On May 6, 2013, the SEC’s Division of Investment Management issued a guidance update for investment advisers that rely on exemptive orders emphasizing the importance of ensuring “compliance with the representations and conditions of such orders.” The guidance update comes as part of the Division’s response to a report issued by the SEC’s Office of Inspector General (“OIG”) in June, 2011, that noted significant deficiencies in the SEC’s process to monitor compliance with the representations and conditions of exemptive orders and no-action letters.
SEC Guidance Update and OIG Report
In the guidance update, the SEC points to the requirements that advisers must adopt policies and procedures that are reasonably designed to prevent violations of securities law under the Advisers Act. The guidance goes on to say that “entities that receive and rely upon exemptive orders are at risk of violating the federal securities laws if they fail to comply with the representations and conditions of such orders.” The guidance does not include specific examples of how the failure by an adviser to comply with representations or conditions in an exemptive order has resulted in harm to investors. However, the guidance refers to the examples cited in the Inspector General’s report of violations of exemptive orders found by the SEC’s Office of Compliance Inspections and Examinations.
Implications for Investment Advisers
The guidance update serves as a general reminder that firms should continue to monitor their ability to rely on exemptive orders but offers little concrete guidance on the types of compliance questions that advisers frequently face.
- Although the guidance update repeatedly references the need to comply with the “representations and conditions” in exemptive orders, it does not address the question of how to determine which representations are sufficiently material to jeopardize an entity’s ability to rely on exemptive relief in the event that they become inaccurate amidst changed circumstances. The absence of any discussion of the materiality of representations may suggest that the SEC staff intends to take the position that the continued accuracy of all factual representations made in connection with an exemptive application is required for continued reliance on the exemptive order. While the nature and drafting of many exemptive orders contemplate the potential for certain changing circumstances, and it would seem unreasonable to expect slavish adherence to every factual representation in an order, investment advisers may wish to consider a principled review of the relative significance of representations that underlie the conditions to their exemptive orders.
- The guidance encourages advisers to build the representations and conditions made in exemptive orders into their compliance policies. However, care should be taken to avoid inadvertently making conduct that is permitted even without an exemptive order into a violation of overbroad compliance policies.
- The guidance update makes clear that exemptive order compliance is likely to be a focus of upcoming SEC examinations. To the extent advisers are conducting mock examinations or otherwise preparing for visits by regulators, they are encouraged to incorporate this topic into their preparations.
- Although the guidance update focuses on exemptive orders, advisers may benefit from a similarly structured approach to mapping what no-action guidance they rely upon and how they meet the various criteria laid out in the relevant no-action letters.