. Regulation of Investment Advisers by the U.S. Securities and Exchange Commission Robert E. Plaze Partner June 2018 -i- TABLE OF CONTENTS Page I. Introduction ..............................................................................................................................1 II. Who is an Investment Adviser? ................................................................................................2 A. Definition of Investment Adviser .....................................................................................2 1. Compensation ............................................................................................................2 2. Engaged in the Business ............................................................................................3 3. Advising about Securities ..........................................................................................3 4. Advising Other Persons .............................................................................................5 B. Exclusions from Definition ...............................................................................................6 1. Banks and Bank Holding Companies ........................................................................6 2. Lawyers, Accountants, Engineers, and Teachers ......................................................7 3. Brokers and Dealers ..................................................................................................7 4. Publishers ................................................................................................................10 5. Government Securities Advisers ..............................................................................11 6. Credit Rating Agencies ............................................................................................11 7. Family Offices .........................................................................................................12 8. Governments and Political Subdivisions .................................................................13 9. Non-U.S. Advisers ...................................................................................................13 10. Exemptive Authority ................................................................................................14 III. Which Investment Advisers Must Register Under the Advisers Act? ...................................14 A. State/SEC Registration ....................................................................................................14 1. Securities Portfolios ................................................................................................15 2. Continuous and Regular Supervisory or Mangagement Services ...........................15 3. Operation of Section 203A of the Advisers Act .......................................................16 4. Exceptions to Prohibition ........................................................................................17 5. State Law Still Applicable to SEC-Registered Advisers ..........................................19 6. Federal Anti-Fraud Law Still Applicable to State-Registered Advisers .................20 B. Exemptions from Registration ........................................................................................20 1. Intrastate Advisers ...................................................................................................21 2. Advisers to Insurance Companies ...........................................................................21 3. Foreign Private Advisers.........................................................................................21 4. Charitable Organizations and Plans .......................................................................24 5. Commodity Trading Advisors ..................................................................................24 6. Private Fund Advisers .............................................................................................25 7. Venture Capital Advisers.........................................................................................28 8. Advisers to Small Business Investment Companies (“SBICs”)...............................29 IV. Who Must Register Under the Advisers Act? ........................................................................29 A. The Advisory Firm ..........................................................................................................29 Proskauer Rose LLP -ii- B. Affiliates..........................................................................................................................30 1. Integration of Affiliates ...........................................................................................30 2. Richard Ellis Test ....................................................................................................30 3. Participating Affiliates ............................................................................................31 4. Umbrella Registration for Advisers to Private Funds ............................................32 V. How Does an Investment Adviser Register Under the Advisers Act or Report as an Exempt Reporting Adviser? ...................................................................................................33 A. Registration as an Investment Adviser............................................................................33 1. Denial of Registration .............................................................................................34 2. Qualifications ..........................................................................................................34 B. Reporting as an Exempt Reporting Adviser ...................................................................34 1. Qualifications. .........................................................................................................34 2. Becoming an Exempt Reporting Adviser .................................................................35 3. State Law .................................................................................................................35 C. Form ADV ......................................................................................................................35 1. Part 1A ....................................................................................................................36 2. Part 2 .......................................................................................................................37 3. Exempt Reporting Advisers .....................................................................................37 D. Electronic Filing ..............................................................................................................37 E. Public Availability ..........................................................................................................38 F. Withdrawal ......................................................................................................................38 1. Registered Advisers .................................................................................................38 2. Exempt Reporting Advisers .....................................................................................38 G. Successor Registrations...................................................................................................39 1. Succession by Application .......................................................................................39 2. Succession by Amendment .......................................................................................39 3. Exempt Reporting Advisers .....................................................................................39 VI. What Are the Requirements Applicable to an Investment Adviser? ......................................39 A. Fiduciary Duties to Clients .............................................................................................40 1. Full Disclosure of Material Facts ...........................................................................41 2. Suitable Advice ........................................................................................................42 3. Reasonable Basis for Recommendations .................................................................43 4. Best Execution .........................................................................................................43 5. Proxy Voting ............................................................................................................48 B. Substantive Requirements (Advisers Act) ......................................................................48 1. Client Transactions .................................................................................................48 2. Advertising...............................................................................................................55 Proskauer Rose LLP -iii- 3. Custody of Client Assets ..........................................................................................64 4. Use of Solicitors ......................................................................................................68 5. Pay to Play (Political Contributions) ......................................................................70 6. Proxy Voting ............................................................................................................75 7. Duty to Supervise.....................................................................................................76