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The weekly news source for investment management legal and compliance professionals

2018 SEC Examination Priorities: Cryptocurrency Joins Cybersecurity, Retail and Disclosure

The SEC’s Office of Compliance Inspections and Examinations on February 7 finally issued what advisory firms, investment companies, broker-dealers, attorneys, consultants and others in the asset management community have been waiting for since mid-January: its 2018 list of examination priorities. This year’s list was marked by two additions: a more polished presentation and the inclusion of cryptocurrency as a priority.
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Advertising Rule Reform: What to Expect

Reform of Rule 206(4)-1, the Advertising Rule, has long been a goal of many in the investment advisory community. With the new SEC chair, Jay Clayton, now indicating that he too would like to see some long-term agency rules revisited, it is beginning to look like 2018 may be the year when the Advertising Rule is brought in line with the realities of today’s business world.
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Recent Stories

Full Disclosure Needed When Advisers Raise Money to Keep Themselves Afloat

Desperate times may call for desperate measures – but not measures so desperate that investors are kept in the dark about key elements and the SEC takes notice. This is especially true when the party seeking to raise money for itself is an investment advisory firm, and the parties from which it seeks to raise those dollars include its own advisory clients.
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Europe Considers Adding ‘Sustainability’ to Fiduciary Requirements

The European Commission, the governing arm of the European Union, is seeking comments on the possibility of adding environmental, social and governmental factors to what asset managers there must consider when making investment recommendations to clients. The Investment Adviser Association, in a January 22 comment letter to the Commission, has raised concerns that such requirements not dilute the duty of asset managers to act in the best interests of their clients.
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Undisclosed Investment Strategy Changes Unlikely to Save the Day

An adviser may start a fund with high expectations, but find that, for a number of reasons, returns do not come in as expected, and in fact go south. Advisers in such situations may be tempted to turn to a higher risk/higher reward investment strategy in the hope it will make up for the losses. Those that do should be aware that such a move may bring with it business and compliance challenges that no adviser wants to face.
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Failure to Disclose Principal Trades May Lead to SEC Charges

The Advisers Act has strict requirements when it comes to self-dealing – and that includes principal trades. Just consider Section 206(3). It prohibits an adviser, while acting as a principal for his own account, from knowingly selling any security to or purchasing any security from any client without first disclosing to the client that he is doing so and obtaining the client’s consent.
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SEC Liquidity Risk Management FAQs Flesh Out ETFs, Role of Subadvisers

Funds and advisers with questions about liquidity risk management programs may breathe a bit easier – at least if some of those questions pertained to how in-kind exchange-traded funds work and the role of sub-advisers. The SEC’s Division of Investment Management on January 10 issued FAQs that address at least some of the questions that have arisen in these areas.
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Status of Administrative Law Judges Will be Reviewed by Supreme Court

It took just eight words: "The petitions for writs of certiorari are granted." With that sentence, the U.S. Supreme Court on January 12 let it be known that it will review a lower court decision in Lucia v. SEC, potentially overturning the way that the agency has traditionally classified its administrative law judges. The high court’s ultimate decision may upend a number of established lower court’s verdicts.
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Know What Your Firm Solicits Before Moving on Compliance

There are two kinds of solicitation that advisory firms might pursue: seeking new advisory clients, and finding new investors for private funds. In terms of compliance, while the two solicitation types share some requirements, they don’t share them all – and, in fact, there are some compliance requirements that are unique to each. It is essential that advisory firms design compliance procedures that address the type of solicitation they perform.
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SEC May Propose Its Own Fiduciary Rule by Second Quarter

It’s an ambitious target, but the SEC is reportedly planning to propose a Fiduciary Rule that would cover all brokers – not just those selling retirement accounts – by the second quarter of this year. That could mean that there will be a proposed rule in about 10 weeks, but it could also mean in about five months, depending on whether "by the second quarter" means the beginning or the end of that quarter.
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SEC Charges Gatekeepers in Federal Court with Aiding and Abetting Fraud

Don’t expect the crackdown on "gatekeepers" – attorneys, accountants, consultants and other third parties that work with advisory firms – to let up any time soon, even with a new SEC chairman at the helm. The agency recently filed charges in U.S. District Court against an attorney and an accountant for allowing, if not enabling, an adviser’s alleged misappropriation of more than $9 million from a charitable foundation.
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Multiple and Repeated Compliance Problems Likely to Draw SEC Action

Compliance is more than simply taking steps to satisfy regulators. If followed in spirit, with an eye toward ethics, compliance should be part of a culture where advisory firms do the right thing simply because it is right. In doing so, they will probably find that they are more likely to satisfy SEC requirements and thereby head off potential enforcement actions.
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