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News January 16, 2006 Issue

Industry Had No Inkling of Staff’s Annual Review Position

Surprised by the staffís position on a 12-month annual review cycle?

Youíre not alone. Last week was the first time IM Insight heard anything about it.

So we ran it by Pickard and Djinis partner Mari-Anne Pisarri, an experienced investment management attorney and someone we consider an annual review expert. In addition to helping her clients with annual reviews, Pisarri has spoken numerous times on the topic of annual reviews at industry conferences, often alongside senior SEC officials. If anyone out there had heard of this position, we thought, it would be Pisarri.

She hadnít.

In fact, she questioned the staffís approach. "I donít know why they are making this more complicated than it has to be, and introducing confusion that they donít have to introduce," she said. "I donít read in the language of the rule itself this concept of a 12-month cycle that starts at a point and ends at a point." Added Pisarri: "When the SEC wants to obtain a report on a 12-month cycle, they know how to do it." She pointed to Exchange Act Rule 13a-1, for example. In the compliance program rule, "if they wanted a Ď12-month review,í they could have said that, and thatís not what they said."

Instead, the rule text requires that advisers and funds conduct an review "no less frequently than annually." In Pisarriís view, if a firm completes its first annual review in April 2006 and hasnít finished its next review by April 2007, it hasnít done its review "no less frequently than annually."

In any event, she noted that the purpose of the rule "was to make sure that people donít build a compliance program and let moss grow on it." To that end, the SEC staff has cautioned that advisers should be monitoring their compliance programs over the course of the year, and may need to make mid-year adjustments to their programs to account for changes in applicable rules or lines of business, or where compliance problems arise. Hence the "no less frequently than annually" rule text. In Pisarriís view, thatís not the same as creating a definitive 12-month cycle. "I donít see the language as making this a Ďreporting periodí or Ďreview periodí so much as ĎAt a minimum, make sure that once a year you go back and look at your program.í"