grade debt security (as defined in paragraph (c) of this section));
- (f) Compliance with paragraph (b) shall not relieve any investment adviser from the disclosure obligations of paragraph (a): compliance with paragraph (a) shall not relieve any investment adviser from any other disclosure requirement under the Act, the rules and regulations thereunder, or under any other federal or state law.
- (b) For purposes of this rule the term “agency cross-transaction for an advisory client” shall mean a transaction in which a person acts as an investment adviser in relation to a transaction in which such investment adviser, or any person controlling, controlled by, or under common control with such investment adviser, acts as broker for both such advisory client and for another person on the other side of the transaction.
- Investment Advisers Controlling, Controlled by, or Under Common Control With an Investment Adviser Registered With the Commission.
- (ii) Who is (A) a partner, officer, director or employee of such investment adviser or (B) a partner, officer, director or employee of a person which controls, is controlled by, or is under common control with such investment adviser: , That the status of such solicitor as a partner, officer, director or employee of such investment adviser or other person, and any affiliation between the investment adviser and such other person, is disclosed to the client at the time of the solicitation or referral; or
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Chapter X. Proprietary and Insider Trading 36 results (showing 5 best matches)
- This pre-approval requirement allows an adviser the opportunity to evaluate potential conflicts of interest between an access person and the adviser’s clients. For example, in the context of an IPO, an adviser can evaluate whether an access person is seizing an investment opportunity that should be presented first to an eligible client. The access person also may have received the investment opportunity as a for directing brokerage to a particular broker-dealer. In any event, an adviser must keep a record of any decision, and the reasons supporting the decision, to approve an access person’s acquisition of securities issued in an IPO or limited offering for at least five years after the end of the fiscal year in which the approval is granted. See Advisers Act Rule 204–2(a)(13)(iii) and Nutshell Section 46F.
- If the primary business of an investment adviser is providing investment advice, all of that adviser’s directors, officers and partners are presumed to be access persons. See Advisers Act Rule 204A–1(e)(1)(ii). An adviser must keep a record of the names of persons who are currently, or were within the past five years, access persons of the adviser. See Advisers Act Rule 204–2(a)(13)(ii) and Nutshell Section 46F.
- the rules promulgated thereunder). It imposes on each such adviser an affirmative obligation to adopt written policies and procedures reasonably designed, taking into consideration the nature of the adviser’s business, to prevent the misuse of material, nonpublic information by the adviser or “any person associated with such investment adviser.” The term “person associated with an investment adviser” means any partner, officer or director of such adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such adviser, including any employee of such adviser. See Advisers Act Section 202(a)(17). Section 204A also authorizes the SEC to promulgate rules and regulations to require specific policies or procedures reasonably designed to prevent insider trading. In this regard, the SEC has promulgated Advisers Act Rule 204A–1, which, among other things, requires an investment adviser to adopt a code of ethics.
- For purposes of the definition of “access person,” the term “reportable fund” means any registered investment company for which an adviser serves as an “investment adviser” (as defined in Company Act Section 2(a)(20)). The term also includes any registered investment company whose investment adviser or principal underwriter is an affiliate of the adviser in question ( , controls, is controlled by, or is under common control with that adviser). See Advisers Act Rule 204A–1(e)(5) & (9). The phrase “purchase or sale of a security” not only includes the purchase or sale of a particular security in the traditional sense, but it also includes the writing of an option to purchase or sell that security. See Advisers Act Rule 204A–1(e)(8).
- Advisers Act Rule 204A–1(a)(1), (2), (4) and (5) require an adviser’s code of ethics to contain standards or provisions applicable to an adviser’s “supervised persons.” The term “supervised person” means any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser. See Advisers Act Section 202(a)(25).
