Posted On: March 26, 2013

Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action

SEC Division Reviews Investment Advisers Act As It Applies to Private Fund Advisers
Currently examining the way applies the 1940 Investment Advisers Act to private fund advisers, the Securities and Exchange Commission is reportedly concentrating specifically on the areas of Form ADV and advertising. SEC Division of Investment Manager Director Norm Champ, who recently spoke at an Investment Adviser Association compliance conference, said that rules related to both areas might have to be modified in the wake of changes brought about due to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Advisers Act’s Rule 206(4)-1 doesn’t let adviser use advertising that includes misleading or false statements or refers to testimonials. Champ, however, noted that because of the advent of new forms of communications, including social media, as well as the birth of new business models since the rule was promulgated decades ago, there might be a need to revise the rule. As to Form ADV, which new registrants to the SEC must fill out, Champ pointed out that the way it is designed may not be take into consideration the sometimes complex nature of private funds.

New Commission Unit REG to Watch For Adviser Risk
Champ also spoke about how the Division of Investment Management’s Risk and Examinations Group has a dual role. REG is tasked with monitoring risks involving the asset management industry , as well as examining registrants under the Division of Investment Management’s jurisdiction.

He said that not only will REG staff conduct qualitative and quantitative financial analyses of the industry and make sure that other SEC divisions understand the risks, but also the group will work with the Office of Compliance Inspections and Examinations to create and execute its own exam programs. It was the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 965 that mandated the creation of a group such as REG.

Just 1 in 10 SEC Exams Leads to Enforcement Action, Says OCIE Official
According to Office of Compliance Inspections and Examinations Deputy Director Andrew Bowden, over the past two years, just 1 in 10 SEC examinations have led to a referral for enforcement. Among the questions asked to determine when such an action is necessary:

• Can remediation occur without a referral?
• Is there an ongoing fraud?
• Are there investors who are being egregiously harmed?
• Is a cover-up taking place?
• Is a recidivist violator is involved?

Bowden talked about how registrants that show Commission examiners that they are committed to dealing with any problems lower their chances of getting a referral. She said that a common mistake registrant makes is not making sure the right people are placed before examiners.

Shepherd Smith Edwards and Kantas, LTD, LLP represents investment adviser fraud victims throughout the US. We have helped thousands of investors recoup their losses.

Related Web Resources:
Only One in 10 SEC Exams Referred For Enforcement Action, Official Says, Bloomberg/BNA, March 11, 2013

Read Mr. Champs' remarks to the IAA Investment Adviser Compliance Conference
, SEC, March 8, 2013

1940 Investment Advisers Act
, SEC (PDF)


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