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A highlight of some of the SEC’s regulatory initiatives for the past year.

Compliance and Regulatory Services (“CARS”) Hot Topics for January 2016

For this month, we thought to highlight some of the SEC’s regulatory initiatives for the past year. In 2015, the SEC was very active with an aggressive agenda that resulted in many new regulations and rule proposals that will be sure to prove to be challenging to implement for many advisers, especially the medium-to-smaller advisers that are already have a difficult time with the cost of compliance. It appears as though the route the SEC has taken will make it extremely difficult for many smaller advisers to operate because of the cost of implementing some of these regulations and proposed rules, if and when they are adopted.

As new regulations are adopted the costs for new resources, including additional staffing, technology and software, are accretive to fixed costs. This adds to the overall operational expenses of managing an advisory firm, and may cause smaller advisers to either go back in-house or sell out to larger asset managers. There just does not seem to be any real easy solution for asset managers in this regulatory environment. To provide a sense of what management firms are facing these days, consider some of the following:

For asset managers of mutual funds, including liquid alts, and business development companies, the SEC has proposed 2 regulations that will add to the already onerous reporting and ongoing compliance requirements for 1940 Act registered investment companies. 

  • The first is a liquidity management regulatory rule proposal. This would require the implementation of a liquidity risk management program and enhanced disclosures directly related to fund liquidity and redemption practices. One of the elements of the risk program requires, among other things, classifying assets into various buckets based on the amount of time an asset would be able to be converted to cash without market impact, ongoing assessment and management of liquidity, establishing a 3-day liquid asset minimum, and board review and approval.   This proposed regulation also codifies the 15% illiquid asset limit in terms of reporting. To read further, please click here: Liquidity Management Rules for Mutual Funds and ETFs
  • The second impacts the use of derivatives. If adopted as proposed, it would limit the degree to which managers of mutual funds and ETFs can use derivatives and would also require them to implement a derivative risk management program administered by a derivatives risk manager. This program would also involve segregating assets to limit exposure to certain predetermined thresholds by offsetting the derivative exposure relative to assets. Please click here for overview of the new derivatives proposal: Derivative Rules for Registered Funds and Business Development Companies

There is also the SEC’s Form ADV proposal that will amend Part 1 to capture and report more information on separately management accounts, derivatives, notional exposure, metrics for determining a relying adviser and more supervisory oversight of branch locations.

This is in addition to the SEC’s cyber security risk alert that makes clear that the SEC is expecting registered advisers to develop a cybersecurity framework administered by a CTO or CISO.

If that wasn’t enough, there is also the FinCEN proposal that would make registered investment advisers subject to the BSA and Patriot Act of 2011anti-money laundering (“AML) requirements, which will be overseen by the SEC. Historically, advisers would rely on an administrator and pretty much almost ignore AML. It seems as though the adoption of this rule will be a game changer to the current modus operandi.

The above is not even close to an exhaustive list of SEC and related regulatory agencies 2015 initiatives and to do so would in and of itself be too exhausting to list.

Our Take: The SEC is on a tear and it doesn’t look like it is going to slow down anytime soon. All one can do is be prepared to address the onslaught of new regulations and have the SEC’s questions answered before they are asked. This is a relatively easy task with the right resources, dedication and commitment to implement the fundament elements of these initiatives in the form of procedures and controls designed to reasonably ensure compliance. During the process, smaller advisers may be left behind, forced to find a way to meet these initiatives, or become part of a larger organization with more extensive resources. At this pace, we may be seeing the end of the mid- to small-investment adviser.