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Chapter VI. Advertising by Investment Advisers 68 results (showing 5 best matches)
- itself involved a no-action request from a new adviser whose investment advisory committee would consist of three persons. One of those persons—the controlling manager—would be responsible for all investment decisions of the committee. Although other committee members could provide advice, the controlling manager would have final decision-making authority and the ability to manage investment portfolios notwithstanding that advice. The controlling manager previously owned and operated an investment adviser unaffiliated with the new adviser. Although he was an employee of the predecessor adviser, the controlling manager was substantially responsible for all investment decisions made by that firm. Subject to the new adviser satisfying the six conditions listed above, the staff of the SEC noted that it would not be misleading for the new adviser to advertise the performance record of the predecessor adviser if the controlling manager was the person actually responsible for making the
- Under the Advertising Rule, an adviser may not, directly or indirectly, publish, circulate or distribute any advertisement “[w]hich refers, directly or indirectly, to any of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.” Advisers Act Rule 206(4)–1(a)(1). A “testimonial” includes any statement of an advisory customer’s experience regarding the adviser’s advisory services or a customer’s endorsement of those services. Of course, the quintessential testimonial is a letter to the adviser from a “satisfied” customer. See Richard Silverman, SEC No–Action Letter, 1985 WL 54061 (avail. Mar. 27, 1985).
- If nothing else, the investment advisory industry is, indeed, a competitive one. While the desire of a given adviser to differentiate itself from others plays out in a myriad of ways, perhaps none is more ripe for abuse than adviser advertising. Acknowledging this, the SEC pays particular attention to adviser advertisements during its periodic inspections. False or misleading statements in advertisements—especially those regarding performance results—are among the most common subjects of SEC deficiency letters and enforcement actions.
- Under the Advertising Rule, an adviser may not, directly or indirectly, publish, circulate or distribute any advertisement “[w]hich refers, directly or indirectly, of such investment adviser which were or would have been profitable to any person[,]” except in certain limited situations. Advisers Act Rule 206(4)–1(a)(2). The SEC’s obvious concern in this regard is that an adviser will only advertise its profitable recommendations in an effort to garner new customers and keep existing ones, thereby giving the false impression that the adviser’s acumen is better than it actually is.
- One problematic area in this regard is the adviser’s ability to comply with the sixth condition noted above, which incorporates Advisers Act Rule 204–2(a)(16). That Rule generally requires an investment adviser to keep all documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of managed accounts that is included in advertisements. This requirement also applies to the use by an investment adviser of a
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Chapter XI. Recordkeeping Requirements 75 results (showing 5 best matches)
- • An “allocation statement” for each aggregated order that the adviser places that specifies the client accounts participating in the order and indicating how the adviser intends to allocate securities among those clients. If the adviser deviates from that statement, it must provide a written statement explaining the deviation. For more on the aggregation of client orders, see Nutshell Section 33B.
- An investment adviser must retain its formation, governance and ownership documents. Each such record must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the adviser’s business. These documents include, depending on the type of entity involved:
- An investment adviser who has custody or possession of client funds or securities must maintain certain additional records. “Custody” means holding, directly or indirectly, client funds or securities, or having any authority to obtain custody of them. See Advisers Act Rule 206(4)–2(c)(1) and Nutshell Section 28D. Custody records must be maintained for at least five years from the end of the fiscal year during which the underlying transactions occurred. Each record must be maintained in an appropriate office of the adviser during the first two years and in an easily accessible place thereafter. See Advisers Act Rule 204–2(e)(1). These records include:
- An investment adviser who exercises voting authority with respect to client securities must maintain certain additional records with respect to those clients. Proxy voting generally is covered by Advisers Act Rule 206(4)–6 (the “Proxy Voting Rule”). See Nutshell Section 28E. Proxy related records must be maintained for at least five years from the end of the fiscal year during which the record was created. Each record must be maintained in an appropriate office of the adviser during the first two years and in an easily accessible place thereafter. See Advisers Act Rule 204–2(e)(1). These records include:
- An investment adviser must maintain virtually all communications between the adviser and its clients. A record of each communication must be maintained for at least five years from the end of the fiscal year during which the communication occurred or, in the case of a written agreement, five years after its termination. Each record must be maintained in an appropriate office of the adviser during the first two years and in an easily accessible place thereafter. See Advisers Act Rule 204–2(e)(1). These records include:
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Chapter IX. Wrap Fee Programs 36 results (showing 5 best matches)
- In a wrap fee program, a brokerage firm usually will receive a fee for services rendered as the sponsor of the program. This will disqualify the brokerage firm from availing itself of the broker-dealer exclusion to the definition of investment adviser found in Advisers Act Section 202(a)(11)(C). See Nutshell Section 3B(3). The exclusion is also unavailable because the very nature of a wrap fee program is the providing of advice which is included in the set wrap fee.
