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Third-Party Advisor Exam Rule May Come Before Election: Ex-SEC Official

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The former director of the Securities and Exchange Commission’s investment management division sees the agency’s chairwoman, Mary Jo White, pressing ahead with plans to require advisors to receive a third-party audit as well as enhanced liquidity risk measures for mutual funds and ETFs.

“My guess is that before the election, SEC Chair Mary Jo White may try to adopt the liquidity rules for mutual funds proposed in 2015 and could propose that advisors be required to hire third party examiners,” Champ, a partner in Kirkland & Ellis’ private funds group, told ThinkAdvisor in a recent interview.

White said early last December that the agency would propose a new rule and amendments to some proposed forms related to the use of derivatives by registered investment companies, like exchange-traded funds, and business development companies. The agency followed through with that proposal, which would limit funds’ use of derivatives and require them to put risk management measures in place, on Dec. 11.

Industry officials agree that the SEC staff is done crafting the third-party audit rule for advisors and that the proposal has been elevated to White as well as to the two SEC commissioners, Michael Piwowar and Kara Stein. However, Stein and Piwowar are said not to be fans of the plan, the officials said.  

Champ, too, has criticized the SEC’s plan to require advisors to get third-party audits, stating such audits will be costly for advisors and their clients and could have unintended consequences.

Champ sees White, under pressure by the Financial Stability Oversight Council, pushing ahead in the coming months with measures in the agency’s five-pronged agenda to modernize and enhance regulatory safeguards for the asset management industry, and argues that a third-party audit rule is really a sixth prong.

The agency moved ahead on two of the measures by adopting final amendments on Aug. 26 to Form ADV as well as proposing in late June that RIAs adopt and implement written business continuity and succession plans.

The three remaining initiatives on White’s five-pronged agenda have been formally proposed and await final action: enhancing management of liquidity risks by mutual funds; a new framework for regulating the use of derivatives by registered investment companies; and requiring all advisors to create transition plans for a major disruption in business.

No formal rule proposal has been introduced as yet regarding the fifth initiative – mandating annual stress tests by large funds and large advisors.

Champ also sees the SEC’s enforcement division continuing its regulatory scrutiny of private fund advisors, and says that Kirkland is bulking up its staff to help private fund advisors handle the ongoing regulatory scrutiny. The most recent SEC action in the private fund advisor space was against four private equity fund advisors affiliated with Apollo Global Management, who agreed recently to pay $52.7 million for misleading fund investors about fees and a loan agreement and failing to supervise a senior partner who charged personal expenses to the funds.

SEC enforcement director Andrew Ceresney said when announcing the Apollo settlement that “a common theme in our recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors.”

In mid-August, Kirkland hired Jamie Lynn William as a partner to help build and grow the Washington office’s Investment Funds Group. Walter most recently served as a senior counsel in the SEC’s Investment Management Division’s Private Funds Branch.

Two other notable Kirkland hires from the SEC were Aaron Schlaphoff, an attorney fellow in the rulemaking office of the SEC’s IM division, as well as former SEC enforcement division head Robert Khuzami.

— Check out DOL Fiduciary Rule Will Force Brokers Out, Ex-SEC IM Director Says on ThinkAdvisor.