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The weekly news source for investment management legal and compliance professionals

Proxy Voting Advice: Proposed Rule Amendments Require Conflict Disclosure

The SEC is having a busy November. On the same week that it proposed substantive changes to both the Advertising Rule and Cash Solicitation Rule, the Commission also voted to propose rule amendments that will affect how proxy advisory firms interact with advisers and others. The changes would, among other things, require proxy advisory firms to disclose material conflicts of interest in their advice and provide those it advises with an opportunity to review and comment on that advice.
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Compensation Conflicts of Interest: SEC Staff Issues Disclosure FAQs

If the SEC’s recent string of settlements involving share class selection and other compensatory arrangements is not enough, the agency’s Division of Investment Management is leaving no stone unturned. In a new set of answers to frequently asked questions, Division staff make it clear just what disclosure they expect from advisers when there is a compensation conflict of interest.
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Compliance Staff Applicants with Data Skills Likely to Draw Interest from CCOs

Chief compliance officers seeking to fill compliance staff positions traditionally seek applicants knowledgeable about the Advisers Act, good people skills and perhaps compliance experience at another firm. Those skills are still important, but CCOs today need to add another core competency to the list: familiarity with data sets, including how to read them, and how to manipulate them to see patterns.
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Ensure Advisory Contracts are Up to Date with Current Compliance Concerns

Advisory contracts with clients are, in many ways, not that different than they have always been. They outline the scope of services a firm provides to clients, contain non-exclusivity clauses allowing firms to do business with other clients, and generally set forth the adviser’s and the client’s responsibilities – but are they keeping up with the times in ways that affect a firm’s compliance, not to mention protection?
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IAA Calls on SEC to Expand Definition of ‘Accredited Investor’

The Investment Adviser Association wants to see the definition of "accredited investor" amended in Regulation D’s Rule 501 to encompass a larger group of entities, including discretionary clients of SEC-registered advisers and "knowledgeable employees" of private funds. The association made that recommendation, among others, in a comment letter to the SEC.
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Share Class Settlement Focuses on Fiduciary Breach, Inadequate Disclosure, Best Execution Failure

SEC’s settlements with advisory firms involving share class violations have gotten a lot of attention recently, particularly when the advisers self-reported under an agency initiative and avoided civil money penalties. Not every advisory firm qualified for that initiative, however, as a recent settlement shows where an adviser had to pay more than $1.5 million, including a $140,000 fine.
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Adviser Settles Solicitor Rule Charges with SEC Following Two Examinations

Advisory firms that rely on a no-action letter to support their business practices should make sure that their interpretation of that letter is correct – especially when those business practices are ones the SEC pays particular attention to, like compliance with Rule 206(4)-3, the Solicitor Rule. An advisory firm that relied on such a letter despite concerns raised by examiners recently learned this lesson.
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Inspector General Challenges SEC Exam Coverage and Investigation Timeliness

The SEC must sometimes regard its Office of the Inspector General as a relentless cop, always on its tail to find either things it is not doing right or challenges it must meet – perhaps not unlike some advisers and broker-dealers may feel about the SEC itself. Just weeks after issuing a report critical of the agency’s time management controls, the SEC’s internal watchdog has now raised, among other things, its examination coverage of investment advisers and the timeliness of its enforcement investigations.
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SEC Cracks Down on Improper Proxy Voting

Now that it has adopted guidance on advisory firm proxy voting responsibilities, it appears that the SEC is showing some teeth. In two recent enforcement actions, it reached settlements with advisory firms that voted proxies for their clients after explicitly stating that they would do no such thing.
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SEC Staff to Fund Managers: Verify Accuracy of Performance and Fee Disclosures

The SEC’s Division of Investment Management is apparently not happy with mutual fund disclosures of their performance and fees. In new guidance issued October 7, the Division staff lists a number of improper practices that it has observed and says that funds and fund managers need to verify the accuracy of their performance and fee disclosures prior to filing them with the Commission and providing them to investors.
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Private Fund Adviser Settles Hidden Compensation Allegations with SEC

Failure to disclose compensation is one of those violations almost guaranteed to draw an SEC enforcement action. The agency sees a large part of its mission as protecting investors, so when it suspects that an advisory firm has not been upfront in disclosing what and how it will get paid from clients, expect them to dig deep into that firm until satisfied it unearthed the full story.
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