- The SEC and most states classify those who advise others on the selection of an investment adviser or receive compensation for referring clients to investment advisers as investment advisers themselves. Therefore, a brokerage firm which acts as a sponsor for a wrap fee program must register as an investment adviser under the Advisers Act.
- If an investment adviser offers more than one wrap fee program, it may omit from the wrap fee brochure it furnishes to clients and prospective clients of a particular wrap fee program any information required by Schedule H that is not applicable to those clients or prospective clients. See Advisers Act Rule 204–3(f)(2). In addition, an adviser need not furnish a wrap fee brochure to clients and prospective clients of a given wrap fee program if another investment adviser is required to furnish and does furnish a wrap fee brochure to all clients and prospective clients of that program. See Advisers Act Rule 204–3(f)(3).
- Wrap fee programs were first introduced in the early 1990’s and have become increasingly popular since then. They have gained in popularity because, similar to mutual funds, wrap fee programs pool the assets of multiple clients. Each of these clients typically is investing an amount of money less than the minimum investment required for an individually managed account but significantly more than the minimum account size of most mutual fund accounts. Through pooling, these clients gain access to the more successful investment advisers who usually cater only to investors with high account minimums. However, unlike mutual funds, wrap fee programs provide individual investment advice directly from the adviser to the client, rather than indirectly through a fund entity.
- Once wrap fee programs became prominent in the industry, the SEC amended Form ADV and Advisers Act Rule 204–3 to require sponsors to provide a separate wrap fee brochure to each client and prospective client of a wrap fee program. A wrap fee brochure must contain at least the information required by Schedule H of Form ADV. An adviser must deliver the wrap fee brochure in lieu of the disclosure brochure (typically Part II of Form ADV) mandated by Advisers Act Rule 204–3(a). See Advisers Act Rule 204–3(f)(1). While an adviser can insert additional information into its wrap fee brochure that goes beyond the information required by Schedule H, that additional information must solely relate to the wrap fee programs that the adviser sponsors. While a wrap fee sponsor need not deliver its standard disclosure brochure, the portfolio manager who actually manages a client’s assets must deliver its standard disclosure brochure to the client.
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Preface 3 results
- This book is designed for those interested in learning the fundamentals of investment adviser regulation as set forth primarily in the Investment Advisers Act of 1940 and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. In particular, it is targeted towards investment advisers and their chief compliance officers. However, those associated with mutual funds, hedge funds, private equity funds and collateralized debt obligation (CDO) funds will likely find it useful as well.
- Investment adviser regulation has changed significantly over the last few years, and it is likely to be a moving target going forward. In particular, the Securities and Exchange Commission has attempted to regulate advisers to hedge funds and other private investment funds, but has had only limited success. This effort likely will continue, as Congress and the various states, in addition to the SEC, become involved to varying degrees.
- We endeavor to put the most current and accurate information available in this book. Accordingly, we welcome any suggestions and comments that could improve on its contents. Please feel free to e-mail us at the addresses below with those suggestions or comments.