SEC News

Dec. 28, 2015 Traders in China and Hong Kong Paying $920,000 to Settle Insider Trading Case
Dec. 28, 2015 SEC Issues Annual Staff Reports on Credit Rating Agencies
Dec. 22, 2015  SEC Seeks Public Comment on Transfer Agent Rules
Dec. 22, 2015  Morgan Stanley Settles Charges in “Parking” Scheme
Dec. 21, 2015  SEC Charges Financial Advisor in Market Manipulation Case
Dec. 18, 2015  Convicted Fraudster Using Aliases Charged Again for Defrauding Investors
Dec. 18, 2015  SEC Issues Staff Report on Accredited Investor Definition
Dec. 18, 2015  J.P. Morgan to Pay $267 Million for Disclosure Failures
Dec. 17, 2015  SEC Charges Martin Shkreli With Fraud
Dec. 16, 2015  SEC: Hedge Fund Adviser Lied to Investors
Dec. 15, 2015  SEC Announces Fraud Charges Against Investment Adviser
Dec. 15, 2015  SEC Files Charges in Multi-Million Dollar Market Manipulation
Dec. 11, 2015  SEC: Sports Team Offering Is A Penny Stock Fraud
Dec. 11, 2015  SEC Proposes Rules for Resource Extraction Issuers Under Dodd-Frank Act
Dec. 11, 2015  SEC Proposes New Derivatives Rules for Registered Funds and Business Development Companies
Dec. 10, 2015       SEC Suspends Public Accountants for Bad Auditing
Dec. 7, 2015  SEC: Lawyers Offered EB-5 Investments as Unregistered Brokers
Dec. 3, 2015  SEC Announces Charges for Spoofing and Order Mismarking
Dec. 2, 2015  SEC: Grant Thornton Ignored Red Flags in Audits
Dec. 1, 2015 SEC Charges Bitcoin Mining Companies
Dec. 1, 2015 SEC, FINRA, MSRB to Hold Compliance Outreach Program for Municipal Advisors

Speeches

Dec. 16, 2015  Remarks to the ICI 2015 Securities Law Development Conference David Grim, Director, Division of Investment Management
Dec. 9, 2015  Keynote Address at the 2015 AICPA National Conference: "Maintaining High-Quality, Reliable Financial Reporting: A Shared and Weighty Responsibility" Chair Mary Jo White
Dec. 9, 2015  Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments  Barry Kanczuker, Associate Chief Accountant, Office of the Chief Accountant
Dec. 9, 2015  Remarks before the 2015 AICPA Conference on Current SEC and PCAOB Developments Courtney D. Sachtleben, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 9, 2015  Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments Christopher D. Semesky, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 9, 2015  Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments Ashley Wright, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 9, 2015  Remarks before the 2015 AICPA Conference on Current SEC and PCAOB Developments Christopher M. Rickli, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 9, 2015  Remarks Before the 2015 AICPA National Conference on Current SEC and PCAOB Developments Michael W. Husich, Senior Associate Chief Accountant, Office of the Chief Accountant
Dec. 9, 2015 Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments Kris Shirley, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 9, 2015 Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments  Brian T. Croteau, Deputy Chief Accountant, Office of the Chief Accountant
Dec. 9, 2015 Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments  Julie A. Erhardt, Deputy Chief Accountant, Office of the Chief Accountant
Dec. 9, 2015 Remarks before the 2015 AICPA Conference on Current SEC and PCAOB Developments Wesley R. Bricker, Deputy Chief Accountant
Dec. 9, 2015 Remarks Before the 2015 AICPA National Conference on Current SEC and PCAOB Developments James V. Schnurr, Chief Accountant, Office of the Chief Accountant

FINRA News

Dec. 31, 2015 Are Your Investments Ready for the New Year? FINRA Offers 6 Tips for 2016
Dec. 30, 2015 FINRA Releases Report on its Securities Helpline for Seniors
Dec. 29, 2015 FINRA Sanctions Barclays Capital, Inc. $13.75 Million for Unsuitable Mutual Fund Transactions and Related Supervisory Failures
Dec. 23, 2015 FINRA Fines Macquarie Capital (USA) Inc. $2.95 Million for Submitting Inaccurate Blue Sheet Data
Dec. 21, 2015   FINRA Sanctions Cantor Fitzgerald & Co. $7.3 Million for Selling Billions of Unregistered Microcap Shares, and for Related Supervisory and AML Violations
Dec. 21, 2015 FINRA, SEC Issue Investor Alert: 10 Questions Investors Should Ask About Securities-Backed Lines of Credit
Dec. 18, 2015 FINRA Sanctions Fidelity Brokerage Services LLC $1 Million for Supervisory Failures
Dec. 17, 2015   FINRA Announces New Public Board Member 
Dec. 16, 2015 FINRA Arbitration Task Force Issues Final Report
Dec. 10, 2015   Corporate Bond Liquidity Healthy by Most Measures: FINRA Research
Dec. 1, 2015 SEC, FINRA, MSRB to Hold Compliance Outreach Program for Municipal Advisors

(Complete Listing: http://www.finra.org/Industry/Regulation/Notices/2014/index.htm)

FINRA Rule Filings List:
(Complete Listing:  http://www.finra.org/Industry/Regulation/RuleFilings/2014/index.htm)

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