SEC Guide for Newly Registered Advisers
On July 24, 2007, the Securities & Exchange Commission’s (“SEC”) Division of Investment Management and Office of Compliance Inspections and Examinations came out with a guide for recently registered investment advisers. (According to the SEC, approximately 30% of all registered investment advisers became registered since January 2005.) The guide identifies many of the important compliance areas, including fiduciary duties, Form ADV and other filings, code of ethics, best execution, and books-and-records requirements. Because it provides a general overview of these areas, the guide will likely be the starting point of the analysis of most issues. It is available on the SEC’s website at www.sec.gov/divisions/investment/advoverview.htm.
SEC “Compliance Alert
”The SEC’s Office of Compliance Inspections and Examinations published its first “Compliance Alert” in June 2007 in the form of a letter to Chief Compliance Officers. The letter describes issues recently reviewed by SEC examination staff—such as performance advertising and disaster-recovery plans—and encourages firms to implement improvements in these areas. With respect to performance advertising, the SEC notes that it has observed a lack of policies and procedures, or ineffective policies and procedures, governing marketing and performance advertising. With respect to disaster-recovery plans, the SEC used the experience of advisers in Louisiana and Mississippi after Hurricane Katrina as a case study to evaluate the effectiveness of such plans. Critical to effective recovery-plan components, the Alert concluded, are alternate communication protocols, a prearranged remote location for short-term and possible long-term use and remote access to business records. The Alert also includes topics of particular interest to mutual funds and broker-dealers. The Alert is available at www.sec.gov/about/offices/ocie/complialert.htm
Enforcement Activity Arising Out of SEC Examinations
On Aug. 15, 2007, the SEC issued administrative cease-and-desist orders against two advisers for violations uncovered during the examination process. One case involved an alleged scheme to use soft dollars outside of the 28(e) safe harbor. The adviser and its principal were cited for antifraud and books-and-records violations and agreed to $150,000 in penalties in addition to a censure and cease-and-desist order and an undertaking to provide investors and prospective investors with copies of the SEC’s order. The other case was based on the alleged failure to file any 13Fs during a three-year period— the SEC asserted that the issue came up during an examination and the manager only then filed for the first time (including corrective historical filings). The SEC also alleged that the 13F filing obligation was referenced in the firm’s compliance manual, as well as in memos from the firm’s outside counsel and auditors. The firm agreed to a $100,000 penalty in addition to a censure and cease-and-desist order.
California Proposes Investment Adviser Registration Requirement
The Commissioner of the California Department of Corporations (the “Department”) has proposed to require registration of certain investment advisers that (1) have a place of business in California; and (2) are not registered with the SEC. Under current law, investment advisers not registered with the SEC doing business in California are required to be licensed by the Department. An exemption adopted in 2002 provides that investment advisers with fewer than 15 clients and more than $25 million under management, or those who provide advice only to venture capital funds, need not register with the Department, even if they have a place of business in California. The current proposal would limit the exemption to advisers to venture capital funds. If the proposal is adopted, investment advisers that have a place of business in California will have to choose between being registered by the State of California or by the SEC. Comments on the proposal are due by Nov. 26, 2007. g