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SEC’s Norm Champ talks compliance

Norm Champ, the director of the SEC’s division of investment management, was in New York City Thursday. He spoke to the Practising Law Institute’s annual hedge fund management seminar.

The 2010 Dodd-Frank Act directed the SEC to make rules “designed to enhance the oversight of private fund advisers, including registration of advisers to hedge funds, private equity funds, and other private funds that were previously exempt from SEC registration.” 

The SEC enacted new registration rules, and the number of registered private fund advisers has increased by more than 50%, Champ said. 

“As of September 2014, the registrant population consisted of about 11,438 advisers, with 2,691 of these advising at least one hedge fund.”

They manage $5.4 trillion in reported assets.

Part of Champ’s talk was about compliance. He was talking about investment advisors and hedge funds and private equity. But most of his advice works for compliance programs and professionals across most industries.

*     *     *

Here’s part of what he said. In his remarks, the “Commission” means the SEC, and the “OCIE” means the SEC’s Office of Compliance Inspections and Examinations.

Compliance policies and procedures must be specifically tailored to your firm’s advisory business, and should evolve and grow with your business. For example, earlier this year, the Commission charged an investment adviser with issuing false and misleading advertisements.

The Commission noted that the firm’s policies and procedures only parroted the Commission’s rule, and were not specifically tailored to prevent advertisements from violating the advertising rules. It is crucial that policies and procedures be reviewed and updated as your business changes, as regulations change, and as new guidance is issued.

Advisers must be equally vigilant in identifying, disclosing and managing conflicts of interest. Earlier this year my colleagues in OCIE’s National Examination Program indicated that, as part of their examination priorities for 2014, OCIE staff would be conducting examinations focused on conflicts of interest inherent in the investment adviser business model. In making this announcement, OCIE noted that “[o]ver time, the staff has observed instances of non-compliance with the federal securities laws very often arise in situations where there are unaddressed conflicts of interest,” which leads advisers to “engage in activity that puts their own interests ahead of their clients in contravention of their fiduciary duty and existing laws, rules and regulations.”

As with compliance programs generally, it is important for advisers to continuously review their business models to identify emerging conflicts and risks. Keep in mind that conflicts need to be disclosed to investors before they invest in a fund, and the disclosure must be meaningful. Among other things, this means that the disclosure should be sufficiently tailored for investors to understand the nature and magnitude of a conflict and the particular risk that it presents. A corollary of this is that an adviser should not assume that conflicts which are generally inherent in the advisory model do not need to be disclosed. For example, I believe that the failure to disclose a fee or expense borne by investors is not justified by arguing that the allocation is “industry practice” or “market standard.” 

Norm Champ’s full remarks are here.


Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.

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