More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Securities and Exchange Commission’s Division of Investment Management recently issued two guidance updates — one clarifying whether a person or company that temporarily serves a fund “at cost” or for no compensation is an investment advisor under the Company Act, and the other allowing closed-end fund sponsors to use electronic media to distribute shareholder data.
The first notice clarifies that firms that provide investment management services to registered funds are investment advisors under the Investment Company Act even if such firms are not paid.
The notice says that firms cannot claim exclusion from the Investment Company Act by declining to receive compensation. “Where an advisory contract is assigned (e.g. acquisition), firms must comply with Rule 15a-4 to manage funds pending shareholder approval," it says. "Rule 15a-4 has several additional conditions including board approval and a 150-day limit,” it states.
The notice clarifies that the language in the definition of investment advisor requiring compensation only applies to firms that are in the business of providing such services at cost to all clients.
Cipperman Compliance Services says the notice “does not break new legal ground, so we are assuming that the [SEC] staff has seen several firms try to avoid Rule 15a-4’s requirements.” Also, “this position may apply analogously to investment advisors trying to avoid Advisers Act registration on the theory that they don't receive compensation.”
The second update allows closed-end fund sponsors to use electronic media to deliver the 19a-1 Notice describing distributions from sources other than the fund's profits. To use electronic delivery (email), the shareholder must consent in advance.
Section 19(a) of the Investment Company Act requires closed-end funds to provide a written statement accompanying any distribution from a source other than the fund’s net income.
“This is a good reminder that fund sponsors must deliver such a notice,” says Cipperman. “The issue is whether getting the consents is worth the aggravation instead of just sending a piece of paper.”
Check out SIFMA Launches Investor First Initiative; CEO Gregg Says SEC Should Go First on Fiduciary on ThinkAdvisor.