On April 12, 2018, the Office of Compliance Inspections and Examinations (“OCIE”) hosted its annual Compliance Outreach Program National Seminar for Investment Adviser and Investment Company Senior Officers (the “Seminar”). The annual Seminar is held at OCIE headquarters in Washington, DC and is attended by a limited number of industry representatives, each approved by SEC staff. The Seminar is also broadcast live via webcast for those unable to attend in person.
This year the Seminar focused on the issues surrounding compliance challenges facing the retail industry overall and included the following topics:
- Fees and expenses
- Portfolio management and fintech
- Business Continuity and Disaster Planning
- Initial Coin Offerings and Cryptocurrencies
- MiFID II
The biggest surprise was the SEC’s transparency. A separate Q&A panel took place after each main panel session. This gave the audience an opportunity to participate and ask questions from a much more transparent SEC than years past. This was a new approach by the Staff and it worked to the advantage of industry participants.
For example, we learned that OCIE is focusing on many of the areas as outlined in the 2018 Examination Priorities Report such as robo-advisers, conflict disclosures, and fee related issues. Panelists from the Division of Investment Management (“IM”) and the Division of Enforcement (“Enforcement”) offered some enlightening perspectives as well. Some key take-aways were:
- Conflicts of Interest – New and growing firms must be especially aware of new or increased levels of conflicts that may arise as the organization grows both internally with new employees or externally with new structural relationships.
- Reverse Churning – The Staff is not just looking at the lack of trading to identify reverse churning, but also portfolio turnover and how trading activity or the lack thereof has been communicated to clients.
- Fee Disclosures – Broad language regarding fee maximums and when fees become negotiable either higher or lower than those maximums must be accompanied by detailed language describing the criteria or factors that the firm considers when setting fees.
- Terminated Accounts – Fees must be rebated to terminated accounts on a pro-rata basis no matter how the issue is disclosed in Form ADV or client agreements; lack of disclosure or negative disclosure is not a cure.
- Private Funds – The Staff is currently focusing on fund relationships with affiliated service providers and how those relationships affect fees and valuations.
- Foreign Domiciled Advisers – The SEC has jurisdiction over any subsidiaries that have US offices and are SEC registered. Examination of these firms can occur at the foreign parent if the foreign parent maintains the official books and records of the US registered firm.
- Uni Banco Letter – Doug Scheidt, Chief Counsel of IM, alluded to the misuse and misinterpretation of the Uniao de Bancos de Brasileiros S.A. SEC No-Action letter dated July 28, 1992 (“Uni Banco Letter”), which provides registration relief for certain foreign advisers conducting business with US clients, under specific criteria and circumstances. He stated that firms should view the letter carefully, especially in how it differs from the Foreign Adviser Exemption provided in SEC Rel. No. IA-3222.
- Section 15(c) of the Investment Company Act – Sub-adviser reporting under the Regulation must be independent of the primary adviser. Primary advisers may not have control over the information provided to the Board under Section 15(c) depending on the contractual language of the Sub-Adviser Agreement.
- Overnight Rule – Again, Doug Scheidt of IM cautioned firms regarding use of the “Overnight Rule,” which is viewed by the industry as allowed under Rule 206(3)-2 (Cross-Trade Rule). A cross trade still occurs, even though the firm has gone into the market to place the trade (i.e. interpositioning).
- Real Estate Private Funds – When conducting examinations of these types of funds, examiners are interested in the role of vertical affiliates, such as leasing agents or property managers and the types of fee sharing arrangements that may exist without full disclosure of how fees paid to affiliates compare to independent entities.
The archived webcast will be made available online. Advisory firms are encouraged to look for the archived webcast in the coming weeks. When available, view the SEC’s Compliance Outreach Program National Seminar 2018 here.