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Chapter XVI. Special Issues Relating to the Advisory Business 14 results (showing 5 best matches)
- In response to growing concerns that investment advisers and hedge fund managers have made campaign or other political contributions to government officials in return for investments from government employee pension plans, some states and governmental entities have adopted “pay-to-play” rules that disqualify an investment adviser or hedge fund manager from entering into an advisory contract with a governmental pension plan if the investment adviser makes contributions to a governmental official or entity. Contributions from investment advisers are prohibited in about 22 states. Other states set limits on the amount of contributions. However, in most states with “pay-to-play” laws, investment advisers are allowed to sponsor and solicit funds for a political action committee (“PAC”), but are prohibited from making contributions, compelling their ...and officers to make contributions, or augmenting their employees salaries to encourage contributions to PACs. Any contributions from an...
- Holding companies that buy a controlling interest in multiple public and private investment advisers are increasing in number in the investment management business. Typically, the holding company buys 80% of the equity of the adviser and leaves the remaining 20% for the portfolio managers and senior management of the adviser as a retention and incentive mechanism. The holding company is usually a publicly traded company with access to capital that it, in turn, can use to purchase additional advisers and to help fund the growth of the advisers’ businesses.
- Some “pay-to-play” laws, however, follow a technical approach and restrict their applicability to specific types of investment advisory services, such as the issuance of municipal bonds used to finance highway projects, or prohibit investment advisers from making contributions to specific state officials, such as a state’s treasurer or other governmental officials responsible for the state’s finances. Prior to making any political or campaign contribution, an investment adviser should obtain expert advice about “pay-to-play” and Federal campaign finance rules in the relevant jurisdictions.
- Before selling securities to the public, the adviser must register those securities with the SEC on Registration Statement Form S–1 under the Securities Act. This registration is in addition to the adviser’s registration on Form ADV under the Advisers Act. Before “going public,” a given adviser must comply with the Sarbanes–Oxley Act of 2002 (“SOX”). Because most advisers are not SOX compliant, a detailed review of the adviser’s governance, financial statements, audit committee, governing board, SEC filings, shareholder agreements and compliance procedures is necessary.
- § 66. TAKING AN INVESTMENT ADVISER PUBLIC
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Chapter XII. Chief Compliance Officers (CCOs) and Issues Relating to them 52 results (showing 5 best matches)
- The CCO of an adviser has several major responsibilities when an SEC on-site inspection has been scheduled. (See Nutshell Section 53 for a discussion of SEC inspections.) The CCO should communicate to the visiting inspection team the following aspects of the adviser’s business:
- —Any changes in the adviser’s overall business condition, including financial stability and operational soundness, should be discussed with the CCO. This includes reviewing the adviser’s financial statements on a periodic basis. Also, the CCO should be notified of any new or pending regulations that would have an impact on the adviser’s business.
- The SEC provides some resources to help CCOs perform their obligations more effectively. The SEC’s CCOutreach program, sponsored jointly by the Office of Compliance Inspections and Examinations and the Division of Investment Management, is designed to enable the SEC and its staff to better communicate and coordinate with mutual fund and investment adviser CCOs. The program provides a forum to discuss compliance issues in a practical way, to share experiences, and to learn about effective compliance practices. The program features a number of elements, including regional seminars at various locations across the country and an annual national seminar in Washington, D.C.
- —Policies and procedures should be in place to accurately record and properly respond to customer complaints. In this regard, an adviser must keep written copies of the complaints on hand for easy access by regulators. In addition, the adviser should retain all internal discussions and communications about the substance of any complaint.
- —When a client instructs the adviser to direct brokerage transactions to a particular broker-dealer, the CCO should ensure that the adviser retains written documentation of those instructions in the client’s file. When a client seems to have chosen a less than reputable broker-dealer whose quality of services is suspect, the CCO should make sure that the adviser informs the client of the substandard quality and gives the client a more sound recommendation.
