SEC’s Investment Management Division Considers Applying 1940 Advisers Act to Private Fund Advisors

According to Securities and Exchange Commission Division of Investment Management Director Norm Champ, consideration is being given toward how the 1940 Investment Advisers Act might be applicable to private fund advisors. Champ spoke at an American Law Institute-Continuing Legal Education Group in New York earlier this month.

One reason for this closer scrutiny is that because of the Dodd-Frank Act, advisers to certain private funds that previously didn’t have to must now register with the SEC. Currently, about 40% of SEC-registered advisors work with private funds. Hence, noted Champ, the need to view our regulatory framework from a wider perspective and “how that fits” with these advisors.

It was just recently that the division began taking a more risk-based approach toward how it determines which regulator initiatives are priority. This means that before starting a project, the way it might impact capital formation, investors, regulated entities, and the needed resources are taken into consideration. Champ said that the issue of whether/not to apply the Investment Advisers Act to private fund advisers is up for consideration as a priority. (He made clear that the remarks he made at the event are his own and don’t necessarily reflect that of his employer.)

Champ also discussed exchange-traded funds and how his division will no longer delay considering exemptive relief for ETF funds that invest a lot in derivatives. (Such requests had been placed on hold by the SEC in 2010 while it reviewed how these funds used the derivatives.)

Exchange traded funds (ETFS) are investment companies that can be legally classified as Unit Investment Trusts and open-end companies but are different from these two in that ETFs don’t sell individual shares straight to investors and instead issue shares in “Creation Units,” which are big blocks. Typically, it is institutions that buy these blocks.

That said, any relief request for ETF funds has to come with “two specific representations,” noted Champ: A) An ETF has to attest that the board will review and approve not just the derivatives investment of the funds but the way that the ETF’s investment manager handles risk related to derivatives and B) AN ETF has to represent that its derivative investments-related disclosures in periodic reports and offering documents are in line with staff and commission guidance. Champ acknowledged that there were still some concerns about leveraged ETFs and that the commission would not “support new exemptive relief” for the funds.

Leveraged ETFs, also called ultra short funds, try to deliver multiples of the performance of the benchmark or index they are tracking. They look to reach a return that is a multiple of the inverse performance of the index that is underlying.

Exchange-Traded Funds (ETFs), SEC

Investment Advisers Act of 1940 (PDF)

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