Focus Perspective: Some Things Just Take Time


In 1940, Congress passed the Investment Company Act of 1940 (“Act”), to combat abuses in the investment company industry prior to that time. Recognizing the industry would develop and change over time, the Act gave the SEC the power to exempt “conditionally or unconditionally any person, security, or transaction from any provisions of the Act or any rule thereunder, provided that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of (the Act).” As the industry continued to grow, so did the number of applications for exemption, and the time required to process them.

“In 1990, the Commission requested comments on, among other things, whether it should adopt different procedures for applications. In response, commenters argued that lengthy review procedures delay the commencement of transactions, prevent applicants from responding quickly to changing market conditions, and slow the entry of new products to the market, all to the detriment of investors.

In response, in 1993, the Commission proposed amendments to rule 0-5 under the Act to establish an expedited review procedure for certain routine applications. The Commission, however, did not adopt these proposed amendments.”


On October 18, 2019, “The Securities and Exchange Commission (the ‘Commission’) is proposing amending rule 0-5 under the Investment Company Act of 1940 (‘Act’) to establish an expedited review procedure for applications that are substantially identical to recent precedent as well as a new rule to establish an internal timeframe for review of applications outside of such expedited procedure. In addition, the Commission is proposing amending rule 0-5 under the Act to deem an application outside of expedited review withdrawn when the applicant does not respond in writing to comments within 120 days.”

With adoption of the amendment, the Staff would be able to process all applications more quickly.

See Full Proposal

Examination Results for FY 2019

It’s too early for any information on the number of investment adviser examinations conducted during FY 2019, but not too early to look at the goals set. Prior to FY 2018, results were presented as a percentage of registrants, which caused some confusion among us, depending on whether the percentage was based on the number of registrants at the beginning of the year or the end of the year. For example, in FY 2016, the Plan was to examine 11% of RIAs, and the actual result was reported as 11%, but was that 11% of the 12,201 RIAs at the beginning of the fiscal year in October 2016, or 11% of the 12,616 RIAS at the end of the fiscal year in September 2017, a difference of 45 exams? We would think that the plan would be based on the number at the beginning of the fiscal year, but the actual would be based on the number at the end of the fiscal year. It should be noted that at about this time, the SEC reduced the number of broker-dealers examined, in order to catch-up on the investment adviser side.

The FY 2017 plan was 13%, presumably of the 12,616 RIAs at the beginning of the fiscal year, which would be 1,640 examinations, but the Staff blew that away by conducting 2,114 examinations, almost 16% of the FYE population of 13,223. To end the calculation confusion, the goal for FY 2018 was 2,120 (an actual number of exams, not a percentage of the population), only a slight increase over the actual number of exams conducted in FY 2017, and again projected to be roughly 16% of the 13,223 RIAs. The actual number of examinations of RIAs for FY 2018 was 2,312, a 9% increase over FY 2017, and 17.2% of the 13,458 RIAs at FYE. The FY 2019 goal (originally set based on the FY 2017 actual exams of 2,114) was originally set at 2,160 but was lowered to 1,955 due to the projected Federal Government shutdown. We did hear a rumor that the SEC had examined more than 1,900 RIAs in FY 2019.

Note: The examination numbers used in the paragraphs above are taken from the FY 2018 Annual Performance Plan, the FY 2019 Congressional Budget Justification and the FY 2020 Congressional Budget Justification. Each of these reports include the footnote, “These estimates may be impacted by a number of factors such as size and complexity of firms being examined, industry developments, and other program priorities.” The number of RIAs for each year are taken from the IAPD website.

Enforcement Action

“Despite enduring the longest government shutdown in U.S. history, the U.S. Securities and Exchange Commission’s Division of Enforcement filed more cases in the first six months of this fiscal year than in the same period last year. From October 2018 through the end of March, the division filed 216 new “stand-alone” actions, compared to just 149 during the first six months of FY 2018.

This increase was largely due to 79 cases filed on a single day in March against investment advisers for alleged disclosure failures relating to conflicts of interests associated with certain mutual fund fees. With the addition of these cases, enforcement actions against investment advisers made up nearly 50% of all cases filed so far this fiscal year.”

The 79 settlements are expected to return more than $125 million to clients and involved advisers that failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund shares when a lower-cost share class was available.

“Notably, during the shutdown, the division sued nine individuals and entities accused of hacking into the SEC’s EDGAR system — the electronic portal used by the public to make SEC filings — in 2016. The defendants purportedly accessed the system to extract nonpublic information for use in illegal trading.” It is estimated that the illegal trading generated over $4 million in illegal profits.

See Full Article

Cases Against Investment Advisers


In March, the SEC instituted a settled action against a dually registered IA/BD in connection with the activity of a firm it had acquired. According to the SEC, the firm represented to advisory clients that they were receiving a discount off the firm’s retail commission rates. However, the firm did not adequately disclose that clients could have chosen other outside brokerage options at lower commission rates. The SEC alleged that the firm charged commissions on average 4.5 times more than clients would have paid using other brokerage options, but did not provide any additional services to advisory clients using its in-house brokerage than it did to advisory clients who chose other brokerages with considerably lower commission rates. Without admitting or denying, the firm agreed to pay approximately $5.2 million in disgorgement and prejudgment interest, and a $500,000 civil penalty.


In March, the SEC filed an unsettled complaint against the former Chief Operating Officer of an investment adviser for allegedly aiding and abetting the advisory firm’s overbilling of advisory clients in order to generate additional revenue and improperly inflate his own pay. The U.S. Attorney’s Office for the Southern District of New York brought accompanying criminal charges on the same day the SEC action was announced.

In May, the SEC announced a settled action against a now-defunct registered investment adviser in North Carolina alleging that the adviser overcharged clients for advisory fees, misrepresented the reason the adviser’s custodian arrangement ended (the custodian observed irregular billing practices), and overstated assets under management in Commission filings.  Without admitting or denying, the owner agreed to pay approximately $400,000 in disgorgement and prejudgment interest, and a $100,000 civil penalty.


In June, the SEC instituted a settled administrative proceeding against a private fund manager and its Chief Investment Officer alleging that the manager failed to adopt and implement policies and procedures to address the risk that the traders’ pricing of illiquid mortgage-backed bonds may not conform to generally accepted accounting principles. Without admitting or denying, the fund manager agreed to a civil penalty of $5,000,000 and the CIO agreed to pay a civil penalty of $250,000.

See Full Update

Our Perspective

Just because we don’t have final examination numbers doesn’t mean nothing is happening. We were slightly disappointed that there are no major cases bubbling to the surface, but there may be some that have not quite boiled yet. Not that we have any inside sources, just that this is typically a slow time of year. The Commissioners are involved with Roundtables, so no speeches. Enforcement Staff is trying to close cases before FYE. The Examination Staff are finishing up reports, reviewing responses to deficiency letters, assisting in closing out cases, researching IAs that have been selected for examinations in the new fiscal year, planning travel, and scheduling training.

Happy New “Fiscal” Year!

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