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Chapter XIV. Limited Private Right of Action 7 results (showing 5 best matches)
- An investment adviser may still be named as a defendant in a private lawsuit alleging fraudulent investment activity under Exchange Act Section 10(b) and Rule 10b–5 promulgated thereunder or under the Racketeer Influenced and Corrupt Organizations Act (“RICO”).
- Advisers Act Section 215 states that any contracts whose formation or performance would violate the Advisers Act “shall be void … as regards the rights of” the violator and knowing successors in interest. The Court agreed with the respondent that Section 215 did, indeed, provide an implied private cause of action. However, the Court held that the private cause of action was limited. Pursuant to it, a client may sue to void an investment advisory contract. She may also sue for damages based on rescission. However, these damages are limited to the recovery of fees paid, less any value conferred by the adviser. Importantly, the Court held that a client may not sue an investment adviser for any diminution of value of her assets under management, which is inevitably what the client desires.
- The respondent in was a shareholder of the Mortgage Trust of America (the “Trust”), while the petitioners were the Trust, several individual trustees of the Trust, the Trust’s investment adviser (TAMA), and two affiliated corporations (Land Capital and Transamerica Corp.).
- The Advisers Act contains no provision that expressly sets forth a private right of action for investment adviser misconduct. In , 444 U.S. 11 (1979), the Supreme Court held that the Advisers Act only provides a limited private right of action. Clients can sue to void an investment advisory contract and for damages based on rescission (the recovery of fees paid, less any value conferred by the adviser). However, the client cannot sue for diminution of value of his assets under management.
- The main issue that the Supreme Court addressed was whether there were implied private causes of action in the Advisers Act, as there were no express private causes of action. The respondent argued that clients of investment advisers were the intended beneficiaries of the Advisers Act and, therefore, the courts should imply a private cause of action. In particular, the respondent argued that private causes of actions could be inferred from Advisers Act Sections 206 and 215.
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Index 91 results (showing 5 best matches)
- “In the business” (of being an investment adviser), 13–15
- Purchase of investment adviser (see Purchase and Sale (of Investment Advisers))
- Sale of investment adviser (see Purchase and Sale (of Investment Advisers))
- “Holding itself out” as an investment adviser generally to the public, 50–51
- Solicitor for an SEC-registered investment adviser, 165–168
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OUTLINE 98 results (showing 5 best matches)
Copyright Page 3 results
- Nutshell Series, In a Nutshell
- Thomson/West have created this publication to provide you with accurate and authoritative information concerning the subject matter covered. However, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. Thomson/West are not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
- Printed in the United States of America
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Table of Authorities 25 results (showing 5 best matches)
- Boston Investment Counsel, Inc. and Robert E. Campanella, In re, Advisers Act Rel. No. 1801, 1999 WL 373782 (June 10, 1999),
- McKenzie Walker Investment Mgt., Inc., In re, Advisers Act Rel. No. 1571, 1996 WL 396091 (July 16, 1996),
- Association for Investment Mgt. & Research, SEC No–Action Letter, 1996 WL 729385 (avail. Dec. 18, 1996),
- Denver Investment Advisors, SEC No–Action Letter, 1993 WL 313090 (avail. July 30, 1993),
- Investment Company Institute, SEC No–Action Letter, 2001 WL 436249 (avail. Apr. 10, 2001),
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Table of Statutes and Rules 4 results
- Publication Date: January 8th, 2008
- ISBN: 9780314172655
- Subject: Banking/Financial Institutions
- Series: Nutshells
- Type: Overviews
- Description: Investment Adviser Regulation in a Nutshell is designed for persons interested in learning the fundamentals of regulation set forth primarily in the Investment Advisers Act of 1940 and the Securities and Exchange Commission rules and regulations. In particular, this book is targeted toward investment advisers and their chief compliance officers. However, those associated with mutual funds, hedge funds, private equity funds, and collateralized debt obligation funds will find it useful as well.
