Securities Regulator Issues Important Guidance For Newly-Registered Investment Advisers

James J. Eccleston, esq.

he Securities and Exchange Commission (SEC) has published a "plain English" summary of the law to help new advisers understand their compliance responsibilities. This publication is part of a broader effort to communicate to investment advisers that they have certain critical obligations, and that the SEC will ensure compliance with those obligations through routinely examining investment advisers, issuing deficiency letters to them and, if necessary, bringing enforcement actions against them. Let's highlight the key sections of this latest SEC guidance.

Preliminarily, the SEC faces increased regulatory burdens as the number of SEC-registered investment advisers continues to grow. Since January, 2005, approximately 3,200 advisers have registered with the SEC, for a total of about 10,500 investment advisers. Newly-registered investment advisers now comprise approximately 30% of that total.

The SEC's latest publication, "Information for Newly-Registered Investment Advisers", contains general information about the Investment Advisers Act of 1940 (sometimes referred to as the "Advisers Act") and selected rules under the Advisers Act. The very first section of the publication indeed is the most important: investment advisers are fiduciaries. As fiduciaries, investment advisers:

Must act in the best of interests of their clients;

Must provide investment advice in their clients' best interest;

Have a duty of undivided loyalty and utmost good faith;

Must employ reasonable care to avoid misleading clients;

Must provide full and fair disclosure of all material facts to clients and to prospective clients; and

Must eliminate, or at least disclose, all conflicts of interest.

The second section discusses the compliance program that investment advisers are required to adopt and implement, in order to "prevent, detect and correct violations of the Advisers Act." Not only must investment advisers review their policies and procedures at least annually to test their adequacy and effectiveness, they also must designate a "Chief Compliance Officer" to be responsible for administering those policies and procedures. While it is critical that investment advisers tailor their compliance programs to address the particular risks presented at their firms, the SEC cautions that it will expect investment advisers to address the following issues to the extent that they are relevant:

Portfolio management processes (including allocation of investment opportunities);

Accuracy of disclosures (including account statements and advertisements);

Proprietary trading and personal trading activities;

Safeguarding of client assets;

Creation and maintenance of required records;

Privacy protection safeguards;

Trading practices (such as best price and execution procedures);

Marketing advisory services, including through the use of solicitors;

Valuation of client assets and assessment of advisory fees; and

Business continuity plans.

The next several sections of the SEC publication detail many of the points raised above. In particular, investment advisers (and their attorneys) may find helpful guidance on topics such as:

Preparing and filing required reports;

Providing clients and prospective clients with a written disclosure statement;

Maintaining a Code of Ethics governing the conduct of employees;

Enforcing certain insider trading procedures;

Maintaining required books and records;

Seeking to obtain the best price and execution for clients' trades;

Specific provisions required or prohibited in contracts with clients;

Voting proxies of clients' securities;

Advertising the services of advisers;

Advisers paying others to solicit new clients; and

Advisers holding custody or possession of clients' funds or securities.

For each section, the SEC provides helpful citations and references.

Coupled with the SEC's new CCOutreach Program, Compliance Alerts and other efforts, this publication provides basic direction for newly-registered investment advisers. Clearly, the SEC demands compliance with the Advisers Act, and these tools help advisers to do so "early in their operations" - and, hopefully, before the first SEC examination of their operations!

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James Eccleston, an attorney specializing in adviser and broker-dealer issues, is a partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston in Chicago.