The Investment Advisers Act of 1940 (the Act) is the rulebook for SEC-registered investment advisers (RIAs). The Advisers Act, together with the related rules adopted by the SEC under it, lays down the groundwork as to whether and how to register, and how to conduct one’s business once you have successfully done so.
Here are the ten most important things to know for effective Advisers Act compliance that I tell all my clients:
1. Fiduciary duty is paramount: The U.S. Supreme Court, common law, and the anti-fraud provisions of the Advisers Act impose a fiduciary duty on RIAs. This means that advisers owe their clients a duty of care and loyalty and must place their clients’ interest above their own. It also means that they must take all necessary steps to avoid conflicts of interest, and if they cannot be eliminated, to disclose them comprehensively. If you use the fiduciary standard as a compass, it will take you a long way, including with the SEC.
2. Don’t take Form ADV lightly: The main document that RIAs must file with the SEC is Form ADV. Consisting of two parts most of which are available publicly on the SEC’s website, Form ADV is designed to present a detailed picture of your business, and you should be prepared to devote significant time and effort to completing it properly. Form ADV is the tool to get you registered, but filing obligations are ongoing.
3. Check whether other filings are necessary: Depending on your business, other filing requirements may include Form PF under the Advisers Act and Forms 13F (institutional investment managers) and 13H (large traders) under the Securities Exchange Act of 1934. Check with counsel whether you are a candidate.
4. Calculate assets under management correctly: The term regulatory assets under management is used uniformly under the Advisers Act for different purposes, including to determine whether or not to register with the SEC, i.e. it is important to get the math right. The AUM calculation includes securities portfolios for which an advisor provides continuous and regular supervisory or management services, counts assets on a “net” basis and includes family and proprietary assets, assets managed without compensation, and accounts of foreign clients. The temptation is to get over-zealous; resist it.
5. Advertising must pass muster: The Advisers Act limits the type of advertising an RIA may conduct. For instance, RIAs are prohibited from using testimonials and from cherry picking past recommendations. Keep in mind that the term “advertisement” is defined broadly and includes any communication addressed to more than one person. In this context, check your website and be mindful about social media.
6. Some exempt advisers still need to file with SEC: Dodd-Frank created a number of new exemptions from SEC registration — more details about them will follow in a separate post. For now, keep in mind that RIAs relying on a few of the exemptions, i.e. the venture capital and private fund adviser exemptions, are not off the hook when it comes to a number of requirements under the Advisers Act, including the filing of a scaled-down Form ADV.
7. You need a Chief Compliance Officer: All RIAs, no matter how small, must appoint a Chief Compliance Officer. The CCO may be an employee of the firm or an outsider, so long as the individual is empowered with full responsibility and authority to develop and enforce appropriate policies and procedures.
8. The SEC may come knocking: The SEC conducts periodic examinations of the advisers under its oversight. Its recent focus has been on new registrants and firms that have never been audited. It has also ramped up its efforts over the past few years by conducting targeted sweeps and relying on technology to identify high-risk advisers. So, be prepared. Contrary to popular belief, the SEC is not out to get you, especially if you follow Tip No. 1.
9. There is no “one-size-fits-all” approach to compliance: RIAs are required to adopt written policies and procedures designed to prevent violations of the Advisers Act. While it can be tempting to simply purchase a compliance policy off the shelf, resist the temptation. Your policies and procedures should be tailored to your firm’s business model and resulting risks. It will save you costs and headache for years to come. Trust me on this one.
10. Compliance is ever-evolving: In 2010, the Dodd-Frank Act dramatically changed the regulatory landscape for advisors, eliminating exemptions, creating new ones, mandating new filing requirements and re-allocating oversight responsibilities among SEC and the states etc. Some action items mandated by Dodd-Frank are still in the SEC’s court. In addition, the SEC issues new guidance/no-action relief/new priorities on investment adviser issues on an almost daily basis. Accordingly, advisers should treat their compliance program as a living organism that needs attention and periodic recalibration.