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The weekly news source for investment management legal and compliance professionals

Fraud Charges Demonstrate that Actions Must Match Disclosures

Telling investors one thing and then doing another is often a recipe for trouble. This may have been particularly true for one advisory firm that the SEC charged January 26 with promising some investors that portions of their profits would be used to protect their investments but instead were used to pay the living expenses of the firm’s owner.
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OCIE Exam Priorities List is a Tool, Not a Compliance Blueprint

New chief compliance officers at small firms, as well as compliance professionals of all sizes of firms, should avoid the trap of regarding the SEC’s annual examination priority list as a template for their own compliance programs. The priority list, published by the agency’s Office of Compliance Inspections and Examinations (OCIE), is a valuable tool for compliance efforts, but those efforts need to address topics in addition to those highlighted in the list.
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Recent Stories

SEC Deals with Backlog as It Resumes Full Operations

This past week marked the first full week that the SEC, as well as much of the rest of the federal government, resumed business since the shutdown began on December 22. It will likely be several weeks more, however, until the agency deals with the backlog of applications, requests, examination actions, enforcement matters and more, enabling it to move forward at its previous pace.
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Determine Auditor’s Custody Rule Savvy before Engagement

The Custody Rule can be a major headache for advisory firms and their legal counsel. It is complicated, open to interpretation, and the SEC is on the lookout for advisers – and accounting firms – that violate it. All the more reason, for both advisers and auditors to be knowledgeable and experienced about the Rule before taking steps that may violate its requirements.
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SEC Registration and Year One: What New Advisers Should Expect

Advisory firms preparing to register with the SEC, a group that includes brand new firms, existing firms that just surpassed the $100 million mark in assets under management, and those setting up a new firm, need to prepare for their first year under the agency’s eyes – a year that may include at least a phone call from examiners.
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IAA Urges SEC Not to Further Regulate Proxy Advisory Firms

The Investment Adviser Association is continuing its effort to head off attempts to further regulate proxy advisory firms. It recently sent a letter to the SEC urging the agency not to take such steps, following up on a similar letter with the same theme it sent to the Senate Banking Committee a few weeks before.
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The SEC Strikes Back: EDGAR Hacking Suspects Found and Charged

Nine suspects – hackers, traders and other entities from multiple countries – were charged by the SEC January 15 in federal court with perpetrating the 2016 hack of the agency’s online Electronic Data Gathering, Analysis and Retrieval (EDGAR) system, including some of its personally identifiable information.
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Cato Institute Challenges SEC’s Use of Settlement Gag Orders

The Cato Institute, the well-known libertarian think tank, took aim at the SEC this month. It filed a complaint against the Commission in federal court, challenging the SEC’s use of the gag order that prevents settlement respondents from denying the allegations in their settlements or telling their side of the story.
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GIPS: Adviser Association Urges Changes in Draft 2020 Standards

The Investment Adviser Association is concerned that the scope and breadth of the proposed 2020 Global Investment Performance Standards (GIPS) may make compliance with GIPS more difficult. It urged the CFA Institute in a recent comment letter to address this and other issues, including that the proposed standards take into account local regulation and the voluntary nature of GIPS.
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Government Shutdown Leaves Advisers, Funds Hanging

The partial government shutdown – which includes the SEC – is now approximately three weeks old, and the effect on advisers, funds and others regulated by the agency is only likely to grow the longer it stays in effect. Most aspects of SEC regulation – examinations, answers to questions or requests, enforcement and more – have slowed considerably, if not stopped, leaving advisory firms and investment companies that are dependent on the SEC without a clear path forward.
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‘Comprehensive Overhaul’ of Custody Rule Urged by IAA

The Investment Adviser Association wants the SEC to consider a “comprehensive overhaul” of Advisers Act Rule 206(4)-2, the Custody Rule, which would, among other things, limit the Rule to risks presented by “actual physical custody.” Other proposed changes included considering circumstances when surprise examinations might not be required, and excepting certain clients or services from the Rule’s requirements.
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SEC Share Class Crackdown Continues and Shows No Sign of Abating

The SEC in late December settled charges against three advisory firms involving their alleged placement of clients in mutual fund share classes that assessed certain fees when less expensive share classes of the same funds were available. These settlements, as well as the inclusion of this practice in the agency’s 2019 examination priorities list, make clear that advisers, mutual funds and their legal representatives should not expect any let-up in these enforcement actions in the near future.
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SEC Takes First Robo-Adviser Enforcement Actions

It was only a matter of time until it happened. With the SEC focusing its enforcement guns on cryptocurrencies and cybersecurity, advisory firms’ use of robo-advisers couldn’t have been far behind. The agency primed the pump with guidance on the subject in early 2017, but really showed that it meant business late last month, when it brought its first two enforcement actions against advisory firms involving the use of robo-advisers.
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Clayton Addresses Past and Future in Senate Testimony

SEC Chairman Jay Clayton, in testimony before a Senate committee, spoke of the agency’s achievements during 2018, as well as what it hoped to do in the coming year. Throughout the hearing, he stressed his ongoing themes, among them looking out for retail investors and staying on top of technological changes, including digital currencies and cybersecurity.
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