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The weekly news source for investment management legal and compliance professionals

Adviser Association Finds Recent Testing of Proposed Form CRS ‘Flawed’

The Investment Adviser Association is not happy with the recent testing of the SEC’s proposed Form CRS. In a December 6 statement, the IAA said that the testing of the relationship summary form, conducted by the Rand Corporation at the agency’s behest, “is substantially flawed and does not provide a reasonable basis for adopting Form CRS as proposed.”
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Ruling Against SEC in ICO Case May Upset Agency’s Cryptocurrency Strategy

The question of whether a digital token constitutes a security may have been put into play by a federal judge’s ruling in an ongoing case involving the SEC and a company engaged in a digital coin offering (ICO). The judge turned down the agency’s request for a preliminary injunction against the company, saying that the SEC had not sufficiently proved that the digital tokens involved met the definition of a security.
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Holiday Compliance: It’s Not Just Gifts, It’s Client and Vendor Parties

Every year at this time, advisory firms and their employees take a fresh look at their gift and entertainment policies to ensure that there are no compliance problems and that everyone knows what is expected. While many employees are aware of their firms’ dollar limits for receiving or giving gifts, there is another issue that draws less attention: employee attendance at holiday parties thrown by clients, prospective clients, vendors or other third parties.
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Commission Ethics Counsel Retires

SEC Ethics Counsel and Designated Agency Ethics Official Shira Pavis Minton announced December 4 that she will be retiring from the agency this month after nearly 10 years with the SEC and more than 20 years with the federal government, according to the agency.
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Recent Stories

Percentage of Advisers Examined Jumps 11 Percent

The percentage of investment advisers examined in fiscal year 2018 by the SEC’s Office of Compliance Inspections and Examinations increased to 17 percent from the 15 percent examined the year before – representing an 11 percent increase in the number of advisers examined, according to the agency. In doing so, OCIE surpassed its FY 2018 goal of holding steady at the 15 percent figure.
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SEC Draws a Digital Line in the Sand for Cryptocurrencies

The SEC, in a recent statement and through recent enforcement actions, made its view on cryptocurrencies clear: Any digital asset deemed to be a security must meet Commission registration requirements. That includes initial offers and sales of these securities, investment vehicles placing money in digital asset securities and those advising others to do the same, or secondary market trading of such products.
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Proxy Advisory Firms Again Front and Center Following SEC Roundtable

The role of proxy advisory firms returned to center stage in recent days following an SEC roundtable that raised questions about the influence such firms have over advisers and funds, conflicts of interest, whether proxy advisers should be regulated, and more. As with a similar roundtable five years ago, viewpoints were aired, with questions remaining about what actions, if any, might be taken at some future date.
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Delays in Providing Compliance Resources to Inexperienced CCO Detailed in Two SEC Settlements

The SEC this month reached a settlement with a former advisory firm over allegations that it failed to perform adequate due diligence and monitoring of key investments. Much of the paperwork in the settlement, as well as in a separate settlement with the adviser’s former chief executive officer involving compliance issues, focused on allegations that the firm hired an inexperienced chief compliance officer and then repeatedly refused to provide him with the compliance resources he requested.
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2018 Enforcement Numbers Top Previous Year

The SEC earlier this month issued the results of its fiscal year 2018 enforcement efforts – and the results show that the number of enforcement actions and total money collected topped those from fiscal year 2017. At the same time, Division of Enforcement officials continued to state that measuring enforcement success primarily though these kinds of metrics “cannot adequately measure the effectiveness of an enforcement program.”
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OCIE Reveals Most Common Cash Solicitation Rule Deficiencies

SEC’s Office of Compliance Inspections and Examinations wants advisers to know the violations its examiners are finding when they visit advisory firms. In recent months, it has issued Risk Alerts highlighting the most common deficiencies cited involving best execution, fees and expenses, and more. Its latest Risk Alert focuses on adviser compliance issues related to Advisers Act Rule 206(4)-3, the Cash Solicitation Rule.
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Fund Association Wants SEC to Propose Rule for Summary Shareholder Reports

The Investment Company Institute (ICI) has made a proposal to the SEC as part of its answer to the agency’s request for comment on ways to enhance fund disclosure for investors. The association, which represents regulated funds worldwide, suggested in a comment letter that the Commission propose a rule creating a new, optional summary shareholder report that would ostensibly make the full shareholder report easier for investors to understand while also helping them compare funds.
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Get the Most from the Exam Postmortem

SEC examiners may visit an adviser for anywhere from one to multiple days. Most advisers will see their visits end with a number of deficiencies found, a few lucky ones will escape with no deficiencies found at all, and a very few unlucky ones will learn that they have been referred to the SEC’s Division of Enforcement. Whatever the outcome of an examination, wise advisory firms will conduct an internal postmortem of the exam experience and lessons learned.
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Procedures Designed to Prevent Conflicts of Interest are Not Just for Show

Conflicts of interest are among the big red flags that the SEC’s Division of Enforcement looks for when investigating advisers. Firms that disclose such conflicts to clients and adopt procedures to handle the conflicts can avoid compliance problems, while at the same time build trust with both existing and prospective clients. But when advisers violate their own procedures and then fail to disclose that they did so, they will not only damage or lose that trust, they are likely to draw in investigators.
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Watchdog Wants SEC to Improve Management of Information and Data Sources

Better acquisition and management of subscription contracts, better controls over certain purchases of electronic information sources (EIS), and better monitoring and tracking of those sources and others – that’s what the SEC’s Office of the Inspector General recommended to the agency in a recent final audit report. The agency concurred and basically said that it will jump right on resolving the problems.
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