Non-Enforcement Matters

Recent Newsworthy Remarks by the SEC

During recent public appearances, spokespersons for the SEC’s Division of Investment Management’s Risk and Examinations Group (REG) provided additional insight as to what the REG will be looking for when it conducts examinations of registered investment advisers.

According to Norm Champ, SEC Director of the Division of Investment Management, REG will have two roles; one is to conduct “rigorous quantitative and qualitative financial analysis of the asset management industry” and second (but not last) to work closely with the SEC’s Office of Compliance Inspections and Examinations (OCIE) to come up with its examination program and also to assist OCIE in conducting its examinations. According to Director Champ, the REG will especially work on learning more about the issues faced by the investment management industry and help promote best practices within the industry. The Director added that OCIE and REG leadership has been meeting with the boards of asset management firms and has been hiring experts in and from the industry in an attempt to better understand and regulate the industry.

In another appearance, Director Champ stated that the Division’s review of private fund advisers will emphasize advertising and Form ADV by such advisers. According to the Director , the rapid increase in registration of investment advisers brought on by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the exemption filing by private fund advisers could, out of necessity, require the SEC to recommend revisions to Form ADV and certain rule changes. Given the expected change under Rule 506(c) under Regulation D — which will allow the general solicitation and general advertising for issuers, including private funds that sell their securities solely to accredited investors — the Director believes that it may be necessary for the SEC to rethink its position on various advertising prohibitions now in place for advisers of private funds. Finally, according to Director Champ, given the complexity of how some of the private fund advisers are structured, with multiple related-parties that may be providing advice, all under one organizational umbrella, Form ADV reporting and even registration for such related entities may have to be modified.

Meanwhile, Andrew Bowden, the Division’s Deputy Director, informed the public that about one in 10 examinations conducted by OCIE results in a referral for SEC enforcement action. According to Mr. Bowden, OCIE would like to see that number decrease as an enforcement referral means additional staff time and expense. OCIE hopes to ward off some of the enforcement referrals by educating the industry as to best practices and necessary steps to avoid enforcement action. According to Mr. Bowden, SEC considerations when determining whether to seek enforcement action include:

  • Is there an ongoing fraud?
  • Has the target(s) attempted to hide the fraud?
  • Is there egregious harm to investors?
  • Is this conduct a repeated violation by the same target(s)?
  • Would the target(s) pay back the victims for losses absent an enforcement referral?

Generally, if an adviser finds itself dealing with the SEC in a matter that may be referred, it is important to take immediate action to correct the behavior that caused the violation, as well as cooperate with, and do not mislead, the SEC during its investigation.