Dan Brecher
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212-286-0747 dbrecher@sh-law.comFirm Insights
Top Ten Things You Need to Know About the Advisers Act
Author: Dan Brecher
Date: August 21, 2015
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The Investment Advisers Act of 1940 (Advisers Act) regulates the actions of investment advisers and requires most advisers to register with the Securities and Exchange Commission (SEC).
Accordingly, the Advisers Act and the interpretive SEC’s rules form the essential “rule book” for the industry.
What you need to know
Since compliance with the Advisers Act can be an arduous task, below are the ten most important things you need to know:
- Fiduciary duty is paramount: The anti-fraud provisions of the Advisers Act impose a fiduciary duty on RIAs. This means that advisers must place their clients’ interests above their own and take all necessary steps to avoid conflicts of interest. By contrast, brokers are presently held to a suitability standard, which obligates them to make recommendations that are consistent with the best interests of the client.
- Don’t take Form ADV lightly: The main document that registered advisers must file with the SEC is Form ADV. Part I seeks information about the adviser’s operations, while Part II is a written disclosure statement. Together, the form is long and complex (more than 70 pages long), and advisers should be prepared to devote significant time and effort to completing it properly. The failure to do it right can lead to costly sanctions.
- Filing obligations are ongoing: Advisers’ filing obligations continue long after they register with the SEC. Registered investment advisers are required to update their Form ADV Parts 1 and 2A within 90 days of their fiscal-year end. Depending on your business model, other filing requirements may include Form PF (advisers to private funds with AUM over $150 million), Form 13H (large traders), and Form 13H (institutional investment managers that exercise investment discretion for $100 million or more).
- Correctly calculating AUM is important: Regulatory assets under management (AUM) include securities portfolios for which an advisor provides continuous and regular supervisory or management services. Under Dodd-Frank, the definition was extended to family and proprietary assets, assets managed without compensation, and accounts of foreign clients. The SEC has made inflated AUM a top priority and any inaccuracies will likely trigger an examination.
- Advertising must pass muster: The Advisers Act limits the type of advertising advisers may conduct. For instance, RIAs are generally prohibited from using testimonials and making references to past specific recommendations that are not properly qualified. It is important to note that an advertisement includes any communication addressed to more than one person that offers any investment advisory service with regard
- to securities. Therefore, websites and social media are both included.
- Some exempt advisers still need to file with the SEC: Advisers relying on exemptions from registration, such as advisers to venture capital funds and advisers to private funds with AUM of less than $150 million, are not off the hook when it comes to reporting requirements. The SEC still imposes certain reporting requirements, including the filing of a scaled-down Form ADV.
- You need a Chief Compliance Officer: All registered advisers, no matter how big or small, must appoint a Chief Compliance Officer. The CCO may be an employee of the firm or an outside party, so long as the individual is empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the investment adviser firm.
- The SEC may come knocking: The SEC conducts periodic examinations of the advisers under its oversight. While the agency currently only audits around 8 percent of RIAs, it has ramped up its efforts over the past few years by conducting targeted sweeps and relying on technology to identify high-risk advisers.
- There is no “one-size-fits-all” approach to compliance: Registered advisers are required to adopt written policies and procedures designed to prevent violation of the Advisers Act. While it can be temping to simply purchase a compliance policy off the shelf, your policies and procedures should be tailored to your firm’s business model and resulting risks.
- The rules can change: In 2010, the Dodd-Frank Act dramatically changed the regulatory landscape for advisors. It eliminated the private adviser exemption and created four, narrower exemptions in its place. While such a significant overhaul is unlikely to occur in the immediate future, advisers need to stay updated on SEC rules changes, enforcement priorities, and regulatory guidance.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
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Top Ten Things You Need to Know About the Advisers Act
Author: Dan Brecher
The Investment Advisers Act of 1940 (Advisers Act) regulates the actions of investment advisers and requires most advisers to register with the Securities and Exchange Commission (SEC).
Accordingly, the Advisers Act and the interpretive SEC’s rules form the essential “rule book” for the industry.
What you need to know
Since compliance with the Advisers Act can be an arduous task, below are the ten most important things you need to know:
- Fiduciary duty is paramount: The anti-fraud provisions of the Advisers Act impose a fiduciary duty on RIAs. This means that advisers must place their clients’ interests above their own and take all necessary steps to avoid conflicts of interest. By contrast, brokers are presently held to a suitability standard, which obligates them to make recommendations that are consistent with the best interests of the client.
- Don’t take Form ADV lightly: The main document that registered advisers must file with the SEC is Form ADV. Part I seeks information about the adviser’s operations, while Part II is a written disclosure statement. Together, the form is long and complex (more than 70 pages long), and advisers should be prepared to devote significant time and effort to completing it properly. The failure to do it right can lead to costly sanctions.
- Filing obligations are ongoing: Advisers’ filing obligations continue long after they register with the SEC. Registered investment advisers are required to update their Form ADV Parts 1 and 2A within 90 days of their fiscal-year end. Depending on your business model, other filing requirements may include Form PF (advisers to private funds with AUM over $150 million), Form 13H (large traders), and Form 13H (institutional investment managers that exercise investment discretion for $100 million or more).
- Correctly calculating AUM is important: Regulatory assets under management (AUM) include securities portfolios for which an advisor provides continuous and regular supervisory or management services. Under Dodd-Frank, the definition was extended to family and proprietary assets, assets managed without compensation, and accounts of foreign clients. The SEC has made inflated AUM a top priority and any inaccuracies will likely trigger an examination.
- Advertising must pass muster: The Advisers Act limits the type of advertising advisers may conduct. For instance, RIAs are generally prohibited from using testimonials and making references to past specific recommendations that are not properly qualified. It is important to note that an advertisement includes any communication addressed to more than one person that offers any investment advisory service with regard
- to securities. Therefore, websites and social media are both included.
- Some exempt advisers still need to file with the SEC: Advisers relying on exemptions from registration, such as advisers to venture capital funds and advisers to private funds with AUM of less than $150 million, are not off the hook when it comes to reporting requirements. The SEC still imposes certain reporting requirements, including the filing of a scaled-down Form ADV.
- You need a Chief Compliance Officer: All registered advisers, no matter how big or small, must appoint a Chief Compliance Officer. The CCO may be an employee of the firm or an outside party, so long as the individual is empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the investment adviser firm.
- The SEC may come knocking: The SEC conducts periodic examinations of the advisers under its oversight. While the agency currently only audits around 8 percent of RIAs, it has ramped up its efforts over the past few years by conducting targeted sweeps and relying on technology to identify high-risk advisers.
- There is no “one-size-fits-all” approach to compliance: Registered advisers are required to adopt written policies and procedures designed to prevent violation of the Advisers Act. While it can be temping to simply purchase a compliance policy off the shelf, your policies and procedures should be tailored to your firm’s business model and resulting risks.
- The rules can change: In 2010, the Dodd-Frank Act dramatically changed the regulatory landscape for advisors. It eliminated the private adviser exemption and created four, narrower exemptions in its place. While such a significant overhaul is unlikely to occur in the immediate future, advisers need to stay updated on SEC rules changes, enforcement priorities, and regulatory guidance.