The Securities and Exchange Commission is reminding advisory firms to stay aware of their own compliance functions. After about 20 examinations of advisers that utilized compliance firms, the regulator found that external compliance officers sometimes were not aware of a firm’s business access, did not communicate regularly with firm principals, nor did they have access to company documents.
Issuing a risk alert, the SEC said that whether a chief compliance officer is a direct employee of a registrant, a consultant, or a contractor, this employee should be given adequate information and authority to be able to do the job. The Commission said that it is the job of the registrant to put into place and execute a compliance program that works. It also warned that firms that do outsource their compliance function might be at risk of not comprehending their own possible shortcomings in this matter. The SEC said that outsourced CCOs should be careful about using “standardized checklists” to get information from advisory firms.
In other SEC news, Commission chairwoman Mary Jo White said that even though private placement issuers, private equity managers, and hedge funds are raising more funds from investors now more than before, the incidents of related fraud is not rising. Some people worried that when the 2012 Jumpstart Our Business Startups Act got rid of the ban on the general solicitation of certain kinds of private placements, there would be those that would use this as an opportunity to take advantage of less sophisticated investors. However, even with the new regulations, not that many private equity managers, hedge funds, and private placement issuers are taking advantage of the opportunity to advertise directly to investors.
Also, White recently spoke out about the Small Business Credit Availability Act, which would lighten up regulations for business development companies. The bill, approved earlier this month by the House Financial Services Committee, would let BDCs raise leverage limits to 2:1 from 1:1, allow them to own advisory firms and asset managers, and up the amount of money they can invest in financial firms.
BDCs, which are closed-end investment companies, put their funds mainly in small operating businesses. They have grown in popularity as investment vehicles. Investors are choosing alternative investments such as BDCs to raise portfolio returns in environments that are low interest. White is concerned that BDCs already expose investors to greater leverage than other closed-end funds do.
On Thursday, Massachusetts regulator William Galvin filed a securities case that involved an AR Capital-sponsored BDC. Galvin is accusing Real Capital Securities of gathering fraudulent proxy votes to back real estate deals that AR Capital had sponsored. You can read more about that story here.
At Shepherd Smith Edwards and Kantas, LTD LLP, our securities fraud law firm is here to help investors recoup their fraud losses. Contact us today.
SEC’s White says private placement fundraising booming, but fraud is not, InvestmentNews, October 28, 2015
2015 National Society of Compliance Professionals, National Conference: Keynote Address, SEC, November 4, 2015
Examinations of Advisers and Funds That Outsource Their Chief Compliance Officers, SEC, November 9, 2015
SEC’s Mary Jo White rips bill to ease restrictions on BDCs, Investment News, November 13, 2015
H.R. 1800 (113th): Small Business Credit Availability Act, GovTrack.US, April 26, 2013