Advising the Adviser: Compliance and Enforcement Under the Investment Advisers Act

ADVISING THE ADVISER: COMPLIANCE AND ENFORCEMENT UNDER THE INVESTMENT ADVISERS ACT JASON BURT AND JAY SCOGGINS

Textbook: You should have available the current edition of any printed or electronic compilation of the federal securities laws, including statutes, regulations, and forms. Assigned readings and additional materials for class discussion are as indicated.

Other Important Information: Class attendance and class participation is expected. Discretionary credit may be given for class participation.

Unit 1: Foundational Concepts

 Classes 1 - 3: What is an investment adviser? What regulations govern investment adviser conduct and why is compliance important?

o Emphasis on the following:

. SEC Makeup: Regulation, Compliance, and Enforcement

. Overview of Investment Advisers Act of 1940 (IAA)

. Other Regulators

. How does the IAA define investment adviser and when is registration required?

 Who is excluded from the definition?

 What exemptions from registration exist?

 Who must register?

o Assigned Reading:

. Regulation of Investment Advisers by the U.S. Securities and Exchange Commission, Robert E. Plaze (December 2015)(“Plaze Outline”), available at www.stroock.com/siteFiles/PAFile120.pdf, pp. 1-27

. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963)

. IAA Sections 202(a)(11) and Section 203

. IAA Rule 202(a)(11)(G)-1; 202(a)(30)-1; 203(l)-1, 203(m)-1

. IAA Rule 203-1

. Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less than $150 million in Assets Under Management, and Foreign Private Advisers, Advisers Act Release No. 3,222 (June 22, 2011)

. Allianz of America, Inc., SEC No-Action Letter (May 25, 2012)

. SEC v. Fife, 311 F.3d 1 (1st Cir. 2002)

1 . Applicability of the Investment Advisers Act of 1940 to Financial Planners, Pension Consultants, and Other Persons Who Provide Others with Investment Advice as a Component of Other Financial Services, Investment Advisers Act Release No. 1092 (Oct. 8, 1987)

. Lamp Technologies, Inc., SEC Staff No-Action Letter (May 29, 1997)

 Class 4: How do investment advisers interact with other market participants?

o Emphasis on the following:

. What are brokers, dealers, high-frequency traders, alternative trading systems, and exchanges?

. How do these entities interact with investment advisers?

o Assigned Reading:

. http://investor.gov/introduction-markets/how-markets-work/market- participants

. http://www.sec.gov/divisions/marketreg/mrclearing.shtml

. Exchange Act Sections 3(a)(4), 3(a)(5), 15(a), 15(b)(4), and 15(b)(6)

. Regulation ATS and Rules 301(b)(2) and 301(b)(10)

Unit 2: Anatomy of SEC Examinations and Enforcement Actions

 Class 5: What rules govern SEC Exams and Enforcement actions, how do they work, and what to think about?

o Emphasis on the following:

. Statutory Authority and Rules Relating to SEC Exams and Enforcement actions

. Document demands and considerations when responding

. Obligations of Adviser

 Promptly Provide

 Truthful and accurate records

. Routine, Sweep, and Cause Exams

. Deficiency letters and Enforcement referrals

. Common pitfalls before, during, and after exams and investigations

o Assigned Reading:

2 . Plaze Outline, pp. 102-110

. https://www.sec.gov/about/offices/ocie/ocieoverview.pdf

. http://www.sec.gov/about/offices/ocie/ocie_exambrochure.pdf

. http://www.acacompliancegroup.com/documents/Preparing-for-an-Exam-- Checklist.pdf

. SEC Enforcement Manual available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf

Unit 3: SEC Exam Focus Areas

 Class 6-7: Fiduciary Duties and SEC Anti-Fraud Provisions

o Emphasis on the following:

. What does it mean to be a fiduciary?

. Why disclosure matters?

. Examples of breaches of fiduciary duty

o Assigned Reading:

. Plaze Outine, pp. 30-34, 72-73

. IAA Sections 206 and 207

. IAA Rule 206(4)-8 Pooled Investment Vehicles

. Securities Act Section 17(a)

. Exchange Act Sections 9(a)(2) and 10(b) and Rule 10b-5

. Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006)

. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963)

 Class 8-9: Advertising

o Emphasis on the following:

. Advertising (performance metrics) and testimonials

. Use of Solicitors

. Brochure Rule

. Pooled Investment Vehicles

3 . Pay to play

o Assigned Reading:

. Plaze Outline, pp. 45-51, 75-77

. IAA Rule 204-3

. IAA Rules 205-1, 205-2, 205-3

. IAA Rule 206(4)-1 Advertisements

. IAA Rule 206(4)-3 Solicitors

. IM Guidance Update No. 2014-4 (Mar. 2014)

. Investment Adviser Use of Social Media, National Examination Risk Alert, Vol. II, Issue 1 (Jan. 4, 2012)

. In the Matter of Mavigator Money Management, Inc., Investment Advisers Act Release No. 3767 (Jan. 30, 2014)

. Cambiar Investors, Inc., SEC Staff No-Action Letter (Aug. 28, 1997)

. Clover Capital Management, Inc., SEC Staff No-Action Letter (Oct. 28, 1986)

. Munder Capital Management, SEC Staff No-Action Letter (May 17, 1996)

 Classes 10-12: Trading

o Emphasis on the following:

. Best Execution

. Suitability

. Front-running

. Unfair Order allocation (cherry picking)

. Undisclosed soft-dollar arrangements

. Principal transactions and cross trades

. Insider Trading

o Assigned Reading:

. Plaze Outline, pp. 34-44

. IAA Rule 206(3) and Rule 206(3)-3(T)

4 . Pretzel & Stouffer, SEC Staff No-Action Letter (Dec. 1, 1995)

. In the Matter of Stephens, Inc., Investment Advisers Act Release No. 1666 (Sept. 16, 1997)

. In the Matter of Calamos Asset Management, Investment Advisers Act Release No. 1589 (Oct. 16, 1996)

. In the Matter of Nicholas-Applegate Capital Management, Investment Advisers Act Release No. 1741 (Aug. 12, 1998)

. Dirks v. SEC, 463 U.S. 646 (1983)

. U.S. v. O’Hagan, 521 U.S. 642 (1997)

. SEC v. Obus, 693 F.3d 276 (2d Cir. 2012)

. US v. Newman, 2014 U.S. App. LEXIS 23190 (2d Cir. 2014)

 Classes 13-14: Compliance Program and Books and Records

o Emphasis on the following:

. Policies and Procedures

. Code of Ethics

. Protecting material, non-public information

. Supervision

. Anti-money laundering

. Records to make and preserve and time limitations

. Custody of Client assets and surprise exams

o Assigned Reading:

. Plaze Outline, pp. 52-54, 61-72, 74-75, 98-102

. IAA Section 204A

. IAA Rule 204A-1 Code of Ethics Requirements

. IAA Rule 206(4)-7 Compliance Procedures and Practices

. In re Scudder Kemper Investments, Inc., Investment Advisers Act Release No. 1848 (Dec. 22, 1999)

. In re John Gutfreund, 51 SEC 93, 113 (1992)

5 . Frequently Asked Questions about Liability of Compliance and Legal Personnel at Broker-Dealers under Sections 15(b)(4) and 15(b)(6) of the Exchange Act (Sept. 13, 2013), available at http://www.sec.gov/divisions.marketreg/faq-cco- supervision-093013.htm

. In the Matter of OMNI Investment Advisors, Inc. and Gary R. Beynon, Advisers Act Release No. 3323 (Nov. 28, 2011)

. In the Matter of The Buckingham Research Group, Inc., Buckingham Capital Management, Inc., and Lloyd R. Karp, Advisers Act Release No. 3109 (Nov. 17, 2010)

. In the Matter of Consulting Services Group, LLC, and Joe D. Meals, Advisers Act Release No. 2269 (Oct. 4, 2007)

. In the Matter of Institutional Shareholder Services, Inc., Investment Advisers Act Release No. 3611 (May 23, 2013)

. In the Matter of Thomas E. Meade, Investment Advisers Act Release No. 3855 (June 11, 2014)

. IAA Section 204; Rule 204-2, Rule 204-3

. IAA Section 223

. Rule 206(4)-2 Custody of Funds

. In the Matter of Comprehensive Capital Management, Inc., Investment Advisers Act Release No. 3636 (July 29, 2013) (custody rule)

. In the Matter of Anthony Fields, CPA, et al., Investment Advisers Act Release No. 3348 (Jan. 4, 